A friend just shared with me how KWSP has accidentally omitted the deductions of her company’s EPF contributions. Although she’d submitted the employees’ KWSP contribution, the contribution was not stated in the latest KWSP statement, and a check with the KWSP authority reveals that there was a ‘technical glitch’ in the system that has made the contribution not registered in the system, and hence not printed on the statement. She was then told to furnish the necessary ‘evidence’ so that KWSP can rectify the error.

My friend was observant enough to have noticed the discrepancy. When she announced to all the other staff members who’d also received their latest EPF statements, none of them was aware of the omission. What if she’d not noticed the discrepancy? And what if didn’t only happen to her company?

I am not trying to downplay the KWSP’s professionalism, but such careless mistakes couldn’t have happened at a worse times, where the government is seen to be in a dire need of liquid cash (recent Sukuk Simpanan Rakyat launch, new units for ASM/ASW 2020, sharp rally in the local stock market).

Make sure you’ve checked, double-checked and triple-checked yours.

And so, the cat is finally out of the bag. The EPF just announced 2008′s dividend to its 5.4 million members- a mere 4.5% (Ouch!)! For comparison’s sake, 2007′s dividend was 5.8%.

Based on EPF’s 2005 Annual Report, out of its total fund size of RM260 billion, 19.1% or RM49.6 billion was allocated to Equity investment. Hence EPF’s RM9 billion RHB acquisition venture represents more than 18% of its total equity investments, without even taking into accounts its existing investment in RHB. Such disproportionate amount of investment in a single stock clearly represents poor portfolio allocation and diversification. The EPF has put at risk our workers’ funds by ‘betting’ heavily on a single large investment.

In addition, the total risk of the bank is 12.5 times its equity value based on a minimum capital-assets adequacy ratio of 8% in Malaysia. This means that in the event of a crisis, for every ringgit investment, up to RM11.50 may be required to bail out the bank and keep it afloat. Will EPF, acting as the owner of the bank, be committed to pump in additional monies from EPF to ??escue??the Bank in the event of another financial or banking crisis?

The Malaysian Government has spent more than RM3.5 billion to bail out Bank Bumiputera on 3 separate occasions in 1984, 1990 and 1998. Will EPF in effect, act as a bail out fund for the bank it now owns?

More…

After all the unnecessary risks it undertook in the past years, one would have expected a much higher return, probably in the range of 6 to 7 percentile.

To the extent that some even considered suing EPF.

Also, to refresh your memory, RM5 billion was handed out to the debt-ridden ValueCap Sdn Bhd in October 2008. Whatever happened to the RM5 billion?

The Employees Provident Fund (EPF) Board today, with the approval of the Minister of Finance, has declared a dividend rate of 4.50 per cent for 2008. The lower dividend rate compared to that of 2007 is due to the increase in investment provisioning resulting from the sharp decline in global equity prices brought about by the worldwide financial crisis.

Despite the financial meltdown, the EPF recorded the highest ever earnings of RM20 billion in gross income for 2008. This represented an increase of 9.36 per cent over the previous year?? gross income of RM18.29 billion.

Tan Sri Samsudin Osman, EPF Chairman said, ??hile the year 2008 was challenging due to the unprecedented global financial crisis that has impacted economies worldwide, EPF?? investment portfolio for the year performed better at the gross income level compared to 2007. However, due to the sharp decline in the equity markets, a large provision had to be made resulting in a marked reduction in net income.??r

Net income for the year was recorded at RM14.26 billion, after deducting allowances for diminution in value of equities and doubtful debts, dividends for withdrawals, investment expenses, operational expenses, and death and incapacitation benefit payments. This represented a decrease of 15.47 per cent over 2007 net income of RM16.87 billion.

