Provident Fund is an Approved Fund

Chapter 1:

1.1 Introduction

This project paper is about the measurement and analysis of financial and social performance of Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and Kumpulan Wang Simpanan Pekerja (KWSP) for the years 2005 to 2008. In Malaysia, there are retirement benefit schemes for employees who have engaged into a contract of service or apprenticeship. It designed to provide the retiring individual who either from private sector or public sector, with dignity and security. Retirees need not to worry about the cost of living after retiring with the existence of this scheme. In Malaysia, employees' provident fund is defined by Thillinathan, R. (2000) as a contribution plan for employees of the private sector; while retirement fund is the defined benefit plan for pensionable-employees in government service.

According to Employees Provident Fund Act 1991, Provident fund is an approved fund or other scheme for the benefit of employees established by an employer or by a group of employers and declared by the Board. Originally, the provident fund was set up in order to provide monetary security to employees when they retire. However, it now plays an important role to employees and after it was developed into a board plan for social security which consists of retirement, buying houses, medical expenses, and related expenses. For our country, government had established Government-Linked Investment Companies (GLICs) to manage provident and also retirement funds for employees, namely Kumpulan Wang Simpanan Pekerja (KWSP) and Kumpulan Wang Persaraan (Diperbadankan) (KWAP).

Government-Linked Investment Companies (GLICs) are defined as Federal Government linked investment companies that invest funds into Government-Linked Companies (GLCs). As stated in the official website of Putrajaya Committee on GLC High Performance (PCG), GLICs are defined by the influence of the Federal Government in appointing or approving Board of Director members and senior management, and having these individuals report directly to the Government, as well as in providing funds for operations and/or guaranteeing capital placed by unit holders.

There are seven GLICs, namely:

1. Khazanah Nasional Berhad (Khazanah),
2. Menteri Kewangan Diperbadankan (MKD),
3. Kumpulan Wang Simpanan Pekerja(KWSP),
4. Lembaga Tabung Angkatan Tentera (LTAT),
5. Lembaga Tabung Haji (LTH),
6. Pemodalan Nasional Berhad (PNB),
7. Kumpulan Wang Persaraan (Diperbadankan) (KWAP).

They are divided into two categories, such as those fully-owned by the Government (which include Khazanah and MKD) and the ‘privately funded' but where government plays an important guarantor or statutory role (KWSP, LTAT, LTH, PNB, AND KWAP).

1.2 Kumpulan Wang Simpanan Pekerja (KWSP)

KWSP, also known as Employees Provident Fund (EPF), is a social security institution which formed under the Laws of Malaysia, the Employees Provident Fund Act 1991 (Act 452) and supervised by the Ministry of Finance. It provides retirement benefits for its members through management of their savings and served as a framework for employers to meet their statutory and moral obligations to their employees. According to Roddy McKinnon (1996), KWSP is the world's first mandatory national (that is centralised and publicly managed) provident fund and was founded by the colonial government in 1951, following an initial proposal made by the Federal Labour Department in 1949, as an administratively simple mechanism for providing lump-sum payments to all workers at the time of their retirement.

Private and non-pensionable public sector employees are the members of KWSP. There are 12.07 million members and 441,820 registered-employers as at 31 December 2008. For employees' provident fund, every employee and employer shall be liable to pay monthly contributions at the rate respectively, as per the Employees Provident Fund Act 1991. The contribution, which will be saved in individual account in KWSP, is calculated based on the monthly wages of an employee. The contribution rate from both employee and employer is a reviewed periodically. Due to the 2007-2009 financial crisis, also known as subprime mortgage crisis, the contribution rate for employees is 8% and the rate for employer is 12%. The rationale given by KWSP was to increase members' disposable income.

Instead for retirement purposes, employees' provident fund also can be withdrawn for housing loan payments, health, investment, and education purposes. In fact, every member of KWSP has two accounts, namely Account 1 (which consists 70% of total contribution) and Account 2 (which includes 30% of total contribution). Members are allowed to withdraw their savings in Account 2 for other purposes except for retirement purposes when they reach 50 years old. In the other hand, members can only withdraw the savings in Account 1 at the age of 55 for retirement purposes, either at lump sum amount, at minimum monthly payments of RM250 for a interval of time (not less than one year), or at minimum RM2,000 at 30-day period.

Moreover, a minimum dividend rate of 2.5% on members' savings upon the end of every financial year will be given annually by KWSP, subjected to the approval of the Minister of Finance. This dividend payment policy, a policy of interest payment on members' savings, is in accordance Section 27, Employees Provident Fund Act 1991. Indeed, the dividend payment which is subject to the returns from investments made by KWSP, is divided into annual dividend and monthly dividend. KWSP invests in approved instruments such as Malaysian Government Securities, Money Market instruments, Loans and Bonds, Equity, and Property. A dividend rate of 4.5% has been given for year 2008.

1.3 Kumpulan Wang Persaraan (Diperbadankan) (KWAP)

In Malaysia, the officers of the public services and employees of statutory bodies and local authorities will be given pension, gratuity, cash awards and other benefits under any written law. Pensions Trust Fund (Kumpulan Wang Amanah Pencen) was given the responsibility to assist the Federal Government in towards funding the cost of these payouts. According to Pensions Trust Fund Act 1991 (Act 454), Pensions Trust Fund was administered by the Pensions Trust Fund Council and Accountant-General Malaysia shall be responsible for day to day administration and management of the affairs of the fund. However, Tun Abdullah Ahmad Badawi, the former Prime Minister, has announced that Pensions Trust Fund will be corporatised into a statutory body, namely Retirement Fund (Incorporated) during The 2006 Budget Speech.

Retirement Fund (Incorporated) which has continued the use of “KWAP” as its identity, was taking over all the functions activities, liabilities, assets, and funds of Pensions Trust Fund and supervised by Ministry of Finance. It was established on 1 March 2007 after the enactment of the Retirement Fund Act 2007 (Act 662) replacing the repealed Pension Trust Fund Act 1991 (Act 454) with the same functions and objectivities. With this changing status, KWAP would self finance and implement its own scheme of services, as well as determining remuneration and manpower requirements in order to be more responsive and dynamic.

