Malaysia:
Employee Provident Fund Changes
Hewitt Comment:
We believe that the aging workforce, the continued shortage of strong talent,
and increasing retention problems in Malaysia will make the employment of
individuals over age 55 the norm rather than the exception in the near future.
Therefore, companies must design their employment terms and conditions, pay, and
supplemental benefit programs in cost-effective ways that, at the same time, are
attractive to mature aged employees.
Background
The EPF, implemented in its current form under the employee Provident Fund Act in
1991, provides lump-sum old age, survivors', and disability benefits. Both employers
and employees are required to contribute. The normal employee contribution rate is
11% and the normal employer contribution rate is 12% of total pay. The Employee
Provident Fund Act defines earnings for contribution purposes as wages, bonuses,
and allowances. Retirement benefits, gratuities, and overtime pay are excluded.
The shortage of professional and managerial talent in Malaysia is hindering
the growth plans of many local and multinational companies. To overcome this
challenge, some employers are providing continued employment opportunities to
employees over the normal retirement age.
However, changes to the EPF contribution rules, effective February 1, 2008, have
made this option more costly for some companies.
Favorable economic conditions and the search for labor arbitrage have led to
increased investment - both domestic and foreign - in the Malaysian economy, and
as the economy expands, the competition for talent has increased.
According to data collected in Hewitt's 2007 Total Compensation Management
survey, the average employee turnover rate is 18%. Turnover among Generation X
and Y employees tends to be the highest, as company loyalty among the younger
generations is weak and apparently
eroding.
Talent issues exist on the other end
of the generational spectrum also. With
the normal retirement age set at age 55,
the International Labor Organization
estimates that only
52% of individuals
aged 55 to 59 and 42% of individuals
aged 60 to 64 remain economically
active.
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To stem the loss of talent, many
employers encourage employees to stay
in the workforce longer. Until recently,
this approach enabled employers to
retain their experienced employees cost
effectively.
Previous EPF practices
Prior to February 1, 2008, employees
over age 55 who had fully withdrawn
their ePF funds were not obliged
to contribute to EPF; however, they
could choose to continue voluntary
contributions at the full rate (11%).
Employees over age 55 were
required to continue making full
contributions to ePF if they had not fully
withdrawn their funds.
In both cases, if the employee
continued to contribute, the employer
was required to make the mandatory
12% contribution to EPF as well. (see
Figure 1)
Current EPF requirements and
practice
Effective February 1, 2008, the following
changes were put in place:
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EPF contributions for employees over
age 55 are now mandatory, either at
full or reduced rates. Reduced rates
are 50% of the full rate, which is
5.5% for the employee and 6% for
the employer. |
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This requirement covers employees
who stopped contributing to the
system (as they made a full withdrawal
before February 1, 2008). Now, these
employees must contribute to EPF at
the reduced rate. |
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The change also applies to employees
over age 55, as of February 1, 2008,
who had not made a full withdrawal
of their funds and were actively
contributing to the EPF. If they
decided to make a full withdrawal
after February 1, 2008, they must
contribute at the reduced rate. |
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Employees who are subject to a reduced rate of contribution can still opt to
contribute at the full ePF rate. |
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In all cases, employers must contribute at their full or reduced rate, according to
whether the employee is contributing at his or her full or reduced rate. |
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