Here’s the EPF’s return in the last one decade:

1998 – 6.70%
1999 – 6.84%
2000 – 6.00%
2001 – 5.00%
2002 – 4.25%
2003 – 4.50%
2004 – 4.75%
2005 – 5.00%
2006 – 5.15%
2007 – 5.80%
2008 – 4.50%

One can’t help but wonder if there’s any co-relation between Bank Negara’s Overnight Policy Rate and the KWSP returns. For reference, here’s the one-decade return for the fixed deposit from major banks.

1997 – 9.33%
1998 – 5.74%
1999 – 3.95%
2000 – 4.24%
2001 – 4.0%
2002 – 4.0%
2003 – 3.7%
2004 – 3.7%
2005 – 3.7%
2006 – 3.5%
2007 – 3.5%
2008 – 3.5%

The fixed deposit rate is also known as the risk-free rate. This means that your money which is kept in a fixed deposit account will not be affected by the market’s ups and downs. It’s as good as the bank’s guarantee. Any instruments that promises higher return than the prevailing risk-free rate will introduce the elements of risk. Again, one must be clear with the definition of risk, and in investment terms, risk is uncertainty- uncertainty in the sense that you might gain more than you invested or you might suffer losses in your capital. So, there’s really nothing negative about risk because it’s just a state of uncertainties.

The only issue is whether the risk you’ve taken is calculated or uncalculated. A calculated risk is akin to setting up a business where you would reduce all the possibilities of making a loss. For instance, you wouldn’t invest in a land with a nuclear waste disposal plant just 1 km away. When putting down money on any investment, it’s often a good practice to write down the risk you can take, thereby setting a threshold of risk tolerance before your investment portfolio turns into an emotional lab experiment.

So, the question we need to ask the fund managers in KWSP is that why are the returns not in tune with the risks the fund is exposed to?

Also, with the recent RM60 billion mini budget announcement, one cannot help but wonder where the Ministry of Finance could dig up such a huge amount of money.

Hint: There are not many places in this country that has so much monetary reserve.

Warning: Self-Promotional Message Ahead ;-)

I am pleased to announce that The Guide to Smart Insurance Planning is now available in hard copy. It’s priced at RM29.90 and is available in bookstores.

I would like to thank Mr Goh and his professional publication team over at Leeds Publications for taking the risk of publishing this book and not holding me responsible for the sales of the book. And also to Ms Ammie who’d helped me proof-read the book for the N-th time. Also to colleagues who’d generiously shared their knowledge and experiences. And to readers who’d been stalking this blog, your feedback has been much appreciated and taken into account.

I will also be at the National Library this Saturday (28th Feb) from 10 a.m. to 12 noon, attending a writer’s workshop organized jointly by MPH and the National Library to promote the book.

You can also purchase this book directly from Meshio.com in 2 simple steps:

Step 1: Make payment of RM29.90 to any of the following bank accounts:

i) Maybank2U (Account Number: 5124-4605-2597)
ii) Public Bank (Account Number: 3144-3269-21)
iii) Standard Chartered (Account Number: 6201-2070-5980)
iv) CIMB (Account Number: 1277-0000-5520-55)
v) Al-Rajhi Bank (Account Number: 12100-7061135053)

Step 2: Send me an email with your details below:

Name:
Shipping Address (for West Malaysia Only):

I’ll be absorbing all shipping fees, until notice of a petrol price hike.

I hope this book will help you understand better the need to protect yourself and your loved ones from unforeseen circumstances, and also to ensure that you’ve not neglected some of the most important coverages you must have in your personal risk management portfolio.

If you’ve already gotten a copy at the bookstore or if you’d bought the online edition of this book, I would like to thank you for the support!

Before we engage the enemy, we must first understand as much as we can about the enemy. Otherwise, it will be difficult to decide on the best tactics to neutralize the enemy. So, what’s this recession monster that’s being portrayed to sound like Armageddon itself?

Investopedia defines recession as…

“A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.”

In other words, it’s the downward spiral of everything the economy holds dear, an inevitable part of the economic cycle. Like a strict diet regime for an obese individual, the recession is nature’s way of correcting the mal-investments and artificial booms that has occurred in the course of the business cycle.