KWAP will handle contributions from employers only which consist of annual contributions from Federal Government, statutory bodies, local authorities and agencies, and receipt of government's share from KWSP, LTAT, and Teachers' Provident Fund (TPF). As stated in Statutory and Local Authorities Pensions Act 1980 (Act 239), it is mandatory for employers (that is statutory bodies, local authorities and agencies) to contribute for their employees (KWAP's members) who have opted for the pensionable scheme, at the rate of 17.5% of the employees' monthly salary; while 5% of annual emolument budget will be provided by Federal Government. As at 31 December 2008, there are 493 employers and 106,944 members in KWAP.

As requested by law, KWAP made contributions to EPF (KWSP) and Social Security Organisation (SOCSO). KWAP also use the funds to invest into equity, Malaysian Government Securities, fixed income, money market, and alternative investment as permitted under Retirement Fund Act 2007 (Act 662). Besides executing investment, KWAP will manage and monitor the investments' performance, as well as setting investment policy and guidelines. However, KWAP is unlike KWSP in some ways. The management of members' administration and benefits payments for KWAP are placed under Jabatan Perkhidmatan Awam (JPA) Malaysia. All the payments of pension, gratuity and other benefits are distributed by JPA and are calculated based on a series of computations determined by JPA.

1.4 Government-Linked Companies Transformation (GLCT) Programme

In Vision 2020, Malaysia must be a comprehensively developed country which is developed economically, developed politically, developed socially and culturally, progressive and caring according to the official website of Vision 2020 and “The Future of Asia” Speech. Nevertheless, underperformance of Government-Linked Companies (GLCs) previously, both financially and operationally, had affected the achievement towards Vision 2020. Therefore, GLCT programme (which contained five policy guidelines and ten initiatives for government, GLC Boards, GLICs, and GLCs) was launched to drive grow and development the economy by government in May 2004 as stated in “The Launch of The GLC Transformation Programme” Speech. Whilst, Putrajaya Committee on GLC High Performance (PCG) is a key player that will implement, monitor, and catalyse this programme. It is chaired by Second Finance Minister with participation of heads of PNB, KWSP, Khazanah, LTAT, LTH, and representatives from MKD and the Prime Minister's Office.

Government-Linked Companies (GLCs), also known as state-owned organisations, are the companies that have a primary commercial objective and in which the Malaysian Government has a direct controlling stake. They were established to operate in commercial affairs and act as an integral part of the Malaysian economic engine which catalyses developments in strategic sectors and provide mission-critical services. The government has an ability to appoint Board of Director members and senior management for GLCs either directly or through GLICs. Besides that, the government also makes major decisions for GLCs which related to awarding contracts, strategy, restructuring and financing, acquisitions and divestments.

GLCs are defined as the main providers of utilities, postal services airlines, airports, public transport, water and sewerage, and banking and financial services inM.A. Norhayati and A.K. Siti-Nabiha (2009). Notable GLCs in Malaysia include Proton Holdings Bhd (automotive sector), Telekom Malaysia Bhd (media and communications sector), Malaysian Airline System Bhd (transportation and logistics sector), Tenaga Nasional Bhd (utilities sector), and MIMOS Berhad (technology and infrastructure sector), and Pantai Holdings (healthcare sector). They are in key industries that propelled the country's economy forwards and have been competing with foreign companies. Therefore, the GLCT programme is a long-term programme which provides an enabling environment or stronger economic fundamentals for GLCs to perform, becomes a critical driver to meet the Vision 2020.

Although GLCs are very important in the realization of Vision 2020, GLICs are also the trigger of change and key conduit for this national aspiration. GLICs, which constitute a significant part of the economic structure of the nation, must continue to accelerate change as active shareholders of GLCs in order to implement an effective monitoring on GLCs. However, its level of involvement in GLCs will vary depending on their respective mandates. For GLICs that have high controlling in GLCs, significant oversight responsibilities have been given to ensure the improvement of GLCs' performance, and contribution to the nation's development and the key stakeholders.

1.5 Scope of Study

GLICs are not public listed companies and are not registered under the Companies Act 1965, so there may be insufficient disclosure of information. Although there are seven GLICs in total, this study targets fund management entities, namely KWAP and KWSP due to their similarities. The paper also focuses on KWAP and KWSP for financial years 2005 until 2008 However, comparisons can only be made for the financial years 2007 and 2008. This is due to KWAP's incorporation as a statutory body on 1 March 2007 and its first performance report was for the financial year 2007.

The financial and social performance of KWAP and KWSP will be measured and analysed because they both play vital roles in our country. These organizations manage a capital pool (which are the funds from public and government) and contribute back to the society in terms of dividend payouts and periodic pension payments. They may choose to invest their funds in either the local market (mainly) or foreign market. Their investments within the country can produce an indirect effect on the Gross Domestic Product (GDP) of Malaysia. In addition, they are the controlling shareholders of some GLCs which have a significant impact on the economy of Malaysia. As stated in Roddy McKinnon (1996), EPF (KWSP) act as the provider of basic social security to a significant proportion of Malaysian as the source of long-term investment funds for state-led initiatives. Hence, the scope for this study would be limited to KWAP and KWSP.

1.6 The Objectives of the Study

For this study, the first objective is to compare the financial performance of KWAP and KWSP in order to identify which fund management company of government has better performance. Then, the second objective is to identify if there is a balance between social and financial goals of KWAP and KWSP. In addition, this study is implemented to find out if there is a relationship between “return on investment (ROI) and the social index” and also “ROI and consumer expenditures by age of household head (aged above 50)” for KWAP and KWSP.

