STUDIES IN DOMES'IC FINANCE No. 38 THE IMPACT OF CCNTRACTUAL SAVINGS ON RESOURCE MOBILIZATICH AND ALLOCATICN: THE EXPERIDICE OF MALAYSIA Katrine W. Saito and Parthasarathi Shome Public and Private Finance Division Developrnent Seconomics Department April 1977 PREFACE To facilitate the process of economic development is a distinct function performed by the financial structure; the nature and structure of this process are conditioned by the characteristics of the evolving financial structure. One of the significant aspects of this structure has been the role and function of the social security institutions. From a cursory comparative study of the pattern of household sector's financial saving, it appears that one can venture the following conjectures about the impact of social security institutions on saving and its allocation, and on wealth distribution. 1. They seem to have promoted the growth as well as the stability of the household sector saving - particularly in the form of financial assets. And this for several reasons. They have tailored financial instruments to some important saving motives. Households seem to treat this saving initially as a tax; hence these instruments do not adversely affect the relationship between saving and disposable incomes. By reducing uncertainty, they seem to have induced the households to take greater risks with regard to their saving-investment decisions. The contractual nature of this saving imparts stability to household saving behaviour. 2. Since these liabilities are of a longer-term nature, they have been able to provide medium and long-term finance for durable projects with long gestations lags in the public as well as the private sector. By promoting the growth and stability of the longer-term end of the capital market, they have improved the resource allocation process. Since their investment decisions are guided more by the investment motive than by the speculative motive, they induce greater efficiency in the use of resources. 3. Since they have been one of the principal sources for medium and long-term finance, and hence one of the major investors in long-term financial assets, they seem to have reduced the degree of concentration in the distribution of wealth and incomes. The term 'Pension Fund Socialism' in a way describes this phenomenon. If these hypotheses be true, it should be one of the major objectives of financial policies in the LDCs to promote the growth of social security institutions. The Division has planned, under my guidance and supervision, some comparative studies to discuss and test some of these hypotheses on the basis on the experience of countries like Malaysia, Sri Lanka, Philippines, India, Turkey, Brazil and Korea. The Malaysian study is now completed; the results seem to suggest that our hypotheses are empirically sound. V. V. Bhatt a TABLE OF CONTHNTS Page Number I. Introduction ........................ ... ...... 1 II. Social Insurance Legislation in Malaysia ........ 2 III. Coverage and Scope of Contractual Savings Institutions.................................... 10 IV. Resource Mobilisation Through Contractual Savings Institutions............................ 13 V. The Impact of Contractual Savings Institutions on Private Saving.............................. 18 VI. Investment Pattern of Contractual Savings Institutions.................................... 25 VII.. Conclusion ................................ . 3 TABLES, I. INTRODUCTION Contractual savings schemes, such as pension and provident funds, social security schemes, and life insurance, serve a significant economic as well as social objective in many developed and developing countries. These schemes provide security to individuals in a variety of risk-ridden situations, and also serve as an important source of resources which can be used to finance economic development. The experience of developed countries such as the US and UK bear witness to the significant contribu- tion which these schemes can make, at a critical development stage, to the industrial and financial development of the country. In both these countries, pension funds and insurance companies exerted a stabilizing influence on the long-run development of the financial markets, and also acted as an innovative investor, being a major source of industrial 2/ finance. Although in many developing.countries contractual savings 1/ OECD emphasised this point: "The efficiency of certain markets, in particular those in the Ubited States, the United Kingdom, the Netherlands and in Switzerland seems to stem to a considerable extent from the part played in these markets by intermediaries that collect funds on a contrac- tual basis and invest them principally in long-term forms.1 OECD, Cammittee for Invisible Transactions, Capital Markets Study, General Report, Paris 1967, p. 12. 2/ In both these countries both pension funds and insurance companies held substantial amounts of industrual securities, both equities and long- term loans, in their portfolios; see idem Chapter II and D. K. Sheppard, The Growth and Role of U.K. Financial Institutions, London: Methuen & Co., 1971. -2 schemes are still limited in operation and coverage, in some countries they have already developed into significant financial institutions. Malaysia is such a country, and the objective of this study is to assess the role which the Malaysian contractual savings institutions have played in the mobilisation of savings, and the extent to which the savings of these institutions have contributed to the financial and economic devel- opment of the country. The layout of the paper is as follows: Section II reviews the existing contractual savings institutions in Malaysia; section III examines their scope and coverage; section IV studies their success in mobilising resources; section V tests the oft-debated issue of whether these resources could have been mobilised in the absence of these institu- tions i.e., the effect of contractual savings on the propensity to save in non-contractual form;and section VI presents the allocation pattern of the resources mobilised and analyses the economic ramifications thereof. Concluding remarks and a summary of findings comprise section VII. II. SOCIAL INSURANCE LEGISLATION IN MALAYSIA The contractual savings institutions covered in this paper include both the life insurance business as well as other forms of contracts such as the provident fund, social security schemes etc. There is a reasonable measure of doubt regarding the definition of and any disaggregated taxonomy 1/ This was emphasised in the survey paper by P. Shome, tContractual Savings and the Mobilisation of Resources: A Preliminary Survey" Studies in Domestic Finance, No. 29, World Bank, November 1976. on contractual savings due to the wide nature and forms of these institu- tions. Same schemes may be voluntary, while others mandatory, depending on income scale or occupation factors. This sometimes may lead to a definition of contractual savings excluding mandatory schemes. However, voluntary rchemes may also be considered 'compulsory' by the contributors once the insurance cofttract is entered into, for fear of losing the prin- ciple paid. It is for this reason all forms of contracts, voluntary and mandatory, are included in this study. Apart from the private life insurance business, Malaysia has programs for retirement and death, covered by the Employees Provident Fund (1952) under the jurisdiction of the Ministry of Finance, and the Teachers Provident Fund (1962) under the Public Services Department as well as accident injury, medical care, disablement and dependent benefits, covered by the Employee's Social Security Act (1969) under the jurisdiction of the Ministry of.Labor. The latter is further subdivided into the Employ- ment Injury Insurance Scheme (for employment injury only) and the Invali- dity Pension Scheme (from whatever cause), becoming effective from 1971 and 1973 respectively. An outline of the major social insurance programs in Malaysia is presented in Table 11.1. (a) Insurance Legislation: The Insurance Act (1963), applicable to all insurance business in Malaysia, provided a broad legislative framework within which all insurance companies operating in Malaysia could be supervised, and in particular the activities of 'mushroom1t insurance companies in existence prior to 1962 could be regulated. This Act has been modified by a series of subsequent amendments, among which the amendment of May 5, 1970 was particularly important. It sought to further regulate the investments of incurance funds oy requiring that: (i) at least 65 percent of the insurance funds be invested in authorised Malaysian assets by the end of 1970, 70 percent by the end of 1971 and 75 percent by the end of 1972. A further amendment in 1975 in- creased this percentage to 80 percent; (ii) at least 10 percent of the total assets of insurance companies be in Malaysian government securities by the end of 1970, 15 percent by the end of 1971, and 20 percent by the end of 1972. A subsequent amendment in 1975 did not change this percentage. Additional amendments made by the Insurance (Amendment) Act of 1975 were deemed necessary because of the preponderance of foreign insurers and because a better balance was desired between the domestic and the foreign insurance firms. The amendments were aimed at restructuring the insurance industry by encouraging the domestic incorporation of offices of foreign incorporated insurance companies in Malaysia. Domestic companies were also encouraged to acquire a larger share of the rapidly expanding insurance business (currently growing at an annual rate of more than 20 percent). The principle amendments included in the 1975 Act were as follows: (i) A company or society registered to carry on insurance business in Malaysia must now maintain a specified minimum surplus of assets over liabilities (M$1 million for one class of business and M$1.5 million for both classes). In the case of foreign companies, that surplus is in respect of its assets in Malaysia over its liabilities in Malaysia. (ii) It became an offense for anyone to carry on insurance business without registration, and the Director General of Insurance was given power to