Impact of a Recession
So, on the global geopolitical level, we are going to see countries pumping cash into the system in the name of economic stimulus. We will probably see some major tax reforms, revising of the National Budgets, and even Finance Ministers changing hands. Some strategies are aimed at prolonging the inevitable, while some measures are meant to ensure the governing Administration ‘looks good’ in the public’s perception.

On the corporate level, where the impact of the recession is much more pronounced, we are looking at companies filing for bankruptcies, restructuring their business models, and retrenching employees like a slaughterhouse. As for the politically linked corporations – we might begin seeing trend where they start receiving taxpayer’s donation in the name of government handouts.

On the personal level, this is where the average people like you and me is going to see some changes. For starters, we are going to feel the pinch in our pockets. With job cuts and ‘revised’ salaries, there’ll be less disposable income to go around. Nevertheless, it’s not so much of a bad thing after all. It’s a good time for us to reflect on what’s essential and what’s unnecessary luxury. Some will even go to the extreme, switching Milo for Vico, Nescafe for Indocafe. Not that it makes a world of difference, but it helps to feel the recessionary effect.

Shopping and retail outlets will also see fewer crowds. People will eat-in more frequently and skimp on the fashion department. Even your cat would have to switch to a much more affordable cat food. On the upside, it’ll be easier to find parking spaces, and we’ll probably see families spending more time flying kites together or having picnics in the park.

The dark side would not be spared from the downward cycle. Crime rate usually shoots up during recessions, mainly due to unemployment and the sudden adjustment of lifestyles. Generally, intake of alcohol, cigarettes and lottery buying amongst the public would see a sudden spike.

A friend of mine relates to me how even high-level manager who had been retrenched from the workforce faces not only the loss of income, but also pride and dignity. Some even had problems adjusting to a much lower hierarchy in the corporate ladder, resulting in them to consider the possibility of suicide.

For small business owners, dwindling sales figures and inability to pay the bills will be the norm. It doesn’t help when banks start becoming more wary on providing loans to these business owners due to increasing defaults. Hence, it’s important to ensure a good reputation with the bankers so that when you need them, you can count on them.

The Truth about Recession
As we’ve seen from the scenarios above, the recession is not a monster as it was advertised. Yes, it’s depressing to know about the job losses, plummeting stock markets (and hence personal networths), and contraction of spending power amongst the population. However, we also need to realize that a recession is just like any other natural phenomenon, and to prevent a natural event from running its course is only going to snowball the impact of the inevitable. Like the dotcom bust we’ve witnessed in the early 2000, a mal-investment of financial capital would need to be corrected eventually.

An important sign that we must observe from the effect of a recession, aside from the gloom and doom, is that after the crisis, there’s bound to be an opportunity. Remember the Newtonian law? For such a damaging crisis, the opportunity would be equally huge. It could be the rising awareness of a flawed monetary system, as we are now witnessing. It could also be a sign that the existing capitalist economy is no longer sustainable and that certain industries are no longer as profitable as they seemed, and hence there’s a need for a change. If the recession is being resolved with the right attitude and mindset, it could propel the next economic cycle with a stronger foundation and a better living conditions for all.

We have to realize that we are living in a time where great transitions are taking place and there’s no place for self-serving mentalities. It would be detrimental for a government or any political party to place self-interest above the nation’s well-being when the time comes. As I have mentioned before, the only consequence of living in a state of denial is a rude awakening. It’s not enough by just telling the citizenry that recession is going to skip the country (as unbelievable as that might sound) while it engulfs our neighboring countries.

Crucial data that can lead to important decision making for policymakers and business owners should be made available in the public domain and updated consistently.

We also need a government that focuses on serving the people, rather than putting up dramatic power struggle dramas. It might just be the most expensive soap opera every Malaysians would have to pay.