1.7 Contribution of Study

Although KWAP and KWSP may do well in terms of financial performance, the key question is how consistent are they in terms of financial performance throughout the years. Besides that, there are always questions about the balancing of goals in regarding financial and social aspects. There is also public interest in the social impact of KWAP and KWSP towards our society and community. The study also examines the relationship between “ROI and the social index” and “ROI and consumer expenditures by age of household head (aged above 50)”. The rationale is that the rakyat aged above 50 would be reliant in income from pensions or EPF drawings. Thus, this study can also be used by general members of the society and community to identify the social contributions of KWAP and KWSP. The findings of this study will enable the public to know the balance between these entities' financial and social goals. Moreover, this study can be used to inform the public on how well KWAP and KWSP are in managing public funds.

Chapter 2: Literature Review

2.1 Literature Review

Sala-i-Martin (1992) emphasised that pensions can induce retirement, that is equal to buying the elderly out of the labor force and higher aggregate output if the elderly do not work. In Giorgio Bellettini and Carlotta Berti Ceroni (2000), the empirical relationship between social security expenditure (pensions, health, housing, etc.) and economic growth has been analysed. All social security expenditures play a role in determining the growth rate and will hamper private investment, if they are financed through distortionary taxation. Then Feldstein (1974) stated that pensions will crowd out private savings, and therefore may depress real national investment and growth, if they are unfunded.

There have been numerous studies done on various pension or provident funds in other countries. Central Provident Fund (CPF) is a compulsory social security savings plan for Singaporeans. According to Linda Low (1999), CPF is a provider of social security and preservation of family values and welfare. This research also stated that a well designed and implemented social security system is equally vital to enable people to enjoy high standards of living and continue to do so after retirement. However, many CPF schemes and some non-CPF schemes together make up a macro social plan which takes care of housing, health, education and asset enhancement but not unemployment and other more traditional welfare state benefits as mentioned in the study.

Mandatory provident fund (MPF) is a compulsory saving scheme for retirees of Hong Kong and is same with the employees' provident fund. But, many retirees still have to work or depend on financial support from their families due to the limited protection provided by MPF for a limited number of employees. According to Chak Kwan Chan (2003), this is because of a low replacement rate, a low level of contributions, and the exclusion of a large number of economically inactive citizens. As stated in the study, the MPF boosts the economy immediately by creating more jobs for the financial services sector and by providing more business opportunities for banks and insurance companies. Chak Kwan Chan (2003) concluded that MPF has consolidated the foundation of Hong Kong's capitalism by socialising and incorporating the whole working population in the market economy but has provided little protection for their old age.

According to Dorothea Greiling (2005), performance measurement stated as an important tool for increasing accountability because it provides data on how effectively and efficiency the services are delivered. Performance measurement is beset by the unresolved problems of defining indicators, their quality and their reporting. In the study, performance measurement fostered a move towards a contract culture on various levels, improve public budgeting, and promote a better reporting system, as well as modernise public management. Besides that, it stated that it is necessary for using performance measurement as an instrument to achieve greater transparency for the citizens.

Corporate Social Responsibility (CSR) is defined as ‘‘the voluntary integration, by companies, of social and environmental concerns in their commercial operations and in their relationships with interested parties'' according to Commission of the European Communities. The economic, social and environmental benefits achieved when adopting socially responsible behaviours go beyond the boundaries of a single firm and involve wider communities as stated in Francesco Ciliberti, Pierpaolo Pontrandolfo, Barbara Scozzi (2008). With the expanding role of the private sector in national and global governance, the issue of corporate responsibility and accountability, on social issues has been recognised as increasingly important as mentioned in Matten, Crane & Chapple (2003). Besides that, Moon (2004) stated that CSR needs to be understood as part and parcel of a wider system of national societal governance incorporating government institutions, business organisations and non-governmental organizations. Hence, government companies should be assumed to have the corporate social responsibility to community and society, just like the other companies do.

In Malaysia, there is a study on performance of GLC after carrying out the GLCT programme. In M.A. Norhayati and A.K. Siti-Nabiha (2009), it explained the institutionalisation process of the performance management system (PMS) and the changes that brought by the GLCT programme towards GLCs. For example, the projects will be evaluated on return on asset (ROA) and net present value (NPV), rather than simply purely on cost. GLCs are hybrid organizations as they have to achieve financial returns while fulfilling their social responsibilities where they were previously government agencies or public enterprises established to provide services for social purposes. Moreover, as stated in this study, it proved that the process in transforming the organisational culture of a GLC by using accounting tools might be time consuming, costly, and subject to resistance. The study concluded that any change management programme introduced in a GLC should have strong top management support, good financial standing as well as a reliable technical backup to the programme. Thus, the same can be applied on GLICs also because good management ability will result the good financial performance.

Government's control either directly or through GLICs, affect the performance of GLCs. Thus, a better performance of GLIC can affect the government's control in GLCs. For Singaporean GLCs, it proved that they have higher valuations and better corporate governance than a control group of non-GLCs as stated in James S. Ang and David K.Ding (2006). GLCs and non-GLCs' profitability (return on equity) and leverage (total liabilities to total assets) is one part of the performance measurement in the study. However, the firm value is positively and significantly related to government ownership, even after controlling for common governance measures such as non-duality and foreign ownership. They discovered that government ownership has a direct effect on firm valuations.

Refer to Mukul G. Asher (2000), reformation in financial and capital markets, better corporate governance, and modest international diversification of the EPF's portfolio should be required, as well as the development of appropriate annuity products. In this research, it stated that the process of announcing the nominal dividend rate of EPF has become politicized because the opposition political parties, trade unions, and the general public perceive it to be significantly influenced by the government rather than being determined by market forces. Besides that, in Thillinathan, R. (2000), adequacy and performance of EPF, as well as its governance, have been discussed. Furthermore, it stated that the pension scheme for government employees is being funded on a gradual basis. The corporatisation and privatization of many government entities have led to a migration of employees form defined benefit plan (for pensionable-stuff) to the defined contribution plan (for private and non-pensionable-stuff). In this study, it mentioned that the real returns generated by EPF since its inception in 1951 are very respectable by the standards of other developing countries. However, EPF can improve on returns earned on its portfolio if there is a portfolio diversification across asset classes.

