A person or company acquires a contingent liability when they enter into an agreement to act after something else happens first. A co-signer of a loan incurs a contingent liability which comes into effect when the primary borrower fails to pay as agreed. An insurance company incurs a contingent liability when it agrees to pay an agreed upon sum to estate beneficiaries in the event a policy holder dies.

Anyone who has a contingent liability must set aside sufficient funds to meet the requirements of the contract should the contingency occur. Some contingencies are certain, such as your eventual death. Other contingencies are less certain, such as having to pay a loan after co-signing for a relative, or the occurrence of an automobile accident. In either type, insurance companies must maintain a fund which is available (or be able to borrow funds) to meet the potential claims of their policy holders.

The EPF fund was established to provide retirement funds to its members. Basically it is a savings account. As part of a benefit package to give Malaysians financial security, an insurance policy was attached to each account which provided for the payment of RM30,000 in case of death or disability. Probably most members were unaware this policy was in force. The EPF managers were aware of it. They quietly had the proceeds of the insurance policy reduced to RM2,000 (93.3%) in an act of parliment. Members were not told, either before or after.

Coming right after the annuity scheme fiasco, the credibility of the EPF mangers is now completely forfeit, and there is serious doubt whether the EPF fund is intact. The public has not reacted to this pick-pocketing of their insurance benefits, though the sums are relatively large. Many Malaysian households have less that RM500 income per month, and for them the RM30,000 death benefit amounts to five years pay.

Two questions loom large: A) Why did the EPF do this at all (and at this time)? B) Who benefits by what appears to be an act of piracy?

The EPF fund is probably the largest pile of cash in Malaysia, and there are many people in the government who cannot sleep for thinking of ways to get at that money. The EPF invests conservatively, and must keep reserves of cash available to meet the withdrawals of members who retire or become disabled. Shortly after the death of a member the heirs apply to withdraw both the savings account balance (deposits plus interest) along with the life insurance benefit.

The number of members is around 9 million, or 9,000,000. This number can be more simply written as 9[6], which means nine followed by six zeros. Each of these members represents a contingent liability to the EPF of RM30,000 or RM3[4]. The total contingent liability is thus 9[6] times RM3[4] or RM27[10]. The contingent liability of the EPF a few months ago was RM270 billion, which is in the range of the public debt of Malaysia. The contingent liability was not completely removed. The fund managers have left RM2,000 for each member, no doubt to help with the burial expenses. So a more exact amount of the sum picked from the public wallet is 9[6] times RM28[3] or RM252[9] or RM252 billion. Not a bad days work.

This contingent liability is of the certain type, as it is a life insurance policy. Having this liability lifted is a real relief to the fund managers, as now it frees a great deal of money which becomes available for other purposes, such as supporting sagging companies or putting a floor under the Kuala Lumpur Composite Index. If this is not the reason why it was done, along with the prime minister's recent assurance that provisions have been made for internal funding so Malaysia may "insulate" itself from the widely expected world crisis, then the fund managers are invited to provide the real justification.

Because everyone would not be expected to withdraw their savings in the same year, and deaths and disablements would not all occur in any given year, there would be no need to keep the fund totally liquid at all times. The fund earns significant interest and other income, and the members are credited with these profits regularly. Thus each account increases with routine deposits from earnings plus the interest and other profits credited.

In a given year, perhaps 200,000 members die and their estate applies for the death benefit. The EPF then must keep adequate funds liquid for this disbursement. How much is this? Well, using our simplified notation, 2[5] times RM3[4] equals RM6[9] or RM6 billion. So now the fund managers need not concern themselves about this contingent liability, and the fund's accountant can record an increase in net assets.

Legitimately the funds should be added to the member's accounts on an equitable basis. This would be a fair resolution of the matter. But this was not announced by the fund managers. It appears they may have other plans for the money saved from the insurance payout, and also the funds released from the contingent liability account.

This does not give a completely satisfactory answer to why they did it, and only the fund managers can provide the real reasons. [B] is easier and more certain. The insurance companies benefit. It has been difficult to sell life insurance or loan guarantee insurance in Malaysia because the EPF policy was in force and available to all member's estates in the event an unexpected death should occur. Now the insurance agents do not have to overcome this objection.

The insurance agents can legitimately argue their insurance is necessary to defray the expenses of the family and can be used to pay off any large debts, such as a car loan. EON has announced, in a strangely prescient and timely manner, that it is now offering insurance to car buyers which will pay off the balance of the loan if the policy holder should die or become disabled before the new car loan is fully paid.

This type of bank loan guarantee insurance has a decreasing benefit as the loan is paid off, but the premiums usually do not reflect this. In insurance circles this type of loan is of the decreasing term variety, and is not considered a wise purchase. The profit to the insurance company is high because the premium is combined with the loan so that the interest on the premium becomes a significant source of revenue in itself. A car buyer should decline this offer because there is not sufficient value for the money charged.

The better choice is to buy either a whole life policy that then can be used to pay off the car, or a term policy just long enough to cover the first half of the car loan. The premiums for this type of term life insurance, if purchased from a competitive insurance company separate from the automobile agency, can be paid in annual installments, and often with smaller monthly payments.

So the primary beneficiaries of the EPF action are the insurance companies, along with the EPF managers themselves and the companies whose stocks and bonds they buy. The purchase of bonds is a bad investment in the present inflationary environment, and the EPF managers are aware of this. So if they intend to buy bonds in Malaysian companies they should be held accountable for their actions.

In an earlier column the significant depreciation incurred in any new car purchase prior to the end of 2004 was discussed. The AFTA depreciation problem argues strongly against any automobile purchase until then. If enough buyers defer car purchases it will force the government to make satisfactory adjustments in order to soften the blow of the AFTA agreement, and it might cause the EPF managers to reconsider their cancellation of the insurance benefit before a world court is asked to intervene. Nine million angry members is enough to bring the entire matter of EPF fund management to a fair and equitable conclusion.