QUESTION TIME There is a typically Malaysian malady when it comes to companies, agencies and funds that are associated in one way or another with the government - transparency, or more accurately, the lack of transparency. It may be an overworked term but once you have transparency it makes it that much easier to make such organisations accountable.

If the mistakes that you are make are going to be laid bare and naked for everyone to look at when the time for reporting comes, it is a major incentive to stay on the path of correct behaviour and not stray away from the straight and narrow.

The Employees Provident Fund or EPF is not government owned, the money it has - over RM550 billion at last count, a full quarter more than Bank Negara Malaysia’s foreign exchange reserves of RM435 billion as at mid-June - belongs to its members, over 12 million of them.

But effectively it comes under the Finance Ministry and is bound by law to take instructions from the finance minister which are in line with the EPF Act. Also, board members are appointed by the Finance Ministry, which clearly implies considerable government control over the fund.

This government control was exercised in the past. The EPF has been used to prop up the falling market, without success of course, and has bought some rather dubious stocks at overvalued prices, including Renong and United Engineers (M) at the height of the 1997/98 financial crisis.

Exact numbers are not available because of the opacity of EPF’s buying and selling of its investments but if the numbers are totalled up, the total losses incurred from these transactions will easily come up to billions of ringgit.

At its own admission, EPF continues to trade in equities, and its share of investments in equities have risen to nearly 40 percent now. But EPF’s newly appointed CEO Shahril Ridza Ridzuan defends this in an interview as necessary to lock in profits so as to pay out dividends to members.

We are not totally convinced that there are no other ways of doing it.

If for instance EPF were to invest in shares with good dividend payments and have a larger proportion of the investment portfolio in fixed income instruments such as Malaysian government securities and bonds, then it can receive enough recurrent income to pay out dividends, even though it may be at a lower rate.

Members should be educated to accept lower dividend rates as a trade-off in favour of conservatism. In fact, when EPF first started, its rates were as low as 2.5 percent. That may have been due in part to low inflation but also in part due to conservatism.

After all, its target rate of return overall is merely two percentage points over inflation and it should be quite easy to achieve that and preserve capital by putting its money in conservative investments.

Problem with secrecy

Shahril maintains that this trading will not be publicly disclosed in EPF’s reports, except to disclose it to Bursa Malaysia under the exchange’s requirements to notify changes of major shareholdings in listed companies, throwing a veil of secrecy over the trading activities. His reason for that is not to tip off the market about its trading patterns.

But surely after the trades are done they can be disclosed without disclosing too much of its trading strategy.

The problem with this secrecy is that it is possible to hide many investment losses of specific counters or investments which will never come to light if EPF’s trading records are not disclosed. That’s always a dangerous thing and especially so with a fund the size of EPF’s, one of the largest such funds in the world, where many relatively smaller but  very large absolute losses can be covered up.

Many other retirement funds are much more forthcoming in their accounts and public disclosures.

This writer had occasion to ask for information from the California Public Employees’ Retirement System (CalPERS) which provides pension fund, healthcare and other retirement services for about 1.6 million California public employees. It has assets of over US$250 billion (RM800 billion) and is the largest pension fund in the US. It is also worth noting that EPF’s assets are more than two-thirds that of CalPERS.

It was reported then, in 2007, that CalPERS wanted to withdraw its investments from Malaysia over corporate governance issues and we wanted to know how much it had invested here. Within 24 hours, CalPERS sent us a spreadsheet of over 1,000 lines detailing not only all their investments in Asia but when they were purchased, at what price and what was the gain or loss based on the current market price.

That enabled us to come to the conclusion that the CalPERS withdrawal would have hardly any impact on Malaysia because they had less than RM15 million invested here at that time.

The point is that retirement funds elsewhere disclose their investments in a detailed enough format to enable anyone to make a proper analysis. Their investment objectives are revealed and the benchmarks by which performance will be assessed are clearly stated for all their funds.

That is not so with the EPF.  It is necessary to institutionalise transparency mechanisms within the EPF so that any wrong doing will be uncovered, if not sooner, as soon as public reporting is made.

A retirement fund should have no need for such high levels of secrecy - it’s members’ money which is involved. All members, whose money is it that EPF manages, are entitled to know what investments EPF makes and how much money it has made or lost in each of them.

Hiding a multitude of bad decisions

Anything less than that perpetuates a system, under the guise of the necessity of secrecy, which can be substantially abused by the government and management to hide a multitude of bad investment decisions. The fund must act at all times in the interests of members, and only in the interests of members.

For a fund size of over RM550 billion, and growing at 8 percent - 9 percent a year, investment losses can be astronomical and could easily run into the tens of billions of ringgit - one billion ringgit is less than 0.2 percent of EPF’s total fund size.

At that kind of size, EPF’s bookkeeping should not only be meticulous and detailed but very transparent to ensure that every tiny bit of the fund is properly invested and  accounted for and can be clearly seen to be so by everyone and especially the members.

P GUNASEGARAM is founding editor of KiniBiz .