2.2 Summary

In short, just like regular companies, GLICs should also practice social responsibility towards the community and society. The social goals of KWAP and KWSP have to be identified first, before further examination on social performance. Compared to financial goals, social goals and performance are based more on subjectivity and not easily quantified. Then, Return on Equity (RoE) and Return on Assets (RoA) are often used as one of the main measures of profitability. The returns on all portfolios can be improved through strategic and also tactical asset allocation. Asset allocation can also be analysed as well. This is one of the key factors with affect the returns on investments.

The performance of GLCs are due to government's control on in its management, either directly or indirectly; through GLICs. This is where good management practices from the parent (GLICs) can be brought to the child (GLCs). Good management ability would result in good financial performance. Conversely, good financial performance reflects good management practices. For KWAP and KWSP, their performance, both financially and socially needs to be analysed individually first. Only then can the balance between both can be examined.

Chapter 3: Methodology

3.1 Introduction

The methodology applied in this study to measure and analyse financial performance is financial ratio; while document review and correlation will be done for social performance measurement and analysis. After the order of each series is confirmed, the hypotheses will be shown as follow:

H1: KWSP has better financial performance than KWAP.

H2: ROI and the index of income and distribution have a correlation of 1.

H3: ROI and consumer expenditures by age of household head (aged above 50) have a correlation of 1.

H4: There is a balance between social and financial performance of KWAP and KWSP.

3.2 Data Collection

In this study, only secondary data is collected. These data include corporate profiles and annual reports of KWAP and KWSP between years 2005 and 2008 which are taken from the official websites of KWAP and KWSP. Social indices will be obtained from Economic Planning Unit, Malaysia and consumer expenditure by age of household head from Global Market Information Database (GMID) - Euromonitor Plc will also be taken for this study. Other information such as the GLCT manual will be obtained from the official website of the Putrajaya Committee on GLC High Performance (PCG) and Vision 2020 from its official website.

3.3Data Analysis

3.3.1 Financial Performance

As stated in Ting-ya Hsieh and Morris H.-L. Wang (2001), Ratio analysis is an excellent way of looking into a company's financial status but the selection of ratios for use is an under-emphasised task in performing the ratio analysis. This study mentioned that the merits of a financial analysis may concern to business strategy and performance evaluation, and comparison with peers is a must in order to understand a company's business health. There seems no agreement on which ratio may be considered as being the most effective indication of impending financial problems and the poor quality of criteria selection will consequently undermine the quality of evaluation in a multi-criteria decision-making framework. Therefore, for this study, the GLCT manual has been chosen as the most appropriate framework for ratio selection.

In fact, GLCT manual is a guideline for GLCs to implement the transformation programme. Although there are no proper guidelines and frameworks for the performance evaluation of GLICs, the GLCT manual also can be used as a guideline for GLICs. The logic is that GLICs, are parents to GLCs. The GLCT manual can be modified and applied in evaluating the performance of GLICs. According to the ten initiatives of GLCT manual (especially initiative 9.2 - Guidelines on Annoucement of Headline Key Performance Indicators and Economic Profit), economic profit of the highest concern. However, this measure is not appropriate for GLICs due to its difference in structure and goals. Other methods to gauge the profitability of KWAP and KWSP will be used as it can be used to determine their financial performance.

For profitability measurement, DuPont system of equation will be used. In Barry D. Smith (1999), DuPont system, which defined as a well-established method of performing financial statement analysis, can be applied to the analysis of property-liability insurance companies with minor modifications. It aids in understanding the relationship between underwriting operations and investment results. DuPont system merges the income statement and balance sheet into two summary measures of profitability which are return on assets (ROA) and return on equity (ROE) as stated in Gitman (1997).

For ROA, it assesses the profitability of total assets and contains two elements which are effectiveness and efficiency according to Chien-Ta Ho and Dauw-Song Zhu (2004). In the study, net profit margin treated as component of effectiveness because it is defined as the ability to achieve the expected goal; while total asset turnover which is defined as the output generated by given resources under the influence of the environmental factors, is treated as component of efficiency. The normal ROA will be shown as follow:

Return on assets (ROA) = Net profit margin × Total assets turnover

However, for this study, ‘sales' will be substituted by ‘gross investment income' due to its difference in nature. Investing is the principle activity for GLICs. Indeed, ‘gross investment income' is their revenue in nature. So, the ROA - DuPont equation is modified as below:

Return on Assets (ROA)

= Net profit margin × Total assets turnover

Besides that, Barry D. Smith (1999) stated that the most useful DuPont equation has always been the ROE equation with its three components. It measures a firm's efficiency at generating profits from every unit of owner's equity. The following equation is the normal ROE.

Return on Equity (ROE)

= Net profit margin × Total asset turnover × Financial leverage multiplier

The financial leverage multiplier in ROE is used to examine the financial decisions made and indicate the extent to which the company reliance on debt financing. In the study, this equation is modified to become return on funds as below:

Return on Funds

= Net profit margin × Total asset turnover × Financial leverage multiplier

Furthermore, return on investment (ROI) will be analysed to determine the financial performance of KWAP and KWSP in this study. This is because provident fund is served as investment income for retiree who have contribute and ROI is the profit made for an amount invested in an asset. It can be used to measure a company's ability of management to generate profits from the invested funds.

Return on investment (ROI) =

Besides ROE, ROA and ROI, the annualised return is measured and analysed in this study too. Annualised returns are different from annual returns. An annual return is a single-period return; while an annualised rate of return is a multi-period, geometric average return. The annualised rate of return is a flat rate of return per every year and can be used to measure the average performance of a company. The formula for annualised return is shown below:

Where:

Rg = Geometric average return

R = rate of return on investment

T = number of year

Last but not least, growth of KWAP and KWSP also will be measured. This included revenue growth ratio and profit growth ratio. For this study, revenue growth ratio will be modified to gross investment income growth ratio.