Making Recession Work for You
Following Sun Tzu’s advice- “Know thy enemy, know thyself and you shall be victorious”, you need to look at how your own personal finance is staking up. Let’s look at 10 ways you can turn the table around and make the ‘monstrous’ recession work for you.

1) Firstly, look no further than your own balance sheet. Keeping an updated balance sheet is definitely no rocket science, but is often neglected simply because you do not see the benefit in the short term. Doing a reality check, like looking at yourself in the mirror takes more than just sheer courage- it takes a whole lot of discipline just to keep at it.

Knowing where you stand financially is the first thing you must do before you start messing around with your money. Even if you decide to go forward in the wrong direction, it helps by having a map so that you know how much you’ve strayed! Therefore, if you haven’t already done so, do yourself a favor- start a journal for your personal finance. It could simply be one of the best ‘investments’ in your financial life.

2) Buyer bewares! If you are a shopaholic, a recession can help you train your self-discipline when it comes to your shopping addiction and making you more conscious about your spending.

Here are a few tips that you can protect yourself to resist against such impulses:

i) Always use cash, because it’s much more painful to part with cash than to swipe with a credit card.

ii) Have a shopping list before hitting the stores and REALLY stick to it!

iii) Filter out the discount and sales tags- “they are on discount because nobody wants them!”

iv) Shop with a full stomach. You are more impulsive and temperamental when shopping with a growling stomach.

iv) Here’s one tip I find very useful, and I call it the ’24-hours Craving’- Would you crave and still come back for it 24 hours later? Some cravings evaporated instantly the moment you leave the store.

v) Resist shopping for the sake of shopping. The Chinese has a saying, “Don’t send the lambs into the wolf’s den”, which means don’t do something when you already know there’s going to be a tragic outcome. There are so many other ways you can spend your weekend productively.

3) Get enterprising! No, don’t quit your day job yet, unless you are already retrenched. You’ve probably figure out that you could earn some extra pocket money working on the weekends. There are many ways you can build passive income using the extra time you have. With access to internet, there’s no longer excuse that there’s no market for your skills.

Many skills become even more valuable in a recession. Repair-related industry, such as cobblers, clothing alterations, car mechanics and computer technicians would probably see a surge in their revenue in the coming months.

However, a word of warning though, with so much opportunities opening up, you can also be easily fall prey into scams if you’re not too careful. Pyramid-schemes, Get-Rich-Quick schemes is especially rampant during a recession.

4) Get charitable! In the midst of a crisis, it’s easy to forget about those who are even more unfortunate than ourselves. By sharing what we have in abundance with others, not only would we be spreading kindness and love (which is in very short supply these days), we can also remind ourselves and be grateful with what we have now.

5) Replacing your hobbies for something less inexpensive would also help you reduce the impact of the recession. If you happen to be a shopaholic, it would really help you save once you replace shopping with jogging in the park.

What about if you happen to like reading? Reading would be tough to replace but you can start sourcing for much more affordable reading materials. In a recession, pre-owned books are going to be very much sought after. So, that’s something for bookstore owners to think about.

6) Cut the cards! It’s a good time to cut and consolidate those plastics. It’s already difficult to juggle between your incoming and outgoing cash flow, let alone managing multiple credit card statements. Do yourself a favor; consolidate all your cards into one, or two at most.

7) Review your memberships. Go through all the renewable membership programs you’ve signed up and trim those that you’ve been benefiting from. You might realize that you are not going to the gym as often as you thought you would when you signed up. I am not a gym-fan. Always preferred the natural outdoor anytime to enclosed gym studios.

8) Attack your subscriptions! Check if your Astro subscription is absolutely essential? Maybe you can cut down on some channels, or even start watching your favorite dramas on the web.

What about your broadband packages? Can you surf with the basic package? I am using StreamyX’s 1MBps, which is costing me RM77 per month and is more than enough. Many people I know have already switched from printed news to alternative online news. Not only because it’s cheaper, but also the news are much more less likely to be spin-doctored.