call for or inspect the accounts of anyone suspected of carrying on insurance business without registration. (iii) Anyone applying for a license to carry on business as a Malaysian insurance agent for any individual must have a minimum surplus of assets over liabilities of M$100,000, as*well as a certificate of solvency signed by his auditor and a professional indemity insurance policy of a minimum value of M$500,000. (iv) All registered insurers must always have a deposit with the Accountant General of Malaysia of a minimum value of $300,000. The deposit can be in cash or in securities specified in the Act, or in both. A bank covenant made between a licensed bank and the Accountant General on account of an insurer can be accepted instead of the sum of cash equal to that covenanted for. In addition to the standard life insurance policies, "hame service" policies are issued, generally for relatively small sums insured (the average sum insured in 1970 was M$1,,000). Premia are collected from the policyholders by agents who make door-to-door collections at intervals of once a week or more. This "home service" scheme is designed to provide a life insurance service for the lower income sections of the community. (b.) Provident Fund and Social Security Legislation (i) Provident Fund Legislation Effective July 1, 1952, the nnployees Provident Fund Ordinance of 1951 came into operation. Under 'the jurisdiction of the Ministry of Finance, -6- the Employees Provident Fund was set up with the objective of providing programs for retirement and death to low-wage employees. The EFF has subsequently expanded both its geographical coverage as well as its coverage over a broad spectrum of employees. Originally, the EFF covered all non-pensionable employees aged 16 or above in West Malaysia whose salary was M$400 per month or less and who worked in establishments employing at least five workers. Such employees were liable to contribute approximately 5% of their salary. Once an employee is liable to contribute to the EPF, he is required to continue to contribute even if his salary should exceed M$LOO per month. The employer is obliged to contri- bute at the same rate. In 1963, employees earning up to M$500 per month in establishments with three or more workers were covered, and in 1964 all establish- 1/ ments, irrespective of size came under the,provision of EPF. In December 1970* all employees, irrespective of salary, were covered by the Fund, with a moratorium on any new private funds. The current mandatory contribution rate is 10% of the total wage bill, shared equally by the employer and the employee. For salaries ex- ceeding M$500 per month, the contribution remains the same as that applicable at 4$00. All payments made by EPF are lump sum, comprising the contributions plus a statutory minimum interest-earning of 2.5% (increasing to almost 6% in recent years). Originally a contributor had to reach the 1/ The following employees were, and still are excluded: damestic servants (contribution is voluntary), members of the Armed Forces (covered by (Army Provident Fund), teachers ( covered by the Teachers Provident Fund) and fishermen (not covered at all). -7- age of 55 in order to qualify for withdrawal, but in 1968 the law was amended to allow contributors, upon reaching the age of 50,to withdraw up to 2/ one-third of the contributions accredited tobin plus interest.- At 5$ the contributor can withdraw. Once he withdraws, however, he cannot rejoin. Withdrawal is also allowedfor countributors who are permanently incapacitated for further employment, who have died, or are about to pemanently leave the country. The investment of the surpluses of EPF is regulated by the Trustee Ordinance of 1949 and the Amended Trustee Investment Act of 196. The fund is required to invest at least 70% of total investible funds in Government secur4ties, the remainder in high quality approved assets determined by the Trustee' Ordinance. These are landed property (e.g. mort- * gages on shopping cteris ), .qhares of approved companies (those in which the Government is a shareholder, those lited on the Stock Exchange of Malaysia or those whose sole objective is financing home ownership). The 1949 Ordinance also allows particular types of investments in the U.K., although this has hardly taken place. 1/ The original EFF Ordinance of 1951 was amended by the EFF Act of 1968. 2{ Such withdrawals are primarily for housing purchases by potential retirees. 3/ Examples of approved companies are (i) Malaysian Industrial Development Finance Corp., a private company operating with IBMD loans and financing industry; (ii) Malaysia Building Society Board; (iii) National Electricity Board; (iv) Borneo Mortgage Finaiice Board. 4/ This may partly be attributable to a 1959 amendment whereby all foreign investments required the authorization of the Ministry of Finance. Other Provident Fbnds The Teachers' Provident Fknd (TPF),established under the Education Act, 1961, became operative with effect from January 1, 1962. The regulations regardi3g contributions differ according to geographical location , number of years of service and,whether the school is government- owned or privately-owned (employee contributions varying from 5 to 10 percent of salary to be matched by the employer). The Aziz Commission Report in 1972 classified all teachers as civil servants and therefore, pensionable by the government. Most teachers subsequently opted out of the TPF into Government 'pension schemes, and the number of contributors to TPF has since dwindled. Several other smaller provident funds are also in operation. A 1964 Central Bank survey revealed that at the end of 1963 there were 196 separately constituted funds with 73,962 contributors and total assets of M$315.5 million. Prior to this survey there ias little regulation regarding the investment of these funds. As a result of the survey, however, these funds were required to maintain a minimum of 10% of their total investments in local assets in 1964, 20% in 1965, 30% in 1966 and 5% in 1971. The eligible local assets are broadly similar to the authorized invesLents 1/ Examples of approved companies are (i) Malaysian Industrial Development Fin- ance Corp., a private company operating with IBRD loans and financing indus- try; (ii) Malaysia Building Society Board; (iii) National Electricity Board; (iv) Borneo Mortgage Finance Board. 2/ This may partly be attributable to a 1959 amendment whereby all foreign investments required the authorization of the Ministry of Finance. -9- under the Insurance Act (1963). It should be noted that the statutory minimum of 55% for local investments is lower than for the EPF and may be revised upward. (ii) Social Security Legislation The Emnployees' Social Security Act, was passed in 1969 and provides for certain benefits to employees in the case of two contingen- cies - employment injury and invalidity. The Act was implemented through the Employment Injury Scheme (EIS) in 1971 and the Invalidity Pension Scheme (IUS) in 1973, administered by the Government through the Social Security Organization under the administrative control of the Ministry of Labor. The EIS and IPS extend social insurance to 'industrial' employees against work-related dangers. An industry is defined very broadly as follows: "any busiess, trade, undertaking, employer or calling of employers, and includes any calli.g, service, employment, handicraft or industrial 2/ occupation or a vocation of employees." - This definition has been made broad enough to cover most employees and cueintly the coverage is for employees belonging to firms with five employees or more. The self-employed and employees earning more than M$500 per month are exempted from compulsory coverage, although they may join on a voluntary basis. 1/ This superceded the Workmen's Compensation Ordinance (1952) which provided much less medical and cash benefits. 2/ Employees' Social Security Act, 1969. - 10 - The rates of contribution are 1% and 14 of wages for invalidity and employment injury, respectively. With regard to the EIS, the total c-ontribution is paid solely by the employer. For the IPS, the contribution is shared equally by employer and employee. The government does not 'contri- bute to either scheme except as an employer and towards administration costs. Benefits in the form of pension are paid only if death or invalidity occurs after 3 years of enrollment3 otherwise only the contributions plus interest are paid back. The investments of the Social Security Organization have been primarily in Government securities, the remainder in fixed deposits with the Central Bank. III. COVERAGE AND SCOPE OF CONTRACTUAL SAVIGS INSTITUTIONS Tables II.1 to III. provide information regarding the coverage and scope of different contractual savings institutions in Malaysia in terms of the percentage of population covered, total sums insured or contri- buted to these institutions, these sums as a percentage of national income, the number of foreign vis-a-vis domestic companies, the extent of benefit payments made, etc. In terms of most of these indices it emerges that the coverage and scope of contractual savings institutions in Malaysia have grown significantly since their inception. The percentage of population covered by the EPF has grown from 14.8% in 1960, to 16.5% in 1965, 19.3% in 1970, reaching 23.9% in 1975 - 11 -. (Table 111.2). Data on working population are available on a consistent basis only from 1966, and the figures may well understate the actual working population (for example, the published data includes only full-time employees.) They do however, provide a clear indication that EPF has steadily been growing in its coverage (the share of working population covered in 1966 was 77 per- cent ,in 1970 was 85 percent, and in 1974 was 97 percent). The share of the total population covered by life insurance dompanies has also been growing, increasing from 2.5% in 1971 to 3.7% in 1974. (Table III-1). The annual percentage increase in the total sums insured by life insurance companies has been impressive, being in the range of 15% - 2h%. From 1965 to 1975 the sum insured per-capita increased from M$78 to M$334.6; from 1971 to 1974 the sum insured per policy increased from M$6752.2 to M$8050.8.