Employees Provident Fund
Encyclopedia
The Employees Provident Fund (Abbreviation
Abbreviation
An abbreviation is a shortened form of a word or phrase. Usually, but not always, it consists of a letter or group of letters taken from the word or phrase...

: EPF) also known Malay
Malay language
Malay is a major language of the Austronesian family. It is the official language of Malaysia , Indonesia , Brunei and Singapore...

 as Kumpulan Wang Simpanan Pekerja (Abbreviation: KWSP) is a Malaysian government agency under the Ministry of Finance. It manages the compulsory savings plan and retirement planning for legally employed workers in Malaysia. Membership of the EPF is mandatory for working Malaysian citizen
Malaysian citizenship
Malaysian nationality law is the law of Malaysia that deals with citizenship and other forms of nationality. Nationality law is mentioned in the Constitution of Malaysia....

s, or non-Malaysian citizens who are either permanent residents
Permanent residency
Permanent residency refers to a person's visa status: the person is allowed to reside indefinitely within a country of which he or she is not a citizen. A person with such status is known as a permanent resident....

 or have been EPF members before 1 August 1998.

Overview

The Malaysian EPF was formally founded after the enactment of the Employees Provident Fund Act 1991 (Act 452), which grants employees retirement benefits via a body that is intended to manage their savings. As of 31 December 2006, a total of 11.4 million members have registered to the EPF, of which 5.4 million are active and contributing members, and 416,000 are active employers.

The EPF is intended to help employees from both private and non-pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...

able public sectors save a fraction of their salary in a lifetime banking scheme, to be used in an event that the employee is temporarily or no longer fit to work. The EPF primarily applies to retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

, but sickness, disabilities
Disability
A disability may be physical, cognitive, mental, sensory, emotional, developmental or some combination of these.Many people would rather be referred to as a person with a disability instead of handicapped...

 or unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

 are also covered. The EPF also provides a framework for employers to meet legal and moral obligations to their employees.

As of June 2010, the size of the EPF stood at RM
Malaysian ringgit
The Malaysian ringgit is the currency of Malaysia. It is divided into 100 sen...

407 billion.

Savings and investments

As of 2007, the EPF functions by procuring at least 11% of each member's monthly salary and storing it in a savings account, while the member's employer is obligated to additionally fund at least 12% of employee's salary to the savings at the same time.

While in savings, a member's EPF savings may be used as investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

s for companies deemed profitable and permissible
Halal
Halal is a term designating any object or an action which is permissible to use or engage in, according to Islamic law. The term is used to designate food seen as permissible according to Islamic law...

 by the organisation, from which dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...

s are banked to respective members' accounts. Alternately, members may use their EPF savings in their own investments, although such activities are not covered by the EPF and the members are to bear any losses made.

Compared to those declared by several other agenda, the EPF declares an annual dividend on funds collected which has been progressively declining since 1987:
1983 to 1987 1988 to 1994 1995 1996 1997 to 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
8.5% 8.0% 7.5% 7.7% 6.7% 6.84% 6.00% 5.00% 4.25% 4.50% 4.75% 5.00% 5.15% 5.80% 4.50% 5.65% 5.80%


Legally, the EPF is only obligated to provide 2.5% dividends (as per Section 27 of the Employees Provident Fund Act 1991).

The EPF claims that the lowered dividend is the result of its decision to invest in low-risk fixed revenue instruments, which produce lower returns but maintains the principal value of its members' contributions. This is due to the EPF primarily aimed at providing a stable financial security of its members.

In addition, the EPF further elaborates dividend rates and their performances are calculated and influenced based on the full distribution of net EPF revenue, depending on the return on investments that in turn is based on asset allocation.

The EPF also attributes the declining interest market rate since 1996 to the interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 market rate. Because 75% of investment funds are concentrated towards bodies closely linked to trends in the interest market rate, including Malaysian Government Securities, loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

s or bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

, and money market instruments, low interest rates for the past few years had an adverse effect on returns for EPF investments.

In April 2007, criticism was raised at a proposed amendment of EPF guidelines (the EPF Bill (Amendment) 2007) that cuts monthly contributions of members above 55 years by 50% (6.2% from 11% for employees, and 5.7% from 12% for employers). The change was described as a disadvantage to tens and thousands of members compared to those under the pension scheme as the former is not given free medical treatment after retirement, and was described as a form of discrimination towards senior members. Under the proposal, an employer of foreign workers may also optionally contribute RM5 monthly per head, raising concerns of employers' preferences towards foreign employees. The government responded by claiming that the proposal may be studied, and later states that members can contribute at any amount above the slashed contributed amount. The EPF guideline for employers of foreign workers remains unchanged, citing that the policy has been implemented before in 1998.

Withdrawal

As a retirement plan, money accumulated in an EPF savings can only be withdrawn when members reach 50 years old, during which they may withdraw only 30% of their EPF; members who are 55 years old or older may withdraw all of their EPF. When a member dies beforehand, the EPF fund is withdrawn in favour of a nominated individual. Withdrawals are also possible when a member will emigrate
Emigration
Emigration is the act of leaving one's country or region to settle in another. It is the same as immigration but from the perspective of the country of origin. Human movement before the establishment of political boundaries or within one state is termed migration. There are many reasons why people...

, becomes disabled
Disability
A disability may be physical, cognitive, mental, sensory, emotional, developmental or some combination of these.Many people would rather be referred to as a person with a disability instead of handicapped...

, or requires essential medical treatment. Members above 55 years old can choose not to withdraw EPF savings immediately and withdraw only later, and, under existing guidelines, employers may continue to contribute 12% of the members' salaries at their own discretion.

Accounts

Effective 1 January 2007, a member's EPF savings consists of two accounts that vary by their share of savings and withdrawal flexibilities. The first account, dubbed "Account I", stores 70% of the members' monthly contribution, while the second account, dubbed "Account II", stores 30%. Account I restricts withdrawals to the moment the member reaches an age of 55 years old, is incapacitated, leaves the country or passes away. Withdrawal of savings from Account II however, is permitted for down payment
Down payment
Down payment is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.A loan is then required to make the full...

s or loan settlements for a member's first house, finances for education and medical expenses, investments, and the time when the member reaches 50 years of age.

See also

  • The Central Provident Fund
    Central Provident Fund
    In Singapore, the Central Provident Fund is a compulsory comprehensive savings plan for working Singaporeans and permanent residents primarily to fund their retirement, healthcare and housing needs. It is administered by the Central Provident Fund Board, a statutory board under the Ministry of...

    , Singapore's Provident Fund
  • Provident Fund
    Provident Fund
    Provident fund may refer to:* Employees Provident Fund Organisation of India, India's retirement plan* Mandatory Provident Fund , Hong Kong's retirement plan* Central Provident Fund , Singapore's retirement plan...

    , for other "Provident Funds" in other countries.
  • Economy of Malaysia
    Economy of Malaysia
    The Economy of Malaysia is a growing and relatively open state-oriented and newly industrialised market economy. The state plays a significant but declining role in guiding economic activity through macroeconomic plans...


External links

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