Improved pension benefits

This news article from The New Straits Times tells us that the government can afford to pay an extra RM1.3billion next year to pensioners because of revision in the rules pertaining to pension payments to retired government servants and their family members, after their deaths.

Among the changes made are that the maximum amount of pension is increased from half of last drawn salary to six tenth of last drawn salary. Also the payment to spouses and eligible children of deceased pensioners after 12.5 years, will be increased from the current 70% of the retiree's pension to a full 100% of the retiree's pension.

These are very good improvements to an already excellent pension benefits to civil servants.

The only setback to the government pension scheme is the lack of vesting and guarantee. A government servant who decides to leave the government service after a substantial number of years will not get any pension benefit and neither will benefit from contributions to EPF for his/her past services. This may not encourage staff with good opportunities to serve outside the government to leave. Also if the retiree falls foul of the law to the extent that the pension benefits can be withdrawn the whole pension benefit is withdrawn and the family members will suffer during their years of needs.

Additional RM1.3b for pension benefit

PUTRAJAYA: The government will spend an additional RM1.3 billion on remunerations, gratuities and other benefits for more than 500,000 retirees and dependants next year.

This year, the pension benefit payout is estimated at RM7.6 billion.

Pension Department director Datuk Yeow Chin Kiong said additional expenditures would have to be incurred following the implementation of several new benefit and derivative pension schemes as well as revised pension formula as endorsed by the government.

Beginning January, under a revised formula, pension will be computed based on a maximum of 30 years of service as opposed to the current 25 years.

The government has also agreed to restore derivative pension to 100 per cent to those who receive 70 per cent after 121/2 years from the date of retirement or death of a civil servant.

Also from January, a mother or father of an unmarried civil servant who died while in service will be paid an ex-gratia in one lump sum.

"This is the best offer pensioners or their dependants could ever have hoped for. Pension is like a lifetime gratuity.

"The government, taking into account affordability, could pay the significant increases despite the current economic climate," Yeow told a press conference in his office yesterday.

The department also anticipated a "change in heart" in some 66,000 civil servants who had opted for the Employees' Provident Fund prior to the implementation of the revised pension perks.

"I believe more than half of them will opt for pension scheme in view of the better and improved benefits," he said, adding that civil servants have until Feb 1 to do so.

"The government would also spend about RM32 million on 1,989 retirees who had migrated next year. "In the past, we did not pay non-resident retirees."

Yeow said most of the retirees migrated to follow their children or work overseas.

Retirees or dependants who have doubts or queries can call the department at its hunting line at 03-88854906, or Yeow's assistant director Ahmad Nizam Norati at 03-88854125.

They can also surf its website at www.jpapencen.gov.my or go to the department's branch office on the fifth floor of the Maju Junction Hall in Jalan Sultan Ismail or the Public Service Department headoffice at Presint 1 here.

These "goodies" were among improved pension perks revealed by Prime Minister Datuk Seri Abdullah Ahmad Badawi at a public sector Workers' Day gathering in May.

Among others, Abdullah had said the government decided to raise the retirement age from 56 to 58 in view of the longer life span of Malaysians.

In recognition of their contributions to the country, Abdullah had also said retirees with at least 25 years of service would be given RM720 in pension, also effective January.

Visit to Bank Negara Malaysia

On Wednesday 24th December 2008 the third year students of the Actuarial Science and Risk Management (ASRM) program at Universiti Sains Islam Malaysia (USIM) visited Bank Negara Malaysia (BNM). They were given a briefing on career opportunities for ASRM students at BNM. According to the speaker, graduates in ASRM can apply for employment at BNM throughout the year. They must obtain a cumulative grade point average of at least 3.0 before they can be considered for selection. This is an opportunity for students who are interested in a career at BNM and for those who are still below the qualifying requirements of 3.0, they can start improving their grades from now - they still have two semesters of coursework to improve their grades.

BNM is a very good employer and has excellent facilities for their staff. Their requirements for graduates in actuarial science and risk management could be met by ASRM students from USIM.

At the end of the visit students were treated to a nice tea and cakes at the executive cafeteria.

Research in Islamic Finance

This is an area for USIM to show its capabilities. The Actuarial Science and Risk Management Program combined with the Financial Mathematics program can develop substantial research expertise. USIM also has within its campus the World Fatwa Management and Research Institute (INFAD) and the Faculty of Economics and Muamalat that can help strengthen research in Islamic Finance.

