Tightening the EPF Act

Proper investment policy, disclosure, governance and accountability should be mandated under the law for EPF’s near half a trillion ringgit funds
THE recent brouhaha over the Employees Provident Fund (EPF) financing a government-sponsored RM1.5bil housing scheme highlights several issues facing the nation’s premier retirement fund.
Considering that it is a major heavyweight, which manages almost RM470bil belonging to some 12 million members, it is important to ensure that the EPF does its job, and does it as well as it should.
Questions swirl around three main issues: The kind of projects that the EPF should finance and the risk they bear; the amount of government influence over what the EPF should do; and the level of transparency and accountability that the fund shows to its members.
Sadly, on all three counts, it shows serious deficiencies. Although it has improved in recent years, in terms of the quality of investments, it has in the past made some dubious investments which have never been fully explained.
In part this is due to substantial government influence over its operations, specifically, the Finance Minister, who not only appoints board members but also has substantial influence over them, the law requiring directors in most cases to be subservient to the Finance Minister.
Meantime, the way the EPF reports its results, and its investments and losses and gains, leaves much to be desired. It is impossible for a fund member or anyone else to independently verify the soundness of its investment decisions. There is no or little statutory requirement for appropriate standards of disclosure, governance and accountability.
Because of its huge size, approaching half a trillion ringgit (it should exceed that mark easily this year), a multitude of sins can be easily hidden in its massive books. That’s all the more reason for an eagle eye to be kept on it at all times.
The way to ensure that the EPF keeps on the straight and narrow is to mandate that unambiguously through an amendment to the EPF Act. That should start with clear definitions of directors’ qualifications, requiring them to be those who have impeccable integrity and have an unblemished and distinguished record of service in the finance, accounting and investment fields.
The current Act gives the power to the Government, through the Finance Minister, to nominate the board members, but this should be preferably done through a committee rather than a single individual.
The Act should then specify clearly the role of the directors, which would be to oversee the implementation of measures which will follow a highly specified investment policy and return objectives.
The investment policy should specify a low risk approach that would preserve members’ contributions, while at the same time providing a moderate rate of return.
It should also specify very broad allocation strategy between various classes of assets, for example Malaysian Government Securities, other investment-grade bonds, equities, property and real estate and other investments.
Changes to the EPF Act should clearly specify that directors and the fund should at all times act solely in the interest of members who own the funds in the first place. While the Government can borrow money from the EPF, it has no business inducing it to invest in businesses that have high risk.
That will stop the board from making a decision to invest in a project just because the Finance Minister or someone else told it so. Those with long memories will remember that the EPF has made strange investments before, like Time dotCom.
The changes to the Act should also specify in fairly specific terms the kind of disclosure that it makes. It should itemise all the investments it makes, and state when they were made and at what price, and how much it is losing or making on each one.
Averages have a way of disguising major outliers. On average, gains may be respectable but that does not mean major losses may not have been made on some investments. The only way to ensure that does not get buried under the mountain of funds is to disclose it.
These are not unrealistic changes. Many retirement funds act this way. Take CalPERS or California Public Employees’ Retirement System, the United States’ largest public pension fund with assets totalling some US$220bil (about RM660bil).
It publicly discloses its investment policy and asset allocation decisions. Those interested can view its investment track record. Journalists can ask for and receive its investment details for specific companies, areas and regions.
Here’s what it says in its own words: “Our goal is to efficiently and effectively manage investments to achieve the highest possible return at an acceptable level of risk. In doing so, CalPERS has generated strong long-term returns.”
We want EPF, whose size is not very far away from CalPERS, to do the same for all its members. The EPF does not belong to the Government and therefore the Government must not have full powers over the way it acts.
Until these changes to the Act are made and the EPF board acts professionally and above board in every decision it makes, taking all the required professional advice, we can’t ever be sure that EPF is always acting purely in the interests of its constituents – the Malaysian working public.
Independent consultant P Gunasegaram (t.p.guna@gmail.com) is happy that the EPF declared 6% dividends. He hopes it can continue to do so.

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Hunt on for Roshan Vikas directors

Depositors lodge complaint against women’s SHG after they find its office to be closed

Failure of borrowers to repay loans and administrative overheads exceeding the revenue resulted in the financial crisis in women’s self-help group, Roshan Vikas, in the old city, leading to registration of a criminal case, investigators said.
The Hussaini Alam police registered a cheating and misappropriation of funds case against the board of directors of Roshan Vikas in the last week of December following a complaint lodged by 15 depositors. This self-help group was started by some voluntary organisations to support women belonging to the lower economic strata in the old city.

Problems galore

Women’s groups, each comprising 15 members or more, were formed in each locality and each member of the group would contribute Rs. 30 to Rs. 50 a month.
Twenty-five per cent of the sum collected over a specific period of time would be deposited with the main group controlled by the board of directors. The remaining amount would be disbursed among members as loans.
The board of directors tied up with some banks and also secured some group loans ranging from Rs. 50,000 to Rs. 1,00,000.
“However, of late the loan repayment dipped and administrative overheads such as expenses for meetings of the directors and collection and depositing money increased, forcing use of money from the principal amount,” the Hussaini Alam Inspector, J. Venkat Reddy, said.
The controversy over some employees of micro-finance companies forcibly collecting money from borrowers and the government’s direction not to use force for recovering money had an indirect impact on this self-help group’s transactions. Some borrowers stopped clearing their loan amounts, adding to its financial woes, the police said.

Depositors worried

The board of directors is reconstituted every three years.
Interestingly, most of the group members are unaware who the directors are since the field officers deal with them during disbursal of loans and collection of deposits.
Closure of the Roshan Vikas group office at Charminar bus-stop created fears of cheating among the depositors some of whom approached the Hussaini Alam police.
Police are on the lookout for Qutsia Begum of Falaknuma, a director, and believe that her arrest could help in the arrest of the remaining directors.
Meanwhile, the police top brass reportedly decided to transfer the case to the Central Crime Station.