Gross investment income ratio

= Incremental change of gross investment income

Where:

X1 = Gross investment income of previous year

X2 = Gross investment income of current year

And, the profit growth ratio will be shown as:

Profit growth ratio = Incremental change of profit

Where:

Y1 = Profit of previous year

Y2 = Profit of current year

3.3.2 Social Performance

According to Linda Low (1999), Central Provident Fund (CPF) has played a significant and crucial role in the economic, socio-political aspects of nation-building in Singapore. It has become a huge package of many social security, economic and socio-political schemes as stated in the study too. In Initiative 5 - Achieving Value through Social Responsibility of GLCT manual, GLCs need to align the expectations of the government, private investors, employees, and consumers around the nature and extent of their contributions to society. This method can also be applied on GLICs. Hence, it will be used to measure and analyse the social performance of KWAP and KWSP.

Document review will be performed on various documents such as the annual reports of KWAP and KWSP, PCG - GLCT manual, Vision 2020, and Malaysian quality of life reports for the social performance. In order to identify the balance of financial and social goals, mission and vision statements of KWAP and KWSP will be reviewed while using others (GLCT manual and Vision 2020) as a basis. In initiative 3 - GLIC Monitoring and Management Framework, GLICs have to increase value of shareholder and other key stakeholders such as customers, labour force, private sector, suppliers, community, and Bumiputera. In this study, only contributions of KWAP and KWSP towards the community will be identified. Besides that, the relationship between “ROI and the social index” and also “ROI and consumer expenditures by age of household head (aged above 50)” will be determined by using correlation.

Correlation is a common statistic which describes the degree of relationship between two variables. According to the Research Method Knowledge Base, r, the correlation, will be always between -1.0 and +1.0. If r is negative, there is a negative relationship between two variables; if it's positive, the relationship is positive. The correlation equation is shown as below:

Where:

N = Number of pairs of scores

?xy = Sum of the products of paired scores

?x = Sum of x scores

?y = Sum of y scores

?x2 = Sum of squared x scores

?y2 = Sum of squared y scores

According to Malaysian Quality of Life Report, social index is an aggregate measure of the quality of life. It is computed using 42 indicators which represent eleven components of life and uses 1990 as a base year. These aspects are income and distribution, working life, transport and communications, health, education, housing, environment, family life, social participation, public safety, and culture and leisure. In this study, income and distribution, which consists of real per capital income, Gini coefficient (measure of inequality in distribution of income or wealth), and incidence of poverty, will be used to indicate the relationship with ROI. The assumptions made for in this study is that the investments made by both KWSP and KWAP in the local markets would, directly or indirectly, affect the economic growth and also the facilities in the country. It should be noted that GLICs are the ones who have control over GLCs. These GLCs in turn, contribute to the society by providing facilities, roads, housing, electricity, and also provide employment opportunities. Examples of such GLCs are Sime Darby, Proton, and Tenaga Nasional Berhad.

Besides that, the consumer expenditures by age of household head (aged above 50) will be measured for correlation with ROI also. This is because pension or employees' provident fund is assumed to be the main source for people who retired. The contributors are allowed to withdraw money at age 50 due to the KWSP scheme. Therefore, it is rational to use the consumer expenditures by age of household head (aged above 50) data in the relationship with ROI as part of the analysis.

Chapter 4: Result and Discussion

4.1 Financial Performance

4.1.1 Financial Ratio

Ratio

KWAP

KWSP

2007

2007

Return on Assets

Net Profit Margin

Total Asset Turnover

Net Profit Margin

Total Asset Turnover

(ROA)

=

0.993

x

0.077

=

0.979

x

0.054

=

0.0763

=

0.053

=

7.63%

=

5.30%

Return on Funds

Net Profit Margin

Total Asset Turnover

Financial Leverage

Net Profit Margin

Total Asset Turnover

Financial Leverage

(ROF)

=

0.993

x

0.077

x

1.001

=

0.979

x

0.054

x

1.003

=

0.0764

=

0.0532

=

7.64%

=

5.32%

Return on Investment

=

10.81%

=

5.39%

(ROI)

Table 1: Ratios 2007

From the results above, KWAP was doing better in year 2007. There was a 7.64% of return on funds (ROF, also known as return on equity) for KWAP against 5.32% for KWSP. Besides that, KWAP's return on assets (ROA), at 7.63% is higher than KWSP's 5.30% obtained in 2007. Even though KWSP has more invested capital, the return on investment for KWSP (5.39%) is lower as compared with KWAP (10.81%). As KWSP has overseas investments, these investments may be impacted by the global financial crisis in 2007.

Through DuPont system, the breakdown of the ROF, it shows that the net profit margin of KWAP is 0.993. This is slightly higher than KWSP (0.979). It indicates that KWAP is more efficient in its operations, in line with its vision to be a high performing fund assuring sustainable pension benefits. Moreover, KWAP's efficiency can also be seen in its total asset turnover. KWAP is also more efficient in generating the income by given resources as it total asset turnover ratio is 0.77, that is higher than KWSP (0.54).

Other than operational efficiency affecting on the total asset turnover ratio, the ratio can also be influenced by the differences of the asset bases between KWAP and KWSP. The large asset base of KWSP influences its efficiency in producing income. For financial leverage multiplier, there is only slightly different between KWAP and KWSP. Both funds rely mainly on contributions and not debt financing.

Ratio

KWAP

KWSP

2008

2008

Return on Assets

Net Profit Margin

Total Asset Turnover

Net Profit Margin

Total Asset Turnover

(ROA)

=

0.187

x

0.058

=

0.747

x

0.055

=

0.0108

=

0.0413

=

1.08%

=

4.13%

Return on Funds

Net Profit Margin

Total Asset Turnover

Financial Leverage

Net Profit Margin

Total Asset Turnover

Financial Leverage

(ROF)

=

0.187

x

0.058

x

1

=

0.747

x

0.055

x

1.002

=

0.0108

=

0.0414

=

1.08%

=

4.14%

Return on Investment

=

1.52%

=

4.18%

(ROI)

Table 2: Ratios 2008

KWSP has better performance in year 2008. The ROA of KWSP is 4.13%, higher than KWAP (1.08%). On the other hand, the return on funds of KWSP is 4.14% as compared to 1.08% of KWAP. Then, KWSP's return on investment is 2.67% higher than KWAP. Returns on investment of KWAP dropped significantly in year 2008 compared to previous year due to the threat of external risk of the US subprime crisis. However, KWSP's returns on investment did not drop greatly because it carried out a crisis simulation exercise in order to test its readiness to manage a crisis in the event of any untoward incidents.