- More impressive and more indicative of the increase in coverage are the figures for total sums insured as a percentage of national income, reaching 18.5% in 1975 (Table III.1). Contributions to the EFF have also grown rapidly, but at a less steady rate than contributions to life insurance companies. For example, in 1961 the annual increase in contributions was 6.6% and in 1975 was 20.6%; between these two dates the annual increase oscillated considerably, reaching a high of 29.4% in 1970 when the EFF legislation was amended to cover all 2/ employees, irrespective of salary. The number of contributors' accounts with 1/ Earlier figures are unavailable. 2/ Refer Section II, p. 6. - 12 the EFF has steadily grown from 1,143,000 in 1960 to 2,800,000 in 1975, while total contributions as a percentage of national income has risen I/ steadily from 1.3% to 1.8% in the same time period. From tables 111.3, III.h and III. some conclusions can be drawn concerning the operation of the insurance business in Malaysia.. The annual premia received-by the life insurance business have grown signifi- cantly over the last fifteen years (Table IiI.3) . Foreign-owned companies have received the major portion of the premia (on average, almost 80%), although in recent years there is,some indication that this share is declining (see Table 111.3). Benefit payments have also expanded with coverage (Table III.). While death and disability, surrenders, policy dividends and bonuses have all grown,-maturity payments have expanded the most rapidly, reflecting the overall aging of policyholders. One interesting aspect of 2/ the life insurance business, referred to earlier, is the "home service" type of enterprise. This business has grown effectively over the years. The suns insured as well as the annual premia have increased seven-fold over the period 1965 to 1973 (Table III.)* The criticism has frequently been levied at contractual savings institutions that they serve to benefit the middle to upper income groups and not those belonging to lower income strata. This clearly is not the case in Malaysia, where both the EPF and the life insurance companies have 1/ In 1971 and 1972, the percentages were as high as 2.0 and 2.1. This may have been because total contributions rose significantly during these years whereas the rate of growth in national income was less impressive than earlier years. (Refer Appendix Table B.) 2/ .See page 5. - 13 - attempted to include in those they serve the lower income segments of the population. The home service scheme of life insurance, for example, was designed to provide a life insurance service specifically for those with 1/ less income, apparently with considerable success. The EPF from its very inception was aimed at lower income employees. It covered employees whose salary was M$400 per month or less (increased to M$500 in 1963, and the salary ceiling was abolished entirely in 1970), and the initial constraint that the establishment should employ at least 5 workers was abandoned in 2/ 1964. By 1970 all employees, with few exceptions were covered by the Fund. Such measures clearly indicate a desire to include those with lower incomes in the coverage of these schemes, and in the case of the EFF, until 1970, of excluding those whose income exceeded a certain limit. Further- more, judging by the extremely high percentage of the working population covered at least by the EFF, these measures appear to have been successful in this objective. IV. RESOURCE MOBILIZATIO THROUGH CONTRACTUAL SAVINGS INSTITUTIONS Saving in contractual form, such as through provident funds or pension schemes, or through the purchase of life insurance, has the ad- vantage of regularity which helps to stabilize the savings rate. Saving thus becomes a commitment on the part of the household and is no longer an erratic residual of income less consumption. 1/ In terms of sums insured, the home service business has grown at a faster rate than the total life insurance business (26 percent compared to 19 percent compound rate of growth over the years 1965 to 1973). 2/ See page 6 for a list of exceptions. hile all contractual savings institutions have this stabilizing influence on aggregate savings, their potential for generating savings can differ depending upon the type of institution. Life insurance contracts have considerable potential for mobilising savings, since they cover not only the risk of future contingency, but also have an annuity element for the insured over and above the risk coverage. By contrast, the savings potential of social insurance programs, such as provident or pension schemes, depends essentially on the principle of funding on which they are based. In Malaysia both the EF and the TPF are based on the "funded" principle of benefit payment whereas the -Er and the IPS follow the "pay-as-you-gon principle. In the full funding (or general average premium) system demarcated funds are set aside for contributors, creating a reserve and earning investment income (interest and appreciation of value). These funds are then used at retirement etc., to pay the claimed benerits. In the pay-as-you-go (or annual assessment) system, benefits are paid from the annual revenue usually with no prior reserve formation except maybe a precautionary.fund. Short-term programs are usually covered by the pay-as you-go system, but long-term programs may be covered by either. The fully- funded method is generally assumed to have a greater capacity to generate surpluses because of the creation of reserves. A program based on the pay- 2/ as-you-go principle may also generate savings through contingency reserves, though this is likely to be to a lesser extent than the fully-funded prin- ciple. 1/ In this sense, group property and term insurance do not mobilize personal savings. For further elaboration, see K. Saito, "An Estimation of House- hold Saving in Sri Lanka", Studies in Domestic Finance, No. 27, World Bank, August 1976. 2/ For a more detailed analysis on the two principles, refer to Franco Reviglio, "Social Security: A Means of Savings Mobilization for Economic Development", IW Staff Papers, July 1967. 14hile plans are newly established, deferred benefits and broader or expanded coverage may bring in added revenues. As the economy grows, if the benefits are controlled and the retirement age is not early, then the period of savings generation can be extended. If claims are illiquid in the sense that it is difficult for employees to borrow on the basis of their contributions, or that employers do not get back their contributions if an enterprise is liquidated, then again the savings potential is high. Household sector savings may also increase through pensions if the poorer employees would not save except through compulsion. Workers may increase other forms of savings after becoming participants in the plans since now they are more aware of the need to save and believe that a comfortable retired life is not impossible to achieve. Also if contributions are illiquid, people may feel the need to save in more liquid forms. Cash contributions and benefits payments of social insurance plans are, by and large, regulated and, therefore, predictable. Thus there is a greater freedom in mobilising these savings on a long-term basis.- Taxation for social security schemes faces less political opposi- tion than other taxes. Employers like it since it is not progressive 1/ It can also be argued that these schemes may have a negative impact on savings, both in other forms and other sectors. For some lower income groups-it may be that their consumption cannot be furtM7 reduced, and their participation in contractual savings schemes may force,them to decrease their savings in other forms. There may also be a negative impact on business savings unless prices or productivity increase. Pension deductions allowable in income tax rates may lower government savings. A detailed analysis of the pros and cons of savings genera- tion by pension funds may be found in M. A. Odle, Pension Funds in labor Sirplus Economies, Institute for Social and Economic Research, University of Test Indies, 1974. - 16 - and probably recognise the po6sibility of passing on its incidence; employees are unlikely to resent it since the tax element is not so obvious as other taxes, and they regard it as an insurance premium. Social security taxation has the advantage of possessing a high income elasticity of yield as the tax base increases during the early stages of development. Further- more, this tax is easily collected if withheld at the source. -An - examination of the Malaysian experience over the last fifteen years reveals that saving in contractual form has been growing steadily (Tables IVl1, IV.2, IV.3). Gross saving in contractual form consists of gross saving through life insurance (estimated as the annual change in the life insurance funds of all registered life insurance companies) plus gross saving through the EPF (estimated as the annual payments received less benefits paid out). Of the two, saving through the EPF has been much larger, averaging approximately four times the saving through life insurance. Saving in both contractual forms has grown impressively over the period at an annual compound rate of 11.2 percent (Table IV.1). Saving through the LIC has increased at a slightly faster rate (an annual compound rate of 15.7 percent). Unlike saving through LIC, saving through the EPF has not been steady; in 1968 and 1969, it declined, while in the next two years it rose sharply (by 53 and 32 percent respectively). This rapid increase can be attributed to a change in the EPF regulations in 1970 which consider. ably widened its coverage. / See page6 . - 17 - Net saving through these institutions is derived by subtracting the credit which they extend to policy holders/contributors from the gross saving figures. Since the EFF does not extend any credit to its contributors, only loans made by LIC to its policyholders need to be taken into account. (Column 4, Table 17.1). In fact, these loans have been substantial, so that net saving through the LIC is much lower than the gross figures. Gross contractual saving as a percentage of