KFH Research bags Islamic finance award

KFH Research Ltd, a wholly owned subsidiary of Kuwait Finance House (KFH), won the recognition as the "New Provider for Islamic Finance Research" from an Islamic finance conference organisers. It received the award from Dow Jones Islamic Market Indexes (DHM), International Institute of Islamic Finance (IIIF) and the Kuala Lumpur Islamic Finance Forum (KLIFF) 2008. Second Finance Minister Tan Sri Nor Mohamed Yakcop presented the award in conjunction with the 5th KLIFF. The team's research coverage includes economics and financial analysis in the GCC, Asia and US/Europe, currency strategies, GCC sectoral coverage and research advisory in Islamic finance, KFH Research said in a statement. KFH Research is led by Baljeet Kaur Grewal (picture) who is its managing director and vice chairman.

BBA vs Musyarakah Mutanaqisah

The following article by Habhajan Singh is related to his previous article which I posted in this blog. There seems to be some differences in method of implementation but I wonder whether the financial commitments of purchaser and financier are any different.

http://islamicfinanceasia.blogspot.com/

Monday, December 8, 2008
RHB Islamic phases out ‘disputed’ BBA financing
By HABHAJAN SINGH
RHB Islamic Bank Bhd has completely phased out Al-Bai Bithaman Ajil (BBA) in favour of the musharakah mutanaqisah concept for its home financing products. This probably makes it one of the first local Islamic subsidiaries of local banks to move away completely from BBA which has been under increasing scrutiny over the years.
The move by RHB Islamic, one of the 17 Islamic banks including Al Rajhi Banking & Investment Corporation (Malaysia) Bhd and Maybank Islamic Bhd licensed by Bank Negara Malaysia (BNM), signals a shift in the local Islamic home financing front away from BBA.
"RHB Islamic has taken a stance of phasing out products and services based on BBA or bai al-inah with effect Oct 1. This is based on (its) Shariah committee's advice to adopt globally accepted Shariah principles," RHB Islamic Head of Shariah Division Ahmad Suhaimi Yahya told The Malaysian Reserve.
He added that the move is in tandem with the bank’s strategy to position itself as the banker of choice for local and international customers looking for Shariah-compliant financial products and services. This is in reference to the fact that BBA, with underlying concepts of bai dayn (debt trading) and bai inah (sale with imediate repurchase), are shunned in jurisdictions like the Middle East and Pakistan. BBA, which may involve the two concepts, is a deferred sale contract for a sale price that includes the profit, with a repayment period agreed beforehand.
For so many years, local Islamic banks have made BBA the linchpin when carving out Islamic financing, which now stands around RM143.4 billion.
The Islamic banking assets, according to latest statistics from the central bank, have expanded by 23% to RM234.9 billion compared to a year ago. The Islamic banking industry now accounts for 16.7% of total assets in the industry. It is understood that other banks are also in the midst of preparing to put on the shelf more home financing offerings that are not based on BBA contracts.
The recent major trigger for the move away from BBA was the July 18 written judgment by High Court judge Justice Datuk Abdul Wahab Patail in Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya, first reported by The Malaysian Reserve on Sept 8.
The judgment, a collective ruling on 12 cases now pending an appeal, sent shockwaves in the local Islamic banking fraternity as they began deciphering its impact.
For starters, the judge had ruled that the application of the BBA contracts in those cases were contrary to the Islamic Banking Act 1983 (IBA). The judge ruled that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.
Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
Following the High Court ruling, BNM sent a circular dated Sept 8 to heads of Islamic financial institutions to "strongly advise" them to review their heavy reliance on the BBA concept in their transactions.
The circular noted the industry's seeming over dependence on BBA, adding that BBA is a Shariah concept introduced more than 20 years ago to facililtate growth and development of Islamic finance.
At its end, RHB Islamic is offering Equity Home Financing-i to its customers based on diminishing musharakah or musharakah mutanaqisah as an alternative to the earlier BBA home financing.

EPF is affected by the Stock Market too

This article in The Star shows that performance of EPF's investment is affected by the ups and downs of the stock market too. Thus the return that EPF can provide for its members can be affected by the performance of the stock market. This is because the EPF invests quite substantially in the stock market.

Risks due to investment in the stock market is substantially reduced if the amount that is allowed to be withdrawn from the EPF is invested in a well managed unit trust fund. It has been shown in the past that the performance of a good unit trust fund has always exceeded that of the EPF over the long term.

Thursday December 4, 2008
EPF Q3 income dips 60%
By YVONNE TAN

PETALING JAYA: The Employees Provident Fund’s (EPF) total investment income for the third quarter (Q3) fell 60.4% to RM2.06bil from RM5.2bil in the previous quarter (Q2) as its investments, especially equities, were affected by the global economic uncertainty.

The EPF said in a statement yesterday income from equities in the June to September period fell by more than half to RM1.26bil from RM2.54bil in the preceding quarter.

In line with accounting best practices and as a conservative provisioning policy, the EPF also made allowances amounting to RM2.29bil for diminution in the value of equity investments due to the deterioration in market value compared with RM416.7mil in Q2.