In contrast to KWAP, KWSP was very effective in gaining the profit in order to achieve its vision to be a leading social security organisation in the world and the best government agency in Malaysia. KWSP was doing well in generating its income as a result of its astute asset allocation strategy which focused more on equities investment. It indicates that KWSP had better management of its invested capital compared to KWAP in 2008.

In summary, although KWAP had superior performance in 2007, this level of performance was not brought over to 2008. Whereas, KWSP's performances was consistent for the 2 years studied. It can be seen in the stability financial ratios of KWSP relative to KWAP. All the 3 financial ratios above by KWSP were within the 4-5% range. Whereas, KWAP's financial ratios were ranging from 1%-10% throughout the 2 years.

Profitability	KWAP		KWSP
Annualised Return	=	6.74%	=	5.58%
(2005-2008)
Ratios
Gross investment income ratio	=	-18.63%	=	11.16%
Profit growth ratio	=	-84.69%	=	-15.17%

Table 3: Returns and Profitability Ratios

The table above shows the annualized returns of KWAP and KWSP for a period of 4 years from 2005-2008. As illustrated, KWAP has generated greater annualised return (6.74%) compared to KWSP (5.58%) over the period. This may be due to the good investment strategies which taken by KWAP, it managed to acquire higher returns before the period of financial crisis. Nevertheless, the returns of KWSP during these years are more consistent and less volatile in comparison with KWAP. This indicates that KWSP is more focused and oriented towards long-term and steady profits.

From 2007 to 2008, there was an increase of gross investment income for KWSP while KWAP's gross investment income has reduced 18.63%. Although the profit growth ratio of both funds show negative value, KWSP's profit growth has better performance than KWAP. Owing to KWSP has ensured the proper risk governance was in line with the investment decision making, KWSP are well performed as compared with KWAP for these two years. Thus, it showed that, when compared to KWAP, the investment strategies of KWSP are more concentrated on producing consistent outputs.

H1: KWSP has better financial performance than KWAP.

As a whole, KWSP's financial performance in term of profitability is better relatively. Although both of them are having similar goals and tasks, KWSP seems to have more experience in managing their funds. This may be due to KWSP being a more matured organization, as it has been established for quite some time. Besides, KWSP is pressured to provide retirement benefits for its large number of members. This is not apparent in KWAP. Under pressure and expectations, KWSP has to perform well in managing the funds of its members. Moreover, from KWSP's vision statement, the organisation has aspirations to be a leading social security organisation in the world and the best government agency in Malaysia. Many business policies such as risk management and crisis simulation exercise have been carried out in order to perform well all the time. All these factors lead to the conclusion whereby KWSP has better financial performance than KWAP.

4.2 Social Performance

4.2.1 Document Review

In Initiative 5 - Achieving Value through Social Responsibility of GLCT manual, there are three principles for the Government, GLICs, and GLCs to guide them in managing their contributions. The principles written as below are after modification:

• Principle 1 - The primary objective should be to enhance members' returns and meet the needs of other key stakeholders.
• Principle 2 - GLICs should proactively contribute to society in ways that create value for their members and other key stakeholders.
• Principle 3 - GLICs should actively manage their contributions to society in the most efficient and effective manner in line with industry norms and best practices as well as the relevant regulatory framework.

To evaluate if KWAP and KWSP have followed the guideline, document review on their annual reports of year 2007 and 2008 will be performed. First of all, the vision and mission statements of KWAP and KWSP taken from their respective annual reports are to be identified in order to determine their awareness towards social responsibility.

i) KWAP

• Vision: A high performing fund assuring sustainable pension benefits.
• Mission: Maximising returns through benchmarking, dynamic investment framework and sound risk management.

ii) KWSP

• Vision: To be a leading social security organisation in the world and the best government agency in Malaysia.

Mission statement:

The Employees Provident Fund (EPF) is a national social security organisation operating through a provident fund scheme in Malaysia. Our principal members are the private and non-pensionable public sector employees. We have a four-fold mission as follows:

• For the members - Our primary mission is to provide retirement benefits to our members through the management of their savings in an efficient and reliable manner.
• For the employers - We are committed to provide an efficient and convenient system to ensure that they meet their responsibility and moral obligations of contributing to the EPF for their employees.
• For the nation - We are also committed towards our nation's socio-economic development through prudent investments.
• For the employees - To all our employees we will provide a motivating, participating and challenging working environment which can propel them to peak performance.

As the statement shown above, neither the vision statement nor mission statement of KWAP consists of a target social goal. In contrast, KWSP has identified its social goal in its mission statement that is to stay “committed towards the nation's socio-economic development through prudent investment”. It indicates that KWSP has recognised the needs of other stakeholders and has awareness in its social responsibility. It is also very important for the organisations to make its vision and mission statements known to its employees as it is one of the initial steps to instill social responsibility.

As observed, KWAP's mission statement is not as comprehensive compared to KWSP. The mission statement of KWSP is well defined, and states clearly the intention of meeting the needs of other stakeholders while enhancing members' return.

These two funds should also have focus to how money was spent rather than how much profit was earned.

From the annual reports of KWAP and KWSP (year 2007 and 2008), corporate social responsibility programmes or events were reported. For KWAP, the social responsibility initiatives have been taken in 2008 were as fund raising activities, donation drive for schools, and also creating an environmentally aware work culture. On the other hand, KWSP has reported its efforts for social responsibility in both years. These efforts were namely the EPF's excellent student's scholarship programme and the social security endowed chair.