9) Pre-retirement exercise! If you happened to be retrenched, not all is lost yet. How can being retrenched works for you? You can look at the retrenchment and the looming recession as a retirement simulator, except that the simulation is real. This is how it feels when you retire – no income, and living off the money stashed in your bank account (if there’s any left). Hence, this could be a good reminder that if you don’t plan for your retirement now, this is what’s going to happen when you ‘really’ retire.

10) Burn the fats! A recession can be good for your health. Just make a quick estimate of how much you’re spending while eating out right now. If you work around Klang Valley, eating out three meals a day would roughly cost around RM20 (inclusive of 2 meals at fancier restaurants such as TGI Friday or Penang Street). That’s at least RM600 a month. You can cut down on the frequencies you eat out and replace those with home-cooked food. For example, eating-in saved me at least RM400 last month!

Also, if you are interested to know if eating at home really can help you save, follow this link for an interesting debate!

If you are a regular smoker, cutting down on the cigarettes or eliminate it altogether would save you quite a lot and lengthen a few more minutes of your life (depending on how long you’ve been puffing). Same goes with alcohol intake, moderating the consumption can stretch your Ringgit further.

Epilogue
So, still think that recession is bad? No doubt, it is going to disrupt our lifestyles quite a bit, and in most cases change is a painful process. As the saying goes, “what doesn’t kill you only makes you stronger”. In fact, this is the first time in my working adult life I am experiencing an economic crisis, and economists are claiming that this crisis is one of the worst ever since World War 2.

As for the financial planning industry, concerned friends have been asking how had the crisis affect my bottom line. It would be ignorantly optimistic to claim it is business as usual. Investors’ confidence has never plunged any lower before this, and being a licensed unit trust consultant, earnings is surely going to take a hit. Insurance products have never been harder to sell, especially when giants like AIG can announce to the world that they’re facing solvency issues. You can no longer believe the numbers anymore, even when they’ve been prepared by the most trusted of professionals. Mega ponzi-schemes disguised as highly lucrative investment plans are being revealed as you are reading this. Greed seems to be the order of the day.

The entire financial industry is undergoing major transformations. It has definitely make the life for us in the financial planning industry very ‘shaky’, for lack of a better word. However, I do believe that for any businesses, as long as we stick to time-tested values such as integrity, honesty and accountability, we would be able to brace through these tough times. I can’t say I’ve found any silver bullets, as I believe that the crisis has yet to be played out fully. Time is better spent preempting for the worst and ensuring that when the storm hits, you have enough flexibility to ride it out unscathed.

However, I am worried that our government is pushing the problem away from their boardroom meetings, and nothing substantial has been brought up to quench the curiosity and doubts from the public. The recent political turmoil has taken too much focus and it seems our leaders are having problem placing their priorities. Time is definitely running short, and I wonder how much longer these politicians are going to continue buying time and avoiding the issue at hand.

The recent drop in Bank Negara’s OPR rate has helped to remove some burden off housing loan borrowers like me. Also, as I am writing this, a local daily’s headline goes – “RM5,000 rebate for a new car purchase!”. You can also read about it here.

We are also witnessing a higher level of awareness on the financial crisis globally, thanks to the Internet. If we are fortunate enough, we will probably see some positive reformation of the non-sustainable monetary system that we have come to depend on for so long. We now have the chance to review the viability of our current capitalist culture.

If the collective governments of the world do not take pro-active stance to remedy the on-going crisis, it’s possible that we might be entering another World War, fighting for leftovers in a resource-depleted planet. A reader posted this great speech by Vladimir Putin at the recent Davos World Economic Forum.

And here’s an interesting quote to end this post:

It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. ~Author unknown

I am not sure how many of you lined up for the 1 billion units of ASW 2020 this morning, but unlike previous years, these hot bananas were still selling after lunch hour. Reader LWY who camped at the POS office since 7:50am claimed that it was sold out at 2:00 pm.

