THE LAST time members' contribution to the Employees Provident Fund (EPF) was reduced in 2003 by 2%, approximately 550,000 members chose to retain it at the original higher level. That translates to a mere 11% of the total number of active contributors at the time.

This group probably constitutes members who are determined to save more for their retirement and are willing to pick up the pen and fill up the form to retain their monthly contribution of 11%. Or perhaps their company made it easy for them to do so.

But while many really need and welcome the little extra, the majority of EPF contributors tend to be nonchalant about the exercise and couldn't be bothered with filling up the form.

While the reduction in EPF contribution is said to be 'voluntary', the move has met with some resistance as it places the burden of filling up the form on those who want to maintain their contribution.

EPF public relations senior manager Nik Affendi Jaafar declined to be drawn into the debate that those who want to retain their commitment shouldn't be the ones 'penalised', except to say that the forms would be available from Dec 1.

'Members who wish to maintain the contribution rate at 11%, may do so by filling up Form KWSP 17A (AHL).'

He says minor amendments are being made to the form and the form will be available at all EPF branches and can be downloaded at the EPF website from Dec 1 onwards.

'It is a simple form that needs to be filled in only once. All members need to do is to submit the completed forms to their respective employers for onward submission to the EPF,' says Nik.

The automatic reduction will be in effect for two years from January 2009. According to Deputy Prime Minister and also Finance Minister Datuk Seri Najib Tun Razak, if all contributors choose to reduce their contributions, the 3% would amount to RM4.8bil annually.

As of June this year, there are 5.5 million active contributors to the EPF.

The Malaysian Trade Union Congress (MTUC) is one of many groups opposing the measure.

'They mention that it is voluntary but it should be the other way round to avoid confusion and unnecessary hardship,' says its president Syed Shahir Syed Mohamud.

He believes that retirement plans for many will be jeopardised.

'In fact, some people want to increase their contribution,' says Shahir, adding that reducing the EPF contribution would affect the dividends earned by employees.

'The employees are going to lose on compounded interest and that will have a bearing on them,' he says.

For example, a 35-year-old person with a RM3,000 monthly salary would be reducing his EPF contribution by RM2,160 over the course of two years. Assuming that a 5% dividend is paid out annually with the compound element over a period of 20 years, he will be RM5,500 'poorer' when he retires. And this is not taking into consideration past (one-year period in 2001 and 2003) and future exercises of a similar nature.

But what is good for the pocket is even better for the retail sector.

Rajen Devadason, CFP, a Securities Commission-licensed financial planner with MAAKL Mutual Bhd, and CEO of RD WealthCreation Sdn Bhd believes this 3% can prove to be a stimulus to the retail sector.

'Retailers will benefit mainly from this measure. The overall health of the economy will also perk up a tiny bit,' says Devadason.

But is the economy in such a bad shape that it warrants such a measure? 'Malaysia is holding up better than most other countries. But our economy's growth will nonetheless also decelerate in the months ahead. This EPF cut is just one macroeconomic 'bullet' in our government's arsenal to combat the worst effects of the global recession,' says Devadason.

Nevertheless, he recommends his clients to retain their contributions at 11%.

'The bottom line is that the smartest, most numerate people in Malaysia are opting for 11%, while the uninformed will probably permit the default,' he says.

Over the two years of the cut, a person who accepts the 8% default option will lose 72% of one whole month's average gross income.

'The EPF is a great investment benefit to Malaysians. I urge all my clients - even business owners - to contribute to it. On top of that, additional non-EPF personal savings and investments should be carried out,' says Devadason.

The contributions are invested by EPF in a number of approved financial instruments to generate income including Government securities, money market instruments and property.

Legally, the EPF is obligated to provide 2.5% dividends. In the past three years, they have provided dividends of more than 5%. Even during the economic crisis of 1997 to 1998, the dividends provided were 6.7%.

'As long as the money flows into EPF first, contributors can invest in unit trusts on a regular basis. Because of EPF's pro-active actions, those who invest in unit trusts using their EPF funds now pay much lower commissions on that portion than they do when they invest their discretionary funds,' says Devadason.

Devadason says that we are moving into a cash-is-king environment, therefore urging people to work harder and save more.

'The public should invest very carefully with an eye to elevating long-term passive income inflows from the highest quality dividend-paying stocks and dividend funds. For those with extra deep pockets, buying choice pieces of rental property would also be smart. However, focus on getting out of personal debt first,' he says.

A macro perspective

On a larger scale, it is necessary to make sense of how much this would affect the Malaysian economy.

Dr Yeah Kim Leng, chief economist at the Ratings Agency of Malaysia (RAM) says that of the RM4.8bil that will be added to the pockets of Malaysians, the marginal propensity of what will be saved must be taken against what is spent.

'Generally, people tend to spend about 60% and save the other 40%. This will go directly into consumer spending, and this will add to private consumption.'

Dr Yeah calculates that if 60% of RM4.8bil is spent, this would amount to about RM2.9bil. Using the end 2008 figure of RM660bil as a base for Malaysia's Gross Domestic Product (GDP), the additional RM2.9bil will give a boost of 0.44% to the overall GDP.

One of the most immediate effects, Dr Yeah informs, is that this will boost consumer confidence.

'This will give a boost so consumer spending can be maintained, and if we can achieve a growth of 6% to 7% next year, we can achieve modest growth in the face of adverse economic conditions.'

Dr Yeah adds that the key is sustaining consumer confidence.

'Malaysia has sufficient liquidity and savings, as we have experienced strong growth of about 9% to 10% over the past six years. Companies have been accumulating wealth, and would have the capacity to weather any economic slowdown.

'Confidence is the key factor, so banks will continue to lend money and support businesses, and it is important to ensure that both businesses and individuals do not cut back on their spending too drastically,' he says.

Dr Yeah explains that this monetary boost is a kind of incentive and says, 'The spill over effect of this is that financial markets and stocks can stabilise, so massive wealth destruction can be stopped.'

It should be noted that the additional RM4.8bil that goes straight into the pockets of the people is different from the Government's RM7bil economic stimulus package announced by Finance Minister Datuk Seri Najib Tun Razak that will be spent on a wide range of projects, from the LRT to repairing of houses belonging to the poor.

'You have to see which projects the money goes into and the speed of the implementation. The extent of the multiplier will depend on the linkages, and how this spending will generate value-added activity to the economy,' he says, adding that it will vary across the types of projects, for example, the building of roads, and in turn if these facilities are used for productive purposes.

'There may be an increase in the number of people employed or in services available, and hopefully increase businesses and employment which will add to productive capacity,' says Dr Yeah.