Other activities reported were: KWAP conducted the jumble sales and donation drives to raise fund to purchase the sport equipments and apparel for the school. There was scholarship programmes by KWSP, offering the students with outstanding results to further their studies overseas and be an employee of KWSP after graduation. Both KWSP and KWAP have contribution towards education. The organisations, being government linked investment companies (GLICs), recognize that students are the future leaders for our country. Hence, KWAP and KWSP help create the value to its members and stakeholders indirectly.

4.2.2 Correlation

H2: ROI and the index of income and distribution have a correlation of 1.

	Correlation
	KWAP	KWSP
ROI and the Index of Income and Distribution	0.7804	0.1347

Table 4: ROI and Index of Income and Distribution

The ROI and the index of income & distribution do not have a correlation of 1. During the period of year 2005 to 2007, return on investment (ROI) of both KWAP and KWSP have a positive correlation with the index of income and distribution. KWAP has a much higher correlation (0.7804) than KWSP (0.1347) towards this index.

It indicates that there may be a link between the returns of KWAP and KWSP towards the index of income and distribution. By assuming causality exists, the returns of KWAP and KWSP both contribute towards the society by distributing wealth and income back to the stakeholders. KWAP would then be a better contributor towards society than KWSP, due to its higher correlation. These may be done directly through their investment decisions, and indirectly through controlled GLCs.

Keep in mind that the results of this computation may be skewed by the data, whereby KWAP has a much higher ROI than KWSP for the years studied.

H3: ROI and consumer expenditures by age of household head (aged above 50) have a correlation of 1.

	Correlation
	KWAP	KWSP
ROI and consumer expenditures by age of household head (aged above 50)	0.9984	0.6849

Table 5: ROI and Consumer Expenditures

The ROI and consumer expenditures by age of household head (aged above 50) do not have a correlation of 1. From year 2005 to 2007, ROI of both organizations have strong positive relationship with the particular consumer expenditures for household heads aged above 50. KWAP has a stronger correlation (0.9984) compared to KWSP (0.6849).

Again, by assuming causality exists, this result indicates that the ROI affects the expenditures of households led by those above the age of 50. The rationale is that both KWSP is a source of income for retirees, and most of the retiree population are aged 50 and above. As most of the population works for either the government or the private sector, they will rely on these organizations as their source of income post retirement. Hence, better returns on investments mean higher payouts, which are then channeled to these people. This group of people will have greater spending power, leading to increased expenditure. Note that in KWSP, there is an option for members to either withdraw early, or retain the money for a certain number of years even after retirement. At maturity, a member may or may not decide to withdraw the full amount of his/her contributions. Also note that the correlation may be lower because not all members of the population are contributors of KWSP. There are a sizeable number of individual which do not contribute to KWSP, such as sole proprietors and civil servants.

The same cannot be said to KWAP because, the pension payments to government servants is a fixed amount. These payments are pre-determined through computations of the individuals' last drawn salary. Hence, it is safe to say that the high correlation between KWAP's ROI towards consumer expenditures is due to mathematical coincidence.

H4: There is a balance between social and financial performance of KWAP and KWSP.

The effectiveness and efficiency of the manner in managing the contributions to society cannot be measured directly due to the unavailability of such information. However, it can be measured indirectly from the result from document review done above. It was shown that KWAP and KWSP have implemented their duties towards society. Although KWAP did not state its social responsibility clearly in vision or mission statement, both of them are conducting their role in contributing to community.

It is noted that social responsibility is also more apparent for KWSP as it has controlling stakes in a large number of listed companies. KWSP has the power to influence these GLCs to be socially responsible or to contribute to society. In a nutshell, there is a balance between social and financial performance of KWAP and KWSP.

Chapter 5: Conclusion

5.1 Conclusion

In this study, KWSP showed better financial performance in terms of profitability. Although KWAP had good financial performance in 2007, KWSP has been delivering a more consistent performance from the years 2007-2008. KWSP also displayed better overall performance.

The performance of KWSP might be influenced by the pressure and expectations of its stakeholders. The stakeholders comprise of the Government, its contributors and also other related parties. Due to the size of the assets managed by KWSP, it faces huge pressure by its contributors to declare high dividends. Whereas, KWAP is an organization established to aid the government in pension payments, and is not accountable directly to its benefactors.

Established in 1951, KWSP is the world's first mandatory national provident fund. KWSP has more experience in managing funds and implementing business policies, and has the expertise to solve a myriad of problems. On the other hand, KWAP was corporatised in 2007, is a relatively young organization.

Besides that, this study has found out that returns on investment (ROI) of both KWAP and KWSP have a positive correlation with the index of income and distribution during the period of year 2005 to 2007. As indicated earlier, by assuming causality exists, the results indicate that the returns of KWAP and KWSP both contribute towards the society by distributing wealth and income back to the stakeholders. The higher correlation of KWAP towards this index due to it reporting a higher ROI for the years studied.

This study also has shown that the ROI and consumer expenditures by age of household head (aged above 50) do not have a correlation of 1. However, ROI of both funds have strong positive relationship with the consumer expenditures from year 2005 to 2007. Note that KWAP contributes indirectly towards government pension payments to civil servants, and these payments are not affected by the financial performance of KWAP. On the other hand, KWSP is a direct a source of income for many retirees. These retirees are mostly aged 50 and above. Assuming there is causality, the study indicates that this group of people will have greater spending power and are willing to spend more, if they receive higher payouts and dividends.

These findings show that the two organizations have implemented their duties towards society. KWAP did not state its social responsibility explicitly in both the vision and mission statements does not mean it does not contribute towards society. Keep in mind that the size of KWAP is much smaller than KWSP. This is why KWAP has less impact in its social responsibility than KWSP. On the other hand, due to its size, social responsibility is very apparent in KWSP. KWSP has the power to influence and control a large number of government-linked companies (GLCs) in its daily operations. This enables KWSP to guide the GLCs to be socially responsible.

Hence, by looking at financial and social performance together, KWSP and KWAP have contributed directly and also indirectly towards society in their own way, within their own means. In conclusion, this study has found out that there is a balance between financial and social performance for KWAP and KWSP.

