Over the past few days, investors that use their EPF Account 1 to invest in privately managed funds are being warned that they could be a huge risk involved in their investment. The source, however was not confirmed, and has been speculated only as “local media”.
It’s true that the local market has experienced some stagnation in 2005, but to condemn the entire industry’s overall performance with such statement leaves existing and potential investors in a somewhat undecided situation. Let’s take a look at the chronological order of the whole event.
On August 7th, our Prime Minister reported the speculative loss of RM 600 million, without quoting the source of the report.
The PM on RM 600 million losses…
Abdullah, who is also the finance minister, was commenting on news reports over the weekend that estimated about 600 million ringgit (US$166 million; euro130 million) in EPF savings withdrawals which went into other investments have resulted in losses over recent years.
Local media have reported that most of the losses were caused after people diverted their savings to fund management institutions that failed to undertake profitable ventures.
On August 8th, being an industry that is regulated by the Securities Commission and also one that has a huge social responsibility towards investors’ money, FMUTM’s president Tunku Datuk Ya’acob Tunku Abdullah immediately questioned the validity of unverified loss claims.
Experts dispute 80% loss claim
Federation of Malaysian Unit Trust Managers president Tunku Datuk Ya’acob Tunku Abdullah said that while there were investors who had lost money, the 80% figure quoted was unsubstantiated. “The difference of RM600mil might not have taken into consideration factors which may have an impact in calculating returns.
“(These include) members redemption upon realisation of profits, switching-in with profits into other funds, conversion to ordinary accounts after reaching the age of retirement, death or other incapacitation,� he said in a statement.
On August 9th, EPF Chairman Tan Sri Abdul Halim Ali introduced alternative measures on the issue could be remedied, if indeed there was really such an issue in the first place.
EPF Chairman on poor fund performance…
EPF chairman Tan Sri Abdul Halim Ali said in a statement that the Fund viewed seriously the losses suffered by its members who had invested in trust funds and had as a result sent a proposal to the Federation of Malaysian Unit Trust Managers asking fund management institutions to tighten the process, procedures and management of investment risks.
The EPF also called on the fund management institutions to reduce the investment management fee that they now charged.Abdul Halim explained that the EPF’s investment scheme was introduced in 1996 upon the insistence of a group of members in the wake of encouraging conditions on the stock market.
He said that seeing that the investment in trust funds had a relatively high risk, the amount of funds that could be withdrawn was limited to only 20% of savings in Account 1 that exceeded RM50,000.
While EPF may have all the good intentions in ensuring that the risks should be reduced when it comes to dealing with retirement funds, but before calling the kettle black, the pot should also look into their own track record on corporate governance and transparency.
Dr. R. Thillainathan criticisms on EPF’s governance…
EPF Investment Panel: Members appointed and can be removed at the pleasure of the Finance Minister. No independent bodies, like Parliament or other expert committees, are consulted on the appointment. Independence of a member of the EPF Investment Panel requires him to declare his interest and abstain from voting on any interested party transactions, but a member is not required to pre-clear his trades or to report on his investment activity
Accountability and Liability: Risk and returns are for the account of the contributors but they have little or no control on investment choices. Contributors are in no position to discipline members of the Investment Panel against bad management because they have no powers. Personal liability of an Investment Panel member is not well-established in law.
Regulation & Supervision: Ministry of Finance is regulator and supervisor of EPF. But it does not have requisite expertise to do this job especially given its many other equally important job functions. Where regulator and regulated are both government bodies, as is the case with MOF and EPF, regulator has been less able or willing to go public with criticism of the regulated.
EPF & Governance Issues: Risk is borne by contributor but investment decision is exercised by EPF. Arrangement potentially explosive.
Contributor vs Regulator: To avoid conflict of interest between contributors and regulator, EPF has to be operated in the best interest only of contributors. Promoting “development� should not be a goal. Conflict of interest between MOF as regulator & government as EPF’s biggest borrower.
Well, sometimes even financial columns need a little “spin-doctoring”.
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