gross private savings (Table IV.1, column 6) and gross national savings (Table IV.1,column 7), has been impressively high, the former ranging froa 6 to 13 percent, and the latter from 5 to 11 percent. Over the fifteen years, the annual average of gross contractual savings to gross national savings was 7.5 percent (Table IV.1)f. No data are available on-savings by the personal sector alone, but estimates have been derived (see Appendix Table C). It should be emphasised that these estimates are of limited reliability, and at most, provide an indication of the magnitude of personal saving in gross form (including both financial and tangible assets) and in the form of net holdings of financial assets. Using these estimates, the importance of personal saving in contrac- tual form becomesquite apparent; the average annual share of net contractual saving in total net personal saving in financial form was 36 percent over the fifteen year period, and the average annual share of gross contractual saving in total gross personal saving (i.e. including both financial and tangible assets) was 13 percent. The resources mobilised by contractual savings ins- titutions have, therefore, been substantial. What remains at issue is whether these resources could have been mobilised in their absence . This is analysed in Section V. 1/ More detailed figures on the generation of the savings figures through the LIC and EPF are presented in Tables IV.2 and IV.3 respectively. - 18 - V. THE INPACT OF CONTRACTUAL SAVINGS ON GROSS HOUSEHOLD SAVINGS The question of whether participation in a contractual savings schemewould discourage or encourage savings in other forms has been much debated. The literature is extensive, both empirical and theoretical1 yet the evidence is inconclusive.-! This literature, however, deals over- whelmingly with the U.S. experience, and its relevance to developing countries can be questioned. The U.S. experience is distinct from that of developing countries in two respects: one is the characteristics of the contractual savings schemes themselves, and the second is the behavioural response of the saver to the participation in a contractual savings scheme. With regard to the operation of the systems, the U.S. Social Security System operates on a non- funded basis; there is, therefore,little saving through the accumulation of reserves. In Malaysia, as in many developing countries, the system 1/ Cross-sectional studies in the U.S. by Cagan ("The Effect of Pension Plahs on Aggregate Savings," National Bureau of Economic Research, New York, 1965) and Katona (Private Pensior.s and Individual Saving, University of Michigan Press, Ann Arbor, 1965) show that private pension benefits stimulate savings by providing a base on which to build towards an appropriate income for retirement. More recent studies by Munnell (The Effect of Social Security on Personal Saving, Ballinger Publishing Co., Cambridge, Mass., 1974)and by Felstein ("Social Security and Savings: The Extended Life Cycle Theory," AEA Proceedings,, American Economic Review , May 1976) dispute these findings, arguing that individuals have reduced their saving in response to the guaranteed benefits provided by social security schemes. - 19 - is funded, and thus saving is not only possible through the system, but is frequently a major component of household sector saving. In discussing the whole question of the impact of contractual savings on household savings, it is insufficient to discuss only the substitutability question when these systems are funded; what then becomes important is the net impact,i.e. whether any substitution between contractual and discretionary savings would offset the savings through the system themselves.1 On the behavioural response of the saver to participation in contractual savings schemes, there are several A-2-rkri reasons why in deve- loping countries this participation would exert a positive impact on total private savings. To start with, in many developing countries, these schemes are of relatively recent origin, and the introduction of these schemes would have an educative impact on savers in the sense that they would become accustomed to budgeting with a longer time horizon. In this way, participation in a contrac- tual savings scheme would encourage the development of a "saving" attitude by 3/ familiarising the saver with the idea of long-term financial planning.- 1/ In Malaysia, for example, it approximated 20% of gross household saving in financial form (see Table IV.1); similar percentages apply to India and Sri Lanka. 2/ Here we are concerned with the net impact on household savings not on aggregate savings. The impact on aggregate savings depends on how much of these funds are absorbed by the Government, and how these funds are used by the Government. 3/ On the other hand, the unfamiliarity of the participant to the scheme may lead to a lack of confidence in the eventual receipt of benefits. Not having witnessed earlier generations participating in and receiving bene- fits from the scheme, participants may have doubts about its operation. In countries where political instability is a problem, such doubts would be even greater. Participants would thus regard their contributions as a tax on their income rather than as a form of saving, and so would be unlikely to substitute their contractual contributions for other forms of saving. Total private savings would thus be increased by the full amount of the contractual savings, with no adverse substitution effect. - 20 - It can also be argued that contributors of low income would save more than they would in the absence of such a scheme. Since they are compelled to save a certain percentage of their income which they would otherwise be unlikely to do, their participation in the scheme would raise their savings rate closer to the national average. In those developing countries where social security schemes are specifically directed towards those of lower income (e.g. Malaysia, where until recently only those whose income was below a certain ceiling could join) this effect is likely to be most pronounced.l/ There is, finally,the question of motivation. Saving through life insurance or provident or pension funds satisfies only two motives: that of bequest and that of provision for old age; such saving does not satisfy other motives (e.g. children's education, dowry provision, purchase of capital equip- ment or a house, or for everyday contingencies). Saving must be undertaken in other forms to meet such needs. Clearly, then, the substitution effect of contractual saving is 'limited. On a priori grounds, therefore, the case can be made that contractual savings schemes do have a positive impact on total private saving. On the issue 1/ A study of the Indian experience corroborates this hypothesis. E. H. Ezekiel (Second India Studies: An Overview, Report to the Ford Foundation, May 1977) concludes that as a result of the provident funds operation in India, the average saving-income ratio of covered workers is much higher than the national saving ratio. - 21 - of resource mobilization, one further point needs to be made, and that is that the operation of contractual savings schemes puts at the disposal of the Government a large volume of funds which can be allocated as the Government sees fit. In developing countries this is likely to be true whether the system is privately-operated or Government-operated. If the former,then there are usually requirements for a minimum percentage of assets to be invested'in Government or "approved" securities. If Government- controlled (as with the Employee Provident Fund in Malaysia) then the entire volume of funds is absorbed by the Government. Moreover, given the newness of many of these schemes, there will be a time lag before the maturing of policies and hence the repayment of benefits. During this period, these funds are available to the Government for the financing of bocial services such as low-cost housing, health, education etc. The significance of these funds as a resource for the Government is discussed further in Section VI. The whole question of whether contractual savings will have a negative impact on total private savings thus depends critically on whether a saver regards his contributions*as a form of saving which are substitutable for other forms. If he does, then he would reduce his discretionary saving to some extent, although this may not be sufficient to offset his saving through the funded system. If he does not, then he regards his contributions as a reduction in his disposeable income, or as a tax. From the a priori arguments presented above, our hypothesis is that contractual savings are not entirely substitutable for other forms of saving, so that a participant in a scheme would be unlikely to reduce his discretionary savings. Furthermore, where these schemes are funded, then gross household savings would be augmented by the increase in the accumulated reserves. The net impact of contractual savings schemes on gross household savings would, it is hypothesised, be positive. In order to test this hypothesis, two analyses -are undertaken: - 22 - In order to study the effect of contractual savings institutions on aggregate savings, we have to test what their effect has been on the propensity to save in non-contractual forms. Ideally, we need data on non-contractual savings in the absence of contractual savings institutions as well as after their introduction. We do not have such data. A proxy would be to compare the propensities to save in non-contractual forms before and after expanded coverage of contractual savings institutions. If contractual savings are regarded as another form of saving, then one would expect that any expansion in their coverage would exert a negative impact on non-contractual forms of saving; if on the other hand, contractual savings are regarded more as a tax (as a reduction in disposable income) than as another kind of saving, then one would expect an expansion in their coverage to have no adverse effect, and to some extent, to have a positive effect on total personal savings. It is evident from Table V.1 that the major expansion in coverage of 3PF took place in 1970 when coverage of the EPF was expanded to include all employees, irrespective of earnings. After this date, the ratio of savings through EPF (referred hereafter as CS) to private disposable income rose markedly; the average annual ratio of CS/PDY for the years 1971- 1975 was 0.019 compared to an average of 0.014 for the years 1961-70. This increase in contractual savings was achieved without detriment to other forms of saving. The ratio of non-contractual saving (NCS) to PDY increased steadily over the fifteen year period and following the expansion of EFF coverage in December 1970, continued its steady growth (the annual average ratio NCS/Y over the years 1972-75 was 0.215 compared to an average ratio of 0.151 over the previous decade. 