5.2 Limitations

The limitations for this study are mainly due to the unavailability of data. KWAP only provides the financial statements from the year 2007 onwards. This is because of its corporatization in 2007, making the financial statement available to the public starting from that year. The annual reports and financial statements for KWAP for the years prior to corporatization are not made public. Moreover, the 2009 financial statements of KWAP have not been released at this particular time.

However, the ROI ratios for years 2005 to 2008 by KWAP and KWSP are made available. Therefore, the measurements related to ROI is be calculated and analysed from year 2005 onwards. This is also true for the ROE computations through the DuPont method. As the period sampled are may not be sufficient to display a trend in the ratio.

The correlation calculations may not be reflective of the actual situation as the sample years are too small. Besides, this study relies on the assumption that causality exists between the two sets of data.

Due to these limitations, particularly on the data of KWAP, only years 2007 and 2008 are measured and compared in respect to the financial performance and social performance. This time period is very short and may not be sufficient to reflect the actual occurrence of KWAP and KWSP in both financial and social aspects.

5.3 Proposed Future Research

Proposed future research should address limitations inherent in this study. It is recommended to cover a longer time period to show more accurate results. A longer time period will smoothen out the trends. A short time period may not reflect the actual performance for KWAP and KWSP. By doing research over a long time period, more data is available to enable the researcher to make a more concrete conclusion on the findings. This will then give the researcher a more complete view on the study. As KWAP releases more financial information in the future, the new information could be incorporated into this study.

Besides of looking in the future, research can also be done with the data from the pre-establishment of KWAP in the comparison for financial and social performance. By adding this data, more interesting findings may appear.

Other recommendations are for future studies to incorporate a broader range of macroeconomic factors, such as gross domestic product (GDP), consumer price index (CPI), and so on. The document review section can also be updated with any new government policies that are implemented. Methods other than correlation can also be used to examine the relationship between the variables. These methods may include regression and other statistical testing.

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Appendix

INPUT	2005		2006		2007		2008
	KWAP	KWSP	KWAP	KWSP	KWAP	KWSP	KWAP	KWSP
Gross investment income (RM bil)					3.698	17.233	3.009	19.156
Net Profit (after tax and					3.671	16.866	0.562	14.307
zakat) (RM bil)
Total asset (RM bil)					48.136	318.298	52.050	346.115
Total reserves (RM bil)					48.069	317.289	52.037	345.434
Invested capital (RM bil)					33.963	313.013	37.037	342.014
Rate of return on	5.36	5.42	6.45	4.98	9.27	5.92	5.93	6.02
Investment (%)

Appendix 1: Data for Ratios and Correlation

Ratio	KWAP						KWSP
	2007						2007
Return on Assets	=	3.67	x	3.70	=	0.0763	=	16.87	x	17.23	=	0.0530
		3.70		48.14				17.23		318.30
Return on funds	=	3.67	x	3.70	x	48.14	=	16.87	x	17.23	x	318.30
		3.70		48.14		48.07		17.23		318.30		317.29
	=	0.0764					=	0.0532
Return on	=	3.67	=	0.1081			=	16.87	=	0.0539
Investment		33.96						313.01

Appendix 2: Ratios 2007

Ratio	KWAP						KWSP
	2008						2008
Return on Assets	=	0.56	x	3.01	=	0.0108	=	14.31	x	19.16	=	0.0413
		3.01		52.05				19.16		346.12
Return on funds	=	0.56	x	3.01	x	52.05	=	14.31	x	19.16	x	346.12
		3.01		52.05		52.04		19.16		346.12		345.43
	=	0.0108					=	0.0414
Return on	=	0.56	=	0.0152			=	14.31	=	0.0418
Investment		37.04						342.01

Appendix 3: Ratios 2008

Profitability	KWAP						KWSP
Annualised return	=						=
	=	0.0674					=	0.0558
Gross	=	3.009 - 3.698					=	19.156 - 17.233
investment		3.70						17.23
income ratio	=	-0.1863					=	0.1116
Profit growth	=	0.562 - 3.671					=	14.307 - 16.866
Ratio		3.67						16.87
	=	-0.8469					=	-0.1517

Appendix 4: Returns and Profitability Ratios

Year	x	y	xy	x2	y2
2005	5.36	110.50	592.28	28.73	12210.25
2006	6.45	122.10	787.55	41.60	14908.41
2007	9.27	123.50	1144.85	85.93	15252.25
Total	21.08	356.10	2524.67	156.27	42370.91

Appendix 5: Data for ROI and Index of Income and Distribution - KWAP

Year	x	y	xy	x2	y2
2005	5.42	110.50	598.91	29.38	12210.25
2006	4.98	122.10	608.06	24.80	14908.41
2007	5.92	123.50	731.12	35.05	15252.25
Total	16.32	356.10	1938.09	89.22	42370.91

Appendix 6: Data for ROI and Index of Income and Distribution - KWSP

Year	x	y	xy	x2	y2
2005	5.36	17497.40	93786.06	28.73	306159006.76
2006	6.45	19422.70	125276.42	41.60	377241275.29
2007	9.27	23334.60	216311.74	85.93	544503557.16
Total	21.08	60254.70	435374.22	156.27	1227903839.21

Appendix 7: ROI and Consumer Expenditures - KWAP

Year	x	y	xy	x2	y2
2005	5.42	17497.40	94835.91	29.38	306159006.76
2006	4.98	19422.70	96725.05	24.80	377241275.29
2007	5.92	23334.60	138140.83	35.05	544503557.16
Total	16.32	60254.70	329701.79	89.22	1227903839.21

Appendix 8: ROI and Consumer Expenditures - KWSP

	Correlation
	KWAP			KWSP
ROI and the index	=			=
of income & distribution
	=	0.7804		=	0.1347
ROI and consumer	=			=
expenditures by age
of household head	=	0.9984		=	0.6849
(aged above 50)

Appendix 9: ROI and Index of Income and Distribution

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