Social security fund needs to keep up with growing liability
A UNIQUE feature of the Malaysian capital market is the strong presence of local government-linked investment funds.
There are seven major government-linked investment companies (GLICs) with total assets under management worth more than RM1 trillion and this is still growing.
GLICs, which in recent times have been known for their prowess in money management, have been upping the ante in their investment strategies by taking on alternative assets such as private equity (PE), infrastructure assets and even taking part in property development projects.
Alternative investment by institutional investors is not unique in Malaysia but has proliferated globally in recent years as they hunt for better returns in a low interest rate era.
One name that is rarely heard of is Social Security Organisation or Socso, a fund with a considerable size close to RM26bil.
Socso was formed as a government department of the Labour and Manpower Ministry on Jan 1, 1971.
It is entrusted with the administration of two social security schemes, namely the Employment Injury Scheme and the Invalidity Scheme.
The Employment Injury Scheme provides protection for employees against contingencies, including occupational diseases and accidents that occur while travelling in the course of employment.
The Invalidity Scheme, on the other hand, provides 24 hours coverage against invalidity or death due to any cause.
The objective of both schemes is to guarantee cash payment and benefits in kinds to employees and their dependants in the event of a contingency.
Meanwhile, GLICs such as the Employees Provident Fund (EPF) and Retirement Inc Fund (KWAP) cater for retirement and pension.
Both funds have since last year set aside more money for riskier investments, including increasing their allocation to the PE sector and infrastructure assets. This is a worldwide trend, where even conservative portfolio managers are now embracing bigger risks to bolster performance.
Socso has so far invested about 20% in equities, 56% in fixed income instruments and 3% in real estate.
Its plan is to bring the equities portion up to 28% by 2020 as well as diversify into property and PE, under its new investment strategy blueprint.
The need to improve its investment returns is very much to keep up with its growing liability, which is more than RM3.5bil annually.
“We are building up our reserves more effectively to meet the increasing payout requirements, contributions alone is not enough to sustain,” says Socso chief executive officer Datuk Dr Mohammed Azman Aziz Mohammed.
Not all eggs in one basket
To keep up with the growing bill, Azman reckons that Socso must generate steady investment returns.
“We can’t just rely on the contributions alone. The fund is growing, but our compensation payment to our members are increasing at a faster rate compared with 10 years ago.
“Hence, we need to improve our returns to ensure that it is sustainable a long term period,” he says.
Under the five-year investment strategy blueprint, Socso aims to achieve returns of between 5% and 6% annually until 2022.
In 2015, Socso generated a 4.5% yield from its investment of which almost 82% of its funds were in bonds and the money market, while the remaining 18% were in equities.
Socso chief investment officer Dr Suzana Idayu Wati Osman says the main focus of the investment strategy is to achieve better and sustainable returns.
“We are deploying what we have in the money market into equities, fixed income, and other assets. We could generate higher income, by diversifying our portfolio across different asset classes and global exposure,” she tells StarBizWeek.
“Our focus previously was more on the operations, not so much on investment strategy,” she says. “On the investment side, we are also following the footsteps of other big institutional investors in diversifying their portfolio to increase returns.”
In 2015, almost 12% of Socso’s fund was in the money market, which yields approximately above 3%.
Suzana says the investment blueprint, which was launched earlier this year, has shown some positive results for this year’s fund performance.
After a lull of more than three years, the FBM KLCI has gained as much as 9% so far this year, which is a boon for local institutional investors.
The bull run since the beginning of the year has recently subsided due to the increasing trend of geopolitical risks as investors seek safe haven assets such as gold.
Malaysia had the strongest foreign equity inflows this year with almost RM11bil invested in local equities.
“Stock picking is key in this market and we believe there are still growth in the equity market,” Suzana says.
“At the end of the day, the equity market needs to be supported by corporate earnings,” Suzana says.
She expects there potential upside in the FBM KLCI from current levels, with limited downside risk despite the disappointing second-quarter corporate results.
Among the factors that will continue driving the local market will be the resilient economic growth and the booming infrastructure projects, she adds.
Meanwhile, to take on the task of increasing returns, Socso has been beefing up its investment team since last year.
Suzana says Socso is also looking to increase its allocation on its external fund managers and overseas exposure.
“The external fund manager programme is not only restricted to equity and fixed-income investments, but also to PE and property investments,” she says.
Socso completed its first real estate investment last year with the purchase of Menara NU2, located within the KL Sentral vicinity.
Suzana says the office building is currently fully occupied, yielding between 5% and 6% annually.
On its equity investment, she says Socso currently has less than 5% stake in its investee companies and mainly invested in the financial and plantation sectors.
Suzana says Socso is likely to take any controlling interests in any companies, and would hold stakes of a maximum of 10%.
Over the past 46 years, Sosco has grown its funds mainly from generating net income from its members’ contribution. Today, a total of 6.4 million employees are covered by Socso.
The contribution to Socso schemes are compulsory, where employees and employers have to pay a certain rate of their monthly salaries into the fund.
Socso’s concept is to pool its resources and share the risks among its members.
Between 2011 and 2015, its financial statements showed that Socso generated between RM2.5bil and RM3.2bil annually from its members excluding investment income, and disbursed between RM2.3bil and RM3.2bil.
Lifestyle diseases, such as diabetes and stroke, among the Malaysian workforce have bumped up Socso’s annual liabilities. It is worth noting that Socso has never increased its members’ contribution rates since its inception in 1971.
According to an old saying, “an ounce of prevention is worth a pound of cure.”
Azman points out that cases of lifestyle-related diseases among Malaysian workers have almost doubled over the last 10 years.
“Social security does not only focusing on compensation. Socso is looking at its role in preventing work-related accidents and fostering healthy lifestyle in the Malaysian workforce,” he says.
Azman, who started his career as a medical doctor and healthy lifestyle evangelist, says that prevention is better than cure.
“Socso is about protecting people, and by nature that is the doctor’s job. I am now in a position which could place prevention policies to protect workers from diseases as well as traumatic injuries caused by accidents,” he says.
Socso has been collaborating with relevant agencies and non-governmental organisations for occupational safety and health (OSH) in organising various prevention and advocacy programmes to enhance safety and health awareness among employees and employers in the country.
So far this year, Socso conducted a total of 448 OSH and 405 advocacy programmes.
“It is crucial to instil the culture of prevention among Malaysians because the financial burden of accidents in terms of compensation, healthcare, and rehabilitation is huge,” Azman says.
Last year, Socso disbursed RM3.5bil to its beneficiaries, 11% higher than the RM3.1bil a year earlier.
Its total income from contributions and investments, on the other hand, grew 8.6% to RM4.3bil from RM3.97bil a year earlier.
There is also another section in the workforce that has yet to be tapped by Socso, which is the informal sector.
According to Azman, there are 2.4 million workers in the informal sector in industries such as entertainment services, agricultural services, night market traders and coastal fishing services.
To address the issue, Socso has introduced coverage for self-employed taxi drivers and ride-hailing service providers such as Grab and Uber under the Self-Employment Social Security Act 2017.
There is also another law in the pipeline – Employment Insurance System Bill (EIS) – to provide protection for loss of employment.
It was reported that the EIS will come into force by January next year, and the rate is 0.4%, of which 0.2% contribution are by employers and 0.2% by employees.
What drives Socso