1/ From Table III.2, it is clear that the coverage of'EPF did expand substantially after 1970. The annual-percentage increase in contributions to the EPF rose markedly, and the percentage of population and working population covered also increased significantly. -23- Still more indicative of the non-adverse effect of OS on NCS is that time and savings deposits (D), which are likely to be close substi- tutes for CS, continued to rise steadily as a ratio to PDY throughout the fifteen-year period. In fact, from the time of the expansion in coverage of EPF, the ratio increases sharply (from 0.027 in 1970 to 0.049 in 1971 and 0.062 in 1973). The annual average ratio D/PDY over the years 1971-75 was more than twice that for the earlier decade (0.056 compared to 0.022). Similar results emerge from an examination of changes in deposits plus saving through life insurance (LIF) (the latter, like deposits, may also be a close substitute for saving through EPP). The ratio (D + LIF) to 1/ FDY has not increased as much as D/EDY over the years 1965-75., but did rise markedly in 1971, and the annual average of the ratios (D + LIF)/PDY for the period 1971-75 did exceed that for the years 1965-70 (0.040 compared to 0.034. The impact of the expansion of CS coverage in 1970 on the ratio PDS/PDY is less marked than on the ratios D/PDY and (D + LIF)/PDY, since like NOS, PDS contains not only saving in financial assets but also in physical assets. Even so, it can be seen that the extension of coverage of CS in no way adversely affected the rate of growth of PDS/PDY, and in 2/ fact appears to have contributed positively: This 'Iabular analysis clearly demonstrates the non-adverse effect of contractual savings schemes on 1/ Data for LIF not available prior to 1965. 2/ Note, for example, that after the expansion of CS coverage at the end of 1970, the ratio PDS/PDY continued to increase. -24- savings in non-contractual form, and in fact, indicates a positive effect at least in the case of savings in the form of time and savings deposits. Econometric AnalYsis: This hypothesi4 can be tested with a simple econometric model. The linitations of data have, to some extent, constrained the analysis, since no data are available cn personal (i.e. purely household) income. Data on private (i.e. household and business) disposable income and savings are, therefore, used. Timeeries data for the period 1961-1975 are used. Gross financial savings of the personal sector CPS) are comprised of savings through contractual institutions (CS) and discre- tionary or non-contractual savings (NCS) Thus, GPS - CS + NCS (1) In any particular year, the saver can be said to perceive a certain part (1 of his CS as a tax on his oncome rather than as a saving. The balance of his CS he would thus regard more as a saving than as a reduction of his disposeable income. Thus: GPS* = NCS + (1 -(! CS (2) As etends to zero, the saver regards his CS increasingly as a form of saving, implying some degree of .substitution between CS and NCS. 1/ We add private consumption and gVoss private savings to generate the data on private disposable incona because they are not directly available. Data on gross private savings are directly available from World Tables, World Bank. Data used are presented in Appendix Table A. 2/ Gross private savings minus savings through the EPF. -25- On the other hand, as tends to unity, the saver regards CS increasingly as a tax, and savings decisions for NCS will be decreasingly affected by the existence of CS. The question, then, is to test the value of 8'. A saver thus has some perceived personal disposable income (PDY*) which is equiyAlent to his actual personal disposAble tncome (PDY) less that portion of his CS which he considers a tax (OKCS). That is, PDY* = PDY - &CS Hypothesising that GPS = a + PDY (3) and that GPS* = a +ý'PDY* taking out 0', the tax element of CS, we have GPS -&'CS a + Y(PDY - 6YCS) NCS + CS - 1CS= a + PDY - -'-CS NCS + (1 - 61 CS = a +'Y'DY -YCS NCS a + 'C PDY - (- ') CS -Y&'CS NCS= a + PDY- (1-'+''&) CS NCS= a + PDY- CS (4) where 1 Since 8is a function of ' and , its value can be obtained by estimating equation (4). NCS = - 1078.20 + .31 PDY - .24 CS........... (v) (-8.39) (10.26). (-.16) R2 =.99 D-W = 1.80 (T statistics in parentheses). - 26 - Thus the value of (= 0.31 and that of is insignificant. The value of is then 1 11 1-1 1- .31 From the regression since is insignificant, one can conclude that CS has no effect on household decisions regarding NCS. Further, eis substantially bigger than zero, indeed much above unity. This implies that in the case of Malaysia, the tax element in CS is very high. Accoridng to our hypothesis, therefore, CS could not have had a negative impact on NCS. This coroborates our inference from the ratio-analysis attempted above. From both the ratio as well as the econometric analyses, it can , therefore, be concluded that the existence of contractual savings schemes in no way adversely affected savings in non-contractual form and, in fact, there is some evidence to indicate that these schemes positively affected aggregate savings. VI. INESTMENT ?ATTZRN OF CONTRACTUAL SAVINGS INSTITUT IONS The impact which saving in contractual form has on the de- velopment of a country depends critically on how these funds are allocated. Certain general criteria guiding the investment of such funds can be speci- fied. First, because the obligations of these institutions are of a long- term nature and are, to some extent, actuarily determinable, it is not neces- sary for these institutions to maintain large liquid and short-term reserves. This is certainly the case for provident funds since withdrawals are permitted only on death, permanent disability or retirement at a specific age, and so can largely be pre-determined. Estimation of the emergence of claims for life insurance companies is also possible,with considerable accuracy and there is small possibility of unanticipated withdrawals. Secondly, funds should be invested in assets which are both safe and readily marketable to ensure the continued confidence of policy holders and to be able to fulfill contractual obligations speedily. In the long-run there is a relationship between risk - 27 - and the subsequent rate of return of a portfolio, and by being aware of this relationship, the appropriate "risk-level" for the portfolio can be decided. The experience of both the U.K. and, to some extent, the U.S. show that it is possible for contractual savings schemes to remain financially viable, and yet play a substantial role in the financial and industrial development of the country. In both these countries the contrac- tual saving institutions exerted-a stabilizing influence on the long-run development of the financial markets. They also acted as an innovative investor and were a major source of industrial finance by holding substan- tial amounts of industrial securities - both equities and bonds. In Malaysia, the major contractual savings institutions are government-owned, so that this problem of maintaining adequate liquidity in the asset portfolio should not arise. However, the investment pattern of these institutions has been severely constrained, and they have been required to invest a major share of their funds in government or semi- government securities. These constraints have channelled major portions of the funds of the contractual savings institutions into the financing of public sector investment. This contrasts with the allocation pattern of these institutions in both the UK and US, where the contractual savings institutions were major purchasers of securities of the private sector. 1/ Schwimmer and Malca (1976) have expanded on this idea in the context of the portfolio management for pension funds: "This risk level is devel- oped through a joint decision of the client and the portfolio manager... In fact... different types of companies should have different risk levels depending upon the "maturity" of the pension, the size of the company, and the composition of the company's labor force" (p. 132). on this issue, see also Harbrecht (1959): Martin J. Schwimmer and Edward Malca, Pension and Institutional Portfolio Management, New York, Washington, London: Praeger, 1976; Faul P. Hrbrecht, Pension Fnds and Economic Power, New York: The Twentieth Century und, 1959. - 28 - The allocation pattern of investments of the contractual savings institutions in Malaysia is summarized in Tables VI.1 to VI.5. This pattern conforms to the regulations detailed in Section II, which stipulate the minimum percentage of assets which must be in government or semi-government securities. Tables VI.1 and VI.2 show the distribution of assets of life insurance companies. From these Tables it ia apparent that the insurance companies have, over the entire period for which data are available, allocated a major portion of their assets to investment in various types of securities (see Table VI.2) (an annual average of 54 per- cent over the period 1963-1975). Holdings of securities were almost equally divided between those issued by various branches of government and those issued by corporations (the annual average holdings over the period were exactly the same: 27.7 percent of total assets were government secu- rities and the same percentage were corporate securities). Holdings of government securities comprised those issued by the Federal Government of Malaysia, by State and Local Governments of Malaysia, and by Foreign Governments. Of these, holdings