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In 2014, the government attempted to increase the Employees’ Provident Fund (EPF) contribution for the employer from 12 percent to 14 percent. State officials, to defend the move, were quick to point out that in Singapore the employer contributes 16 percent to the Central Provident Fund (CPF). However, what they forgot to say was that in Singapore, the movement of the CPF contributions and the wages are linked to national productivity and when times are good, wages and the EPF are revised upwards and as has happened, they have also been reduced in times when conditions are bad.
It is also good to note that in Singapore the employee contributes 20 percent and the whole scheme is tied to housing, healthcare and a host of benefits for the workers. It is also not out of place to point out that the National Trades Union Congress (NTUC), the only trade union recognized in Singapore, has the Prime Minister as Ex-officio President and that the type of tripartism practiced is unique and not much different to a communist form although the economic policy is strictly market driven.
Anyway, the officials who cited the Singapore example must also realize that the markets that Singapore competes in are very different to those in which we often compete. Singapore exited the type of industry we are mostly engaged in moving to high-value industries and services by investing to upgrade the skills which matched their movement upstream.
In addition, the CPF has never been accused of mismanagement or for investing in junk bonds and stocks like the EPF. According to the EPF Act, an employee is required to contribute a minimum of 8 percent and the employer a minimum of 12 percent of the total salary of the employee monthly to the EPF. However, the worker derives very little benefit during his working life and the benefit is wholly for the state in the short term.
Increasing EPF contribution
Many Unions have always welcomed the idea to increase the employer contribution, because it helps an average worker to financially secure his retirement. For example, a 2 percent increase, a worker would put away the equivalent of 25 percent (EPF 22 percent + Employees’ Trust Fund (ETF) 3 percent) annual salary per year excluding gratuity (1/2 month of salary for every year of service after completing five years) annually.
However, people in the informal sector do not place much reliance on the EPF and ETF and for them what is important is their day-to-day expenses and many employees would like to see the cash in their hands, rather than hand over their hard-earned money to the state for safe keeping. The concern for many workers today is how safe their contribution would be by the time they retire and in addition, the real value of the lump sum that will be available to them to invest when they retire.
On the other hand, for the employer, the impact will be an increase in the labour cost. Raising the EPF contribution for the employers could have an adverse impact on private sector job creation and cost structures of firms operating on thin margins. Perhaps to cushion the impact the government would then have to look for better options to ensure the private sector is compensated in some way.
Provident Fund management
The EPF is administratively under the Labour Ministry and the funds are managed by the Central Bank. The EPF is the largest retirement fund (over Rs.1.3 trillion) of private sector workers. Currently, the EPF has invested about 92 percent of its funds in government securities, 6 percent in stocks and 2 percent in corporate debt and in short-term government securities.
The previous government perhaps to mitigate some of the criticism levelled against the fund for certain controversial investments proposed at that time to distribute a dividend to the members of the Provident Fund, who had over 10 years of active accounts. This was the first-ever dividend distribution made by the EPF.
Today, one of the main concerns the members have is the limited benefit the EPF offers a member during their working life, when compared with some of the well-managed superannuation funds globally. Many of those funds support skills development, healthcare and housing. Today, the lifestyles of people have changed and we are moving towards a middle-income country, therefore it is important for the EPF to offer a product that reflects those changes to retain its economic and social relevance.
Possible options
Given the significant changes in the workplace, changing lifestyles and the increase in mortality our policymakers now need to develop a new EPF that can help an average employee to build up a capital to have an adequate pension to live on throughout their retired life.
Furthermore, it may be also be prudent for the government to study its current and long-term funding options and the risks associated with managing the EPF in consultation with the private sector. However, it is a must that an autonomous entity out of Central Bank control is created and also looks at an option of giving a percent as a lump sum gratuity and utilizing the balance for a pension payment.
The private sector could also benefit substantially through a form of an unemployment benefit scheme, which the new system should support. That would help companies to restructure and become more competitive and for the economy to improve its competitiveness.
In the final analysis, while it is necessary to secure the retirement future of many low income workers who do not have the privilege of hefty bonuses and shares, the state also needs to ensure that the competitiveness of the private sector is not impacted negatively by driving up labour costs because that could also lead to more small and medium enterprises (SMEs) evading EPF.
(Dinesh Weerakkody is a former chairman of the Employees’ Trust Fund Board)
