Summarized by Noradilla Hamezah
It is now generally accepted that the activities of the EPF should be geared to further the interests of contributors and not to promote “development”. It is also accepted that there should be no disparity in the treatment of contributors. The EPF’s regulator and fiduciaries were not as clear of its goal even as recently as the late 1980s.
There has always been a “conflict of interest” between the Ministry of Finance (MOF) as
the EPF’s regulator, and the government, as the biggest borrower from the EPF.There is a conflict of interest to the extent that government spending benefits all Malaysians but only private sector employees are mandated by law to contribute to the EPF’s pool of “forced” savings.
As the Malaysian Government Securities (MGS) issues could only be used to finance development, and not operating expenditure, and since the government has generally been responsible in its financing and spending decisions, the safety of the EPF’s investments in MGS was seldom in question. However, the captive demand for MGS by the EPF and other financial institutions have led, from time to time, to artificially low yields for MGS and hence to lower returns for the EPF. With the shortage of MGS, the MOF has been prepared to grant a waiver to the EPF from the requirement that 70% of its funds be invested in MGS. But the law has not been changed and such waivers have been given on an annual basis. There have been periods when yields on new issues of MGS were significantly below equivalent corporate bond yields and of the EPF having or required to invest in such issues nonetheless.
Restrictions on international diversification, the bias towards investments in domestic assets, and the propensity for doing businesses with domestically controlled companies or banks can all increase risk exposures or weaken risk controls. This is a problem in Malaysia to the extent that the government’s development goals constraints the EPF’s investment choices. The new regime of exchange control is likely to increase these biases.
As argued previously, the existing regulations and the under-developed financial markets have prevented the EPF from investing on a portfolio basis. It is thus vulnerable to undesirable external influence on its decision -making powers. Its portfolio is not required to be marked-to-market and its performance is not evaluated with reference to the performance of the market. This can lead to a disparity in the treatment between contributors and to non-optimal investments (and underperformance).
Given the success of Singapore’s Housing Development Board (HDB) and its Central Provident Fund in promoting housing development and home ownership, there were calls on the EPF, (from time to time), to create a Malaysian HDB either directly, or through its subsidiary, MBSB. Fortunately, both the government and the EPF have not responded to these calls. By not promoting or setting up an HDB-type of organization, the EPF has been able to serve its interest better. It was able to deal with a more competitive industry in housing development.26
It is now in a better position to maximize returns, minimize risks and minimize its vulnerability to undesirable external influence because the funds it plans to allocate to housing are lent to house buyers who are free to buy houses from any developer. By channeling its funds to buying loans that originate from many financial institutions without regard to who the developer is (as is being done by Cagamas Berhad which is a mortgage corporation), or by investing in Cagamas bonds, it is stronger and safer than if it were to engage directly in property development or to only lend for the purchase of houses it has developed. As a pension/provident fund it is right that the EPF remains as a portfolio investor and not as a direct investor in property development activities, as it should betaking portfolio risk, not business risk.
In a provident fund arrangement, the contribution is mandatory and therefore it is akin to a defined contribution plan. However, the investment decision is exercised by the fund but the contributor bears the risk. This is a potentially explosive arrangement. The government has addressed this problem by guaranteeing a minimum return of 2.5% p.a. and by mandating the portfolio in which the funds can be invested. This need not produce an optimal arrangement.
The composition and tenure of the EPF’s Board & Investment Panel can minimize the extent of external influence by government. The greater the number of government appointees or the shorter the tenure of members, the greater the external influence exerted by government. The incidence of such external influence may have declined as the number of independent representatives has increased and tenure has been lengthened (from 2 to 3 years).
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