of State and Local Government securities were extremely small. Holdings of foreign government securities have 1/ i.e. from 1963 to 1975, data on the activities of life insurance corpo- rations are unavailable for earlier years since the companies were not subject to the supervision of a Life Insurance Commissioner. declined steadily both in absulute terms (Table VI.1) and as a share of total assets (Table VI.2) from a 23 percent share in 1963 to less than 3 percent in 1975. Wr contrast, holdings of Malaysian Federal Government securities have sharply increased over the period in absolute amounts, and have rather more modestly increased as a share of total assets (from 15.5 percent to 21.9 percent). -Assets held in the form of corporate securities have risen markedly both absolutely and as a percentage of total assets, from a 19 percent share in 1963 to an almost 30 percent share in 1975. Unfortunately, no information is available as to the kind of business in which the stock was purchased. The remainder of the assets portfolio consists of various kinds of loans, and fixed and other assets. On average, loans have comprised 22 percent of total assets, most of these being policy loans. It is interesting to note that insurance companies have held a larger share of their total assets in the Malaysian Government securities than statutorily required. For example, by the end of 1970, 1971 and 1972, they were required to invest 10 percent, 15 percent and 20 percent, respectively of total assets in Malaysian Government securities; the actual figures were 15 percent, 19 percent and 23 percent, respectively. This developnent can, to some extent, be attributed first to the interest rates 1/ For information about the statutory requirements, see Section II, P.4 . offered on Government securities (ranging between 5 and 8 percent on 3 to 20 year securities over the period 1965-74) which appear to compare favor. ably with those available on corporate securities. No data are available on the latter, but an indication can be derived from Table VI.3 which gives the average rates on interest earned (both gross and net of tax) on assets by all life insurance companies. From this table, it is quite clear that the rate of return on government securities compares favorably with that obtained on all assets held by life insurance companies. Second, the low risk on -governent securities would enhance their attract- iveness vis-a-vis corporate stock. The investment pattern of EPF is dominated by the holdings of government securities. The statutory requirement is that a minimum of 75 percent of total assets should be invested in federal government securities. In practice, this percentage has been much higher, ranging from 90 percent of investments plus loans in 1960 to 94 percent in 1975 (Table VIh). In other words, the EFF has adopted a similar practice to the life insurance companies, and elected to hold a larger share of government securities in their portfolio than statutorily required. This share is much higher in the'EPF portfolio than that of the life insurance companies; however, the latter hold a much more balanced portfolio, with the amount of corpcrate securities held being approximately,the same as holdings of government 1/ No data are available in fixed assets held by EPF, making it impossible to arrive at total asset figures. It is for this reason that holdings of different assets have been expressed as a percentage of total loans and investments, (Table VI.5) and that no table has been generated show- ing the allocation of assets in percentage terms. -31* - securities. This difference in portfolio prevails also in other countries, such as India, Turkey and Sri Lanka, and one explanation may be that life insurance companies have operated, at least initially, from the private sector, whereas provident funds have tended in these countries specified to be government-owned and government-managed. The proportion of investments in foreign securities by the EPF has declined substantially over the years (Table VI.5), from comprising 7.5 percent of total investments and loans in 1960 to less than 1 percent in 1975. Holdings of securities of state and local governments have remained extremely small (on average, less than 1 percent of total invest- ments and loans). Direct loans by EFF have risen slightly as a percentage of the total (from 2 percent of the total loans and investments in 1960 to 5 percent in 1975), but remain relatively insignificant. The EFF makes no loans to its contributors, but does extend credit to building societies, which apparently have used these funds primarily for the construction of flats for upper income groups. It is clear, then, that the principle characteristic of the allocation pattern of the Malaysian contractual savings institutions is the predominance of Government securities in their portfolio. Indeed, both EPF and life insurance companies have chosen to hold Government securities in excess of the statutory requirements. This phenomenon, together with the fact that the rates of return on Government securities have-been comparable with these obtained on private investment by these 1/ The pattern of investment of the Social Security Organization (Baploy- ment Injury Insurance Funds) differes little from the EFF (see Table VI.6). Investment has been overwhelmingly in long-term Government bonds 94% of the total investments during the 15 month period, September 1971- December 1972) with the remainder in medium-term Government bonds (5 year maturity) and in fixed deposits with Bank Negara. - 32 - institutions implies that the operation of the contractual savings institutions in the private securities market was the maximu possible, given its limited absorptive capacity. If that is so, then the portfolio policy of these institutions provided a degree of stability to the private securities market as well as to that of the Government securities. This raises questions regarding the impact of the allocation pattern on the composition of investment within the economy. In the absence of contractual savings institutions, it is reasonable to assume that at least some of the savings which they attracted would flow to the commercial banks, and be used according to the current investment pattern of commercial banks. This pattern is quite different from that of the contractual savings institutions in several respects. To start with, the ratio of private vis-a-vis public sector investment is much higher in the commercial banks. For example, taking the annual averages over the period 1966-1968 banks in Malaysia invested almost 80 percent of their total invest- ments in the private sector, whereas the EPF allocated 5 percent and life insurance corporations 71 percent. One further difference in the allocation patterns is the larger share of investments in foreign securities undertaken by commercial banks than by the contractual savings institutions e.g. in 1972 the foreign investments of commercial banks in Malaysia amounted to 7.3 percent of their total assets, whereas for life insurance companies the 1/ They comprise foreign securities held, loans to and balances with banks outside Malaysia, and trade bills payable outside Malaysia. Data taken from Bank Negara Malaysia, Quarterly Economic Bulletin, Sept. 1973. - 33 - corresponding share was 4.7 percent (Table VI.2) and for EFF, it was negli- gible (Table VI-4). Since the EPF comprises the major portion of contractual savings, it can be concluded that the composition of investment is clearly affected, by the presence of these institutions, both in the distribution of funds to public and private sectors, as well as in the share allocated to domestic recipients. The fact that the contractual savings institutions are such an important subscriber to Government securities does not necessarily imply that these funds are used to finance public investment. In Malaysia, however, this does appear to have been the case, assming that if the Government main- tains a consistent current surplus over time, or at least, if it maintains a current balance, then any borrowing which it undertakes must be for use in the capital budget. In Malaysia, the current account has been consistently in surplus for many years. It does appear, therefore, that the purchases of Government securities by the contractual savings institutions in Malaysia have financed a certain share of public sector investment. In fact, this share has been remarkably high, judging from annual change in holdings of Government securities by the contractual savings insti- 2/ tutions as a percentage of total public sector investment. This percentage / (Ma. $) 1966 1967 1968 1969 1970 1971 1972 Current Revenue 1667.0 1839.6 1891.0 2094.3 2400.3 2417.9 2922.0 Current Mcpend. 1619.6 1789.2 1798.8 1933.4 2163.0 2398.0 2912.0 Current Surplus 47.4 50.4 190.0 160.9 237.3 19.9 10.0 Source: Quarterly Economic Bulletin, September 1973, Bank Negara Malaysia. 2/ i.e., total capital expenditure by the Government less defense items. -34- has been very high in Malaysia, ranging between 25 and 50 percent over the 15 year period, with the EFF purchases comprising the major portion. (Table VI.8). Finally, it is possible to arrive at some tentative conclusions on the redistributive impact of this investment pattern of contractual savings institutions. A recently completed study has measured how much income in the Malaysian Peninsula was redistributed through public expenditure from those households with above average ex ante income to those with less than average ex ante income. The study concludes that the amount so redistri- 2/ buted was 4.8 percent of the total and that in fact "Malaysia is shown to redistribute a greater amount through budget activity than the USA in 1960 3/ or 1961." Based on these findings, therefore, it can be argued that the practice of contractual savings institutions in Malaysia to allocate a major portion of their funds to finance public sector investment has, to some extent, had a beneficial effect on the redistribution of income. 1/ J. Meerman, The Distributive Effects of Public Ohpenditure in Malaysia, World Bank RPO 67046, April 1977, "Smmary of Findings." 