“The outlook in the fourth quarter is likely to reflect the full-scale impact of the global meltdown, although there is still hope for the Malaysian equity market to bounce back,” chief executive officer Datuk Azlan Zainol said yesterday.

Azlan believed Malaysia’s competitive edge would help sustain the economy during these difficult times.

The EPF said due to the current global economic uncertainty, stock markets across the globe had fallen significantly, including the local equity market.

Bursa Malaysia’s market capitalisation during Q3 shrank by about RM200bil to RM770bil.

In the same period, the KL Composite Index fell 243.81 points, or 19.3%, to 1,018.68.

On the investment income of RM2.06bil in Q3, the EPF said it was predominantly driven by Malaysian government securities (MGS) and loans and bonds.

In the quarter under review, the EPF received 3.1% higher returns from loans and bonds, raising income to RM1.71bil which was an increase of 3.14% or RM52.05mil from Q2’s RM1.66bil.

Its investment income in MGS rose 1.38% to RM1.217bil against the preceding quarter’s RM1.2bil.

EPF said the most of Q3 investments were in the trade and services sector and the finance sector comprising 38% and 33.9% of total equity investments respectively.

The next largest Q3 equity investment was in the plantations sector, representing 8.5% of total equity investments.

Money market instruments provided an income of RM142.25mil, down 49.21% from RM191.46mil in Q2.

Investments in properties yielded returns of RM21.53mil, down from RM22.66mil in Q2.

“The EPF will always maintain a policy of low-risk investment decisions. As a national premier pension fund, we cannot afford to take on high risk investments,” Azlan said.

Actuarial and Financial Mathematics Seminar at USIM

The Faculty of Science and Technology at University Sains Islam Malaysia (USIM) will be holding a seminar in Actuarial Science and Financial mathematics on 12 January 2008. One of the presenters will be Prof. Dr. Jeyaraj Vadiveloo who is a Watson Wyatt Professor at The University of Connecticut, Storrs, USA.

This seminar is being organized by the final year students of the BSc Honours in Actuarial Science program at USIM.

EPF better than stock Market?

See if this article from The Star makes any sense to you.

Wednesday December 3, 2008
EPF better than stock market

It never gives negative returns

IN general, most people have the impression that the money placed in the Employees Provident Fund (EPF) always generates lower returns compared with the returns from their own investments.

In this article, we will look into the returns from EPF versus returns from the KL Composite Index (KLCI). We assume that investors are able to generate their own returns equivalent to the returns from the KLCI.

Based on our 23 years of data compilation, it is generally true that the average returns generated from EPF are lower than KLCI returns. From 1986 to 2008, the average return of EPF was 6.7%, 2.3 percentage points lower than the average return of 9% from the KLCI (see table).

However, most people do not understand the risks they need to undertake when they invest by themselves. The standard deviation of EPF is only 1.5%, 22.2 percentage points lower than the standard deviation of 23.7% from the KLCI.

We use standard deviation to measure risks. Most investors only look at how to generate the extra 2.3 percentage point returns, forgetting that they need to undertake a much higher risk to generate the extra returns. The extra return is unable to compensate for the extra risks that investors need to take.

Let’s assume one investor invested RM10,000 in the EPF and the KLCI respectively at the beginning of 1986. Logically with the average KLCI return higher than the average EPF return, the fund in KLCI should be higher than the fund in EPF in most periods.

However, as the table shows, by the end of 2008 (we assume that EPF will only be able to generate a return of 4.25%), the fund placed in KLCI would have reached RM40,000 versus RM43,946 generated by EPF, a shortfall of RM3,946.

The main reason behind this shortfall is that the EPF never gives negative returns whereas the KLCI generated negative returns eight times over the past 23 years.

There is a market saying that out of 10 people who invest in the stock market, only one can make money, the others will lose money. Warren Buffett says if you want to win, you don’t lose. Hence, we disagree with some people who advise others not to place money in EPF because it generates lower returns.

In most periods, the money in EPF gets lower return than the money placed in KLCI. However, the main reason for the lower fund value in KLCI by the end of 2008 was the market crash during 1998.

The money in KLCI dropped by 47.1% to RM18,105 in 1998 from RM34,246 in 1997 whereas the money placed in EPF increased further to RM26,594 in 1998 from RM24,924 in 1997. After 1998, it took nine years for KLCI to catch up with the fund value in EPF.

Last year the fund value in KLCI (RM46,000) finally surpassed the fund value in EPF (RM42,154). However, as a result of the recent market crashes, we are anticipating the fund value in EPF to overtake KLCI again this year.

It will take a few years from now for the KLCI to catch up with the EPF again. Unless investors are constantly monitoring their own investments and are able to avoid most of the negative returns, we think it is safer to put money in the EPF rather than withdraw it for their own investments.