Here’s a look at another one of Permodalan Nasional Berhad’s fund- the Amanah Saham Nasional 3′s track record:

ASN3′s return for 2002 – 6.00%
ASN3′s return for 2003 – 7.00%
ASN3′s return for 2004 – 7.50%
ASN3′s return for 2005 – 7.00%
ASN3′s return for 2006 – 6.30%
ASN3′s return for 2007 – 8.00%

I’ve had this fund since I was in high school… and if I knew it would give such returns, I would have ‘bought-in’ with all my ang-pow money.

Now…this is really getting up my nerves: Your KWSP contributions will be AUTOMATICALLY adjusted to the new OPTIONAL 8% rate, regardless of whether you opted for it or not!

Lower EPF Employees’ Contribution Rate Starting January 2009 Wage

Members of the Employees Provident Fund (EPF) will be able to benefit from the reduction of the employees??monthly statutory contribution rate by three per cent, from 11 per cent to 8 per cent, effective from January 2009 wage for a period of two years.

Deputy Prime Minister and Finance Minister YAB Datuk Seri Najib Tun Abdul Razak made the announcement during the winding up speech for the Ministry of Finance on the 2009 Budget on Tuesday. The move will help increase members??disposable income in the context of the current economic outlook. At the same time, the higher disposable income will support domestic consumption and thus help sustain the momentum of economic growth.

The decision to reduce members??statutory contribution rate was taken twice before in 2001 and 2003 as part of an economic stimulus package.

For ease of members and to better facilitate implementation of the measure, the reduction of the employees??contribution from 11 per cent to 8 per cent will be made automatically, effective from January 2009 wage. This arrangement will be implemented until December 2010 wage.

However if members wish to maintain the contribution rate at 11 per cent may choose to do so by filling up Form KWSP 17A (AHL). Once completed, the forms can be submitted to the members??respective employers for submission to the EPF.

In the meantime, the EPF will be issuing a new monthly contributions schedule accordingly. Members and employers may obtain the new schedule and Form KWSP 17A (AHL) from all EPF branches or download them from our website, myEPF, at www.kwsp.gov.my from 1 December 2008 onwards.

Didn’t the Finance Minister said that the decision to reduce the rate from 11% to 8% is optional? Then, what gave the KWSP authorities to act on behalf of the contributors to slash their contribution rates? This made it sounds like a “mandatory” move. Yes, it might seem to have ease members who are keen to slash their contribution trips to KWSP, but what about those who DOESN’T want to slash their rates? What about those who doesn’t want more “disposable” income?

Matters get worse for those who are not well-informed of such new policies that they are not even aware of their contribution being slashed automatically by 3%, and hence causing even more havoc for KWSP’s administrative department.

Via ngobalakrishnan.com…

He also said the union is unsure as to whether EPF had briefed its board of directors and the Malaysian Trades Union Congress (MTUC).

??ntil now, unofficial sources have said there has been no such briefing by EPF. As such, Maseu disagrees with the automatic reduction. To the contrary, it is those workers who agree to reduce their contributions who should be made to apply for that end,??he added.

The Sarawak Bank Employees Union had earlier objected to the move to reduce employees??EPF contributions and described it as a ??lueless knee-jerk reaction??

The union?? chief executive officer Andrew Lo said the move ??ould further jeopardise the already meagre retirement savings of Malaysian private sector workers??

He said instead of seeking to raise wages to increase disposable income and increase domestic demand, the government has chosen to sacrifice those savings.

??e strongly urge workers not to volunteer for this reduction because it will then give employers an excuse not to increase wages,??added Lo, who is also Sarawak MTUC secretary, in a letter to Malaysiakini.

Or is there something KWSP not telling the labour force with this recent move? Or is this a red herring to the recent RM 5 bil + RM 5 bil campaign?

Anyway, with all mindless and inconsiderate measures by KWSP authorities in handling Other People’s Money, you can still opt out from this “3% rate slash” by filling up this form: Form KWSP 17A