2/ Jiew p. 50. The study further adds: "Were we to redistribute so as to attain complete equality of household incomes, total redistribution would need to have been 35 percent. Thus, Malaysia achieved 14 percent of the total needed for household equality." (p. 50). 3/ Idem, p. 50. -35- VII. CNCLUSION The objective of this study was two-fold: first to determine the impact of contractual savings on resource mobilisation and, second to examine the pattern of allocation of the funds thus mobilised in order to assess the impact this pattern has had on the economic development of the country. The findings of this study can be-briefly stated: (1) Contractual savings have not only reduced the erratic element in aggregate saving, but have also exerted a positive impact on private savings. The tabular and econometric analyses corrnborate this view by showing that the presence of contractual savings institutions has not affected the propensity to save in non-contractual forms adversely. (2) The principal characteristic of the allocation pattern of the Malaysian contractual savings institutions is the predominance of Government securities in their portfolio, significantly over and above the statutorily required minimum. This clearly indicates that they preferred Government securities to alternative forms of investment, a preference which may be attributable to the low risk on Governmaet securities. (3) The rate of return on Government securities compared most favourably with that on all assets held by these institutions. Further- more, they held Government securities in excess of the statutory require- ment. These two facts suggest that resource allocation was improved by their existence bringing stability"to the private capital market as well as to that of. the Government securities. (h) The allocation pattern of these institutions has affected the composition of investment in the economy. These institutions purchase a major share of new issues as well as hold a substantial portion of all outstanding Government securities. The Government borrowed primarily to finance public sector investment. This clearly altered the private/public share of investment. Furthermore, compared to the private banking system, a much smaller share of the investment of these institutions has been in foreign assets. It can be argued, therefore, that the operations of these institutions channelled a larger share of investible funds to domestic uses than would have occurred in their absence. (5) Some tentative conclusions can be made on the impact of this altered investment pattern on the redistribution of income. A study 1/ undertaken by Meerman (1977) demonstrated that public expenditure in Malaysia redistributed income from those households with above average income to those with less-than average income. Based on these findings, it can be argued that the practice of contractual savings institutions in Malaysia to allocate a major portion of their funds for financing public sector investment has had some beneficial effect on the redistribution of income. (6) Finally, since contractual savings institutions have increased private savings, and thus the holding of financial assets by the households and since these institutions mobilised resources primarily from middle and lower-income groups, it can be safely inferred that wealth dis- tribution must have become less unequal as a result of the existence of these institutions. 1/ Meerman, op. cit. LIoT Or" TA3LES II.1. Major Social Insurance in Malaysia. 111.1. Coverage of Life Insurance Business. 111.2. Coverage of Employees Provident And. 111.3. Annual Premia of Life Insurance Business. III.h. Benefit Payments of Life Insurance Companies. III.5. "Home Service" Life Insurance Business. IV.1. Contractual Savings in Malaysia. IV.2. Savings Through Life Insurance. IV.3. Saving Through Employees Provident Fund. 7.1. Saving-Income Ratios. VI.1. Distribution of Assets of Life Insurance. VI.2. Distribution of Assets of Life Insurance Companies- (as percent of total). VI.3. Average Rates of Interest Earned on Assets by all Life Insurance Companies. VI-. Investment and Loans of Employees Provident Fund. VI.5. Distribution of Investments and Loans of Bployees Provident Fund (as percent of total). VI.6. Sources and Use of Employment Injury Insurance Fnds. VI.?. Holdings of Federal Government Securities by Contractual Savings Institutions. VI.8. Holdings of Federal Government Securities by Contractual Institutions (as percent of total). VI.9. Contribution of Contractual Savings to Government Development Expenditure. APPENDIX A: Data used in analyses (section V). B: General Indicators of the Malaysian Economy. C: Estimated Savings Data. Table IT.1-- MAJOR SOCIAL INSURANCE PROGRAMS IN MALAYSIA Social Insurance Year Covered Persons Major Administering Contributors Adopted ('000) Benefits Agency 1/ 1. Employees Provident Fund 1952 2880- Retirement Ministry of Employees/ death Finance Employers 2. Teachers' Provident Fund 1962 750- Retirement Public Employees/ Services Dept. Employers 2/ 3. Employment Injury 1971 226- Employment Ministry of Employees/ Insurance Scheme Injury and labor Employers Resulting Invalidity 4. Invalidity Pension Scheme 1973 10007 Accident Ministry of Employees/ Injury from labor Employers any source resulting invalidity / 1975 figures. 2/ Early 1973 figures. Source: 1, Annual Report of the Social Security Organisation, 1972, Government of Malaysia, Kuala Lumpur. 2. Employees Provident Fund Ordinance, 1951, Reprint No. 3 of 1968, Kuala Lumpur. TAPT.E TI.l: CCVFPAGE OF LTFF, IISURNCE BUSINESS Total Sums % of New Sum Total Sums Insured in Force Insured per Popula- Insured Policy tion (Mm) ( increase) (per capita (as % of (M$ ) Covered M$ ) National Irncome) 1965 203.9 758.3 78.0 (8.8) n.a. n.a. 1966 224.2 875.2 (15.4) 90.0 (9.5) n.a. n.a. 1967 259.8 1002.2 (14.5) 99.9 (10.4) n.a. n.a. 1968 323.6 1172.4 (17.0) 113.6 (16.4) n.a. n.a. 1969 365.1 1365.6 (16.5) 128.8 (12.4) n.a. n.a. 1970 431.1 1570.0 (15.0) 144.3 (12.9) r.a. n.a. 1971 545.4 1866.3 (18.9) 167.2 (14.9) 6752.2 2.5 1972 710.5 2315.4 (24.1) 202.2 (17.0) 7425.9 2.7 1973 861.6 2881.0 (24.4) 245.2 (16.5) 7719.7 3.2 1974 1084.2 3485.0 (21.0) 297.8 (16.4) 8o5o.8 3.7 1975 n.a. 4025.7 (15.5) 334.6 (18.5) n.a. n.a. Source: Director General of Insurance, !nnual Report for year ending December 31, 1975; National Income data (GNP at market prices) from Bank Negara malaysia, Quarterly Economic Bulletin various issues- population data from World Bank, World Tables. TABLE 111.2: COVERAGE OF EMPLOYEES PROVIDENT FUND Total Contributions Nhumber of Percent of Percent of Contributors' (M$ million) (o increase) (o of Nat'l. Population Working Population Accounts ('000) income) Covered Covered 2/ 1960 114313 84.9 - 1.3 14.8 n.a. 1961 1232 90.5 6.6 1.4 14.7 n.a. 1962 1250 94.4 4.3 1.4 14.5 n.a. 1963 1430 105.5 11.8 1.4 16.0 n.a. 1964 1488 114.6 8.6 1.5 16.3 n.a. 1965 1554 126.4 10.3 1.5 16.5 n.a. 1)66 1631 137.6 8.9 1.5 17.3 76.9 1367 1717 148.0 7.6 1.5 17.1 82.6 118 1830 152.7 3.2 1.5 17.7 88.6 1969 1949 159.9 4.7 1.5 18.3 88.3 1970 21o4 206.9 29.4 1.7 19.3 85.0 1971 2217 245.9 18.8 2.0 19.7 87-* 1)72 2365 284.8 15.8 2.1 20.7 90.9 1973 2546 291.0 2.2 1.7 21.7 93.3 1974 2710 315.9 8.6 1.5 23.2 97.2 1975 2880 381.0 20.6 1.8 23.9 n.a. Contributors Account as % of population. 2/ Comprises population engaged in following activities: agriculture, including forestry and fishing, mining and quarrying , Government and quasi-government, manufacturing , "pioneer industries." Source: Bank Negara alaysia, Quarterly Eonomic Bulletin, various issues; World Bank, World Tables; The Treasury of Malaysia, Economic Report.. TABLE ITI.3: AI'mUAL PREMIA OP LIFF INSURANCE Domestic Cos. Foreign Cos. Total (AM$ million) (as ;, of (M$ million) (as % of (M$ million) (% total) total) increase) 1965 0.5 ( 6.9) 6.7 (93.1) 7,2 (22.5) 1966 2.3 (41.1) 3.3 (58.9) 5.6 (-22.2) 1967 1.3 (22.0) 4.6 (78.0) 5.9 (13.2) 1968 1.2 (16'.7) 5.9' (83.1) 7.1 (14.0) 1969 1.5 (19.7) 6.1 (80.3) 7.6 (13.2) 1970 1.6 (21.6) 5.8 (78.4) 7.h (-2.6) 1971 2.2 (20.8) . 8.4 (79.2) 10.6 (14.6) 1972 3.5 (26.1) 9.9 (73.9) 13.4 (16.1) 1973 5.1 (24.4) 15.8 (75.6) 20.9 ·(21.6) 1974 3.2 (14.3) 19.2 (85.7) 22.4 (19.0) Source: Director General of Insurance, Annual Report, various issues. TABLE III.h : BENEFIT PAYMENTS OF LIFE INSURANCE COMPANIES (M$ million) Death and Maturity Surrenders Policy Annuities Total Disability Payments Dividends and Payments Bonuses Paid 1)64 3.1 4.8 3.8 1.3 0.1 13.1 1965 4.2 5.4 4.9 2.0 0.1 i6.6 1966 3.9 5.8 5.5 2.2 0.1 17.5 1967 4.1 6.8 5.2 2.1 0.0 18.2 1968 4.5 8.5 7.3 2.4 d.1 22.8 1969 4.6 9.4 8.7 2.8 0.0 25.8 1970 5.8 11.4 8.6 3.2 0.0 29.0 1971 6.3 12.6 9.1 3.4 . 0.1 31.5 1972 7.6 12.0 8.5 4.0 0.1 32.2 1973 8.2 12.2 8.3 4.1 .0.1 32.9 1974 10.7 15.0 10.3 5.2 0.1 41.3 l Incluies Home Service. Source: Director General Insurance, Annual Report, various issues. TABLE III.5: "HOMPS':ICE" 11FE INSUTRANCE BUSINISS (M $ million) Sum) Insured Annual Premia 1965 10.1 1.2 1966 15.8 1.9 9167 24.6 2.8 1968 32.3 3.5 1969 36.7 4.0 1970 37.2 3.9 1971 47.1 4.8 1972 53.5 5.1 1973 77.1 7.0 SOURCE: Malaysia Director General of Insurance, Annual Report, various issues. Table IV.1: GROSS AND NET CON'RACTUAL SAVI\G (M$ million) 1f Gross Contractual Net Contractual Gross Saving Net Saving Saving Saving Through Life Through Total Through Life Total As % of As % of . As T of As % of Insurance Employees (1) + (2) Insurance (4) + (2) Gross Gross ' Gross Gross Provident Private National Private National Fund Savings Savings Savings Savinga (1) (2) (3) (4) (5) (6) (7) (8) (9) 1960 n.a. 72.6 72.6 n.a. 72.6 n.a. 5.1 n.a. 5.1 1961 n.a. 77.1 77.1 n.a. 77.1 11.9 6.7 11.9 6.7 1962 n.a. 80.6 80.6 n.a. 80.6 11.0 7.8 11.0 7.8 1963 n.a. 86.6 86.6 n.a. 86.6 11.5 8.1 11.5 8.1 1964 n.a. 90.7 90.7 n.a. 90.7 10.4 8.0 10.4 8.0 1965 19.0 99.2 118.2 10.7 109.9 10.1 7.9 9.4 7.4 1966 31.3 106.3 137.6 20.8 127.1 10.5 8.9 9.7 8.3 1967 18.7 111.2 129.9 5.7 116.9 9.8 8.2 8.8 7.4 1963 28.8 85.6 114.4 11.1 96.7 8.0 6.5 6.8 5.5 1969 30.9 78.3 109.2 11.0 89.3 5.9 4.8 4.9 4.0 1970 33.6 133.8 167.4 10.2 .144..o 9.9 6.7 8.5 5.8 1971 37.3 182.9 220.2 8.8 191.7 12.7 1C.7 11.0 9.3 1972 41.7 217.1 258.8 7.7 224.8 12.6 11.1 10.9 9.7 1973 92.7 211.8 304.5 17.6 229.4 9.4 7.1 7.1 5.4 1974 50.7 220.4 271.1 1.4 221.8 7.9 - 5.1 6.5 4.2 1975 81.6 275.8 357.4 n.a. 275.8 8.7 7.4 6.7 5.7 No credit is extended by E.P.F. to subseribers. Source: Tables IV.2 & IV.3 and World Bank, World Tables. TABLZ IV. 2: SAVING THROUGH LIFE INSURANCE 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Total Life Fund 143.5 174.8 193.5 222.3 253.2 286.8 324.1 365.8 458.5 509.2 590.8 Change in Life Fund 19.0 31.3 18.7 28.8 30.9 33.6 37.3 41.7 92.7 50.7 81.6 (Gross Saving thro' Life Fund) % Change in Life Fund (15.3) (21.8) (10.7) (14.9) (13.9) (13.3) (13.0) (12.9) (25.4) (11.1) (16.0) (Gross Saving through Life Fund)% ( 1.3) ( 2.0) ( 1.2) ( 1.6) ( 1.4) ( 1.3) ( 1.8) ( 1.8) ( 2.2) ( 1.0) ( 1.5) (Gross National Savings) Change in Outstanding Policy Loans 4.6 1.0 5.0 3.8 2.9 3.1 4.2 5.2 7.8 9.7 n.a. Change in Life Fund - Change in 10.7 20.8 5.7 11.1 11.0 10.2 8.8 7.7 17.6 1.4 na. Outstanding Policy Loans (Net Saving thro' Life Fund) (Ilet Saving thro' Life Fund) ( 0.7) ( 1.4) ( 0.4) ( 0.6) ( 0.5) ((0.4) ( 0.4) ( 0.3) ( 0.4) ( - ) n.a. ( Gross National Savings ) SOURCE: Gross National Savings: Bank Negara Malaysia, Quarterly Economic Bulletin, various issues; all other data: Director General of Insurance, Annual Report, various issues. TABLE IV.3 SAVING THROUGH E,MPLOYEES PROVIDENT FUND (M$ million) 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Total Contribution 84.9 90.5 94.4 105.5 114.6 126.4 137.6 148.0 152.7 159.0 206.9 245.9 284.8 291.0 315.9 381.0 Total Withdrawals 12.3 13.4 13.8 18.9 23.9 27.2 31.3 36.8 67.1 81.6 73.1 63.0 67.7 79.2 95.5 105.2 Total Savings (Contribution - Withdrawals) 72.6 77.1 80.6 86.6 90.7 99.2 106.3 111.2 85.6 78.3 133.8 182.9 217.1 211.8 220.4 275.8 % Change in Contribution - 6.6 4.3 11.8 8.6 10.3 8.9 7.6 3.2 4.7 29.4 18.8 15.8 2.2 8.6 20.6 % Charg;e in 8,tvings - 6.2 4.5 7.4 4.7 9.4 7.2 4.6 -23.0 -8.5 70.9 36.7 18.7 -2.4 4.1 25.1 (Sarlns throuEh EPF) % 5.1 6.7 7.8 8.5 8.0 6.7 6.9 7.0 4.9 3.5 5.4 8.9 9.3 5.0 4.2 3.7 Gross Nat'l. Savings Direct loans are not made to contributing households; therefore differentiation between gross and net savings does not arise. The sudden fall may be due to Gross National Savings nearly doubling between 1972 and 1973. Source: aink flegara nalaysia, Quarterly Economic Bulletin; various issues. TABLE V.1: SAVINGS - INCóME RATIoS PDS/PDY CS/PDY NCS/PDY D/PDY D+LIF/PDY Annual Annual Average Annual Annual Average Annual Annual Average Annual Annual Average Annual Annual Ratio Over Period Ratio Over Period Ratio Over Period Ratio Over Peric Ratio Average Specified Specified Specified Specified Over Period Specified (1) (2) (3) (4) (5) (6) (7) (8> (9) (io) i0 o.127 0.015 0.112 0.005 n. n.a. 1962 0.135 0.015 0.120 0.015 . n.a. n.a. 1963 0.130 0.015 0.115 0.009 n.a. n.a. 1964 0.141 J 0.015 0.128 0.030 n.a. n.a. 1965 0.174 0.165 0.015 0.014 0.159 0.151 0.021 0.022 0.027 1966 0.183 0.015 o.168 0.019 0.027 1967 0.175 0.015 O.160 0.029 0.037 0.034 1)3 0.182 0.011 0.171 0.032 0.042 1969 0.215 0.009 0.205 0.031 0.038 1973 0.191 0.015_ 0.176 0.027 0.036 1T'1 0.195 0.021 0.174 o.049 0.053 1j72 0.214 0.023 0.192 0.049 0.042 0.040 0.6o 0.234 0-1 0.019 023 0.215 o.6 .0560.3 1)73 0.260 0.017 0.243 0.062 0.039 1'74 0.230 0.015 0.215 0.055 0.031 1)75 0.271 0.018 0.253 0.065 0.033 A.arevi-.tions used: PDS - private domestic uaving; PDY = private disposable income; CS saving through EP?; NSC = saving in non-contractual form (derived as PDY-CS); D= time and saving deposits; LIFm savirg through life insurance. TABLE VI.1: DISTRIBUTION OF ASSETS OF LIFE INSURANCE COMPANIES (M$ million) 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1. Innet:-ents 71.6 73.6 87.1 99 104.3 125.6 146.4 174.1 205.6 268.8 323.1 344.1 385.0 N ceae) (.a.) T2.7) (18.3) (4.4) (14.7) (20.4) (1.6) (18.9) (18.1) (30.7) (20.2) (6.5) (n.9) (aï ':vern:nent Securities: 4.0* 47.3 55.8 42.4 -47.2 50.4 51.6 72.2 91.4 125.9 144.7 156.9 179.7 (i) Federal Government 19.4 19.4 1KU 19.1 22.1 23.5 25.9 li.li 69.2 104.4 123.3 135.9 151.5 (ii) Freign Government 28,6 27.9 35.2 22.1 24.0 25.8 24.6 22.5 21.7 21.2 21.1 20.3 20.2 (Iii) State & L-;cal Govern- . - 1.8 1.2 1.1 1.1 1.1 1.3 0.5 0.3 0.3 0.7 8.G ment Securities (b) Cor-orate Securities 23.6 26.3 31.3 48.5 57.1 75.2 94.8 101.9 114.2 142.9 178.4 187.2 205.3 2 Loans 23.7 26.2 38.2 45.0 53.3 64.0 73.7 831 82 8 102.0 129.0 143.8 (4 increase) (n.a.) (10.5) (43.1) (17.8) (18.4) (20.1) (15.2> (12.8) (7.3) (5.2) (8.7) (26.5) (3.5) (a) Land and Building LoanB n.a. 5.2 13.2 19.0 22.0 24.2 26.8 31.5 32.3 29.3 27.0 29.1 n.a. (b) Policy Loans n.a. 19.4 24.0 25.0 30.0 33.8 36.7 39.8 44.0 49.2 57.0 66.7 n.a. (c) Other n.a,. 1.6 1.0 0.6 1.3 6.0 10.2 11.8 12.9 15.3 18.0 33.2 n.a. 3. Fixej ; Other Assets 29.8 41.9 47.5 56.5 61.1 63.6 66.5 64.6 70.7 85.4 84.1 123.4 164.2 (* it.crease) n.a. (40.) (13.4) (=8) (8.) (4.1) (4.6) (-2.9) (9~I) (20.8) (13.5) '6~7) (33.1) Total A:sets 125.1 141.7 172.8 192.4 218.7 253.2 286.6 321.8 365.5 448.0 508.8 596.5 693.0 Tincrease) (n.a.) (13.3) (21.9) (11.3) (13.7) (15.8) (13.2) (12.3) (13.6) (22.6) (13.6) (17.6) 16.2) Source: Director General of Insurance, Annual Report, various issues; Bank Negara Malaysia, Quarterly Economic Bulletin, various issues. TABLE VI.2:DISTRIBUTION OF ASSETS OF LIFE INSURANCE COMPANIES (as percent of total) 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1. Irnrest:,ents 57.2 51.9 50.4 47.2 47.7 49.6 51.1 54.1 56.3 60.0 63.5 57.7 55.6 of which (a) Grerr.:ent securities 38.4 33.4 32.3 22.0 21.6 19.9 18.0 40.0 24.9 28.1 28.4 26.3 26.o (1) Federal Government 15.5 13.7 10.9 9.9 10.1 9.3 9.0 15.0 16.9 23.3 24.2 22.8 21.9 (ii) Fireign Governments 22.9 19.7 20.4 11.5 11.0 10.2 8.6 7.0 5.9 4.7 4.1 3.4 2.9 (iii) State & Local Govern- - - 1.0 0.6 0.5 0.4 0.4 0.4 0.1 0.1 0.1 0.1 1.2 ment Securities (b) Corporate Securities 18.9 18.6 18.1 25.2 26.1 29.7 33.1 31.7 31.2 31.9 35.1 31.4 29.6 2. Loans 18.9 18.5 22.1 23.4 24.4 25.3 25.7 25.8 24.4 20.9 20.0 21-6 20.8 of which (a) Land and Building Loans n.a. 3.7 7.6 9.9 10.1 9.6 9.4 9.8 8.8 6.5 5.3 4.9 n.a. (b) Policy Loans n.a. 13.7 13.9 13.0 13.7 13.3 12.8 12.4 12.0 11.0 11.2 11.2 n.a. (c) Other n.a. 1.1 0.6 .3 0.6 2.4 3.6 3.7 3.5 3.4 3.5 5.6 n.a. 3. Fixed and Other Assets 23.8 29.6 27.5 29.4 27.9 25.1 23.2 20.1 19.3 19,1 16.5 20.7 23.7 T9t2l A:zets 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Table VI.l. TABLE VI.3: AVERAGE RATES OF INTEREST EARNED ON ASSETS BY ALL LIFE INSURANCE COMPANIES (per cent) 1/ Gross Rate Net Rate Interest Rates on 2/ Government Securities 1963 6.0 4.8 n.a. 1964 6.4 5.1 n.a. 1965 8.3 7.0 5.12 - 5.75 1966 8.1 6.8 5.12 - 5.75 1967 8.1 7.4 .25 - 5.75 1968 8.5 7.3 5.75 - 6.25 1969 8.1 , 7.0 5.75 - 6.5o 1970 8.4 7.2 5.75 - 6.50 19,71 8.2 6.8 5.75 - 6.50 1972 7.8 6.8 5.75 - 7.00 1973 7.9 7.0 6.00 - 7.50 1974 8.7 8.4 6.75 - 8.00 1/ After deduction of tax. 2/ 3 years to 20 years. SOURCE: Annual Report of the Director General of Insurance, year ending, December 1975. Bank Negara Malaysia. Quarterly Bulletin, 1973-1976. TABLE VI. 4 . INVESTMENTS AND LOANS OF THE EMPIWYEES PROVIDENT FUND (M$ million) 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 609.2 706.8 814.0 929.5 1060.9 1210.9 1375.6 1554.6 1699.9 1891.6 2122.1 24s2.4 2783.3 3165.4 3523.7 4ool.5 ease) n.a. (16.0) (15.2) (14.2) (14.1) (14.1) (13.6) (13.0) (9.3) (-.3) ~ .2) (14.6) i ~.) (13.7) (11.3) (13.6) (aN her:zert Securities: (ii -eSeral ^overnment g 558.0 655.5 762.2 870.6 998.4 n48.4 1312.1 1494.4 1639.8 1831.3 2062.0 2384.4 2734.6 3116.6 3474.9 3952.7 ± reign ,overnments 46.2 46.3 46.3 46.4 46.5 46.5 46.6 46.7 46.7 46.8 46.7 34.5 34.5 34.6 34.6 34.6 (ii) 2-tate and Local 4overn- ment securiti e f 5.0 5.0 5.5 12.5 16.3 16.0 16.9 13.5 13.4 13.5 13.4 13.5 14.2 14.2 14.2 14.2 0s 0.0 19.0 31.0 45.0 54.0 63.0 71.0 74.4 94.4 89.1 96.2 99.6 98.4 103.3 175.5 215.1 ` :crease) ;.a. (9.0) (¯63.) (i5.2) (2~0) (16~.7) (12.7) ((.89) -(26~9) (~~) (.) T3.5) (-1.2) (5.0) - (69.9) (22.6) (a . Societies 3/ 10.0 19.0 26.0 40.0 49.0 58.0 66.0 68.4 87.0 81.1 65.4 69.4 75.4 85.4 125.4 157.4 b) her L/ - - 5.0 5.0 5.0 5.0 5.0 6.0 7.4 8.0 30.8 30.2 23.0 17.9 50.1 57.7 stal. :';ectet &Loans 619.3 725.8 &45.0 974.5 1115.2 1273.9 1446.6 1629.0 1794.3 1980.7 2218.3 2532.0 2881.7 3273.1 3699.2 4216.6 J'1-:e reasur Bills; include Federal Government Pmcurities issued outside Malaysia. Ser::een 1963 and 1969, obtained as the difference between loans and a catch-all item including Loans + State and Local Government Securities. -1 -s on Mortgages + Debenture Loans for 1960 - 1969. 4/ inc~::;es investmer.t in Land and Buildings, i.e., fixed assets. 2 re: (i) Bank legara alaysia, Quarterly Bulletin varlous issues. (ii) Lee, H, L., "Household Savings 'in West Malaysia", for "Loan" Figures only, between 1960-1969. TABLE VI.5: INVESTMENTS AND LOANS OF THE EMPLOYEES PROVIDENT FUND (as percentage of total) 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 m:ests 98.4 97.4 96.3 95.4 95.1 95.1 95.1 95.4 94.7 95.5 94.3 96.1 96.6 96.7 95.3 94.9 (al 't. Securities 98.4 97.4 96.3 95.4 95.1 95.1 95.1 95.4 4 95.5 94.3 96.1 96.6 96.7 95 3 94 9 _ciral 3overnment %f 90.1 90.3 90.2 89.3 8. 90.1 90.7 91.7 91.4 92.5 93.0 94.2 9 95.2 93.9 93 7 (tf o reign Goeernments 7.5 6.4 5.5 4.8 4.2 3.7 3.2 2.9 2.6 2.4 2.1 1.4 1.2 1.1 0.9 908 gii) State & Local Gov't. 0.8 0.7 0.7 1.3 1.5 1.3 1.2 0.8 0.7 0.7 0j6 0.5 0.5 0.4 0.4 0.3 !Jans 1.6 2.6 3.7 4.6 4.8 4.9 h-9 4.6 2.3 4.5 4.3 3.9 3.4 3.2 4.7 5.1 (a) Builling Societies 1.6 2.6 3.1 4.1 4.4 4.6 4.6 4.2 4.8 4.1 2.9 2.7 2.6 2.6 3.4 3.7 (bl Other - - 0.6 0.5 0.4 0.4 0.3 0.4 0.4 0.4 1.4 1.2 0.8 0.5 1.4 1.4 TU.L 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100,0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 fEx--!,,de Treasury Bills; include Federal Government Securities issued outside Malaysia. 5ource: Bank Negara Malayoia, Quarterly Economic Bulletin; various issuao. TABLE. vI.6: SOURCES AND USE OF E4PLOYMENT INJURY INSURANCE FUNS (1971-72) (Stock figure: M$ 'OO) 1971 (3 months) 1972 Total Sources of Funds Employer Contribution 73.133 2294.-56 Investment Income 2.574 2370.273 Uses of Funds Benefit Payments + Fees 2.067 202.483 20-.550 Cash at Bank 70.785 167.496 238.281 Cash in Hand .281 2.160 2.4h3 Investment: (a) 6% p.a. Federal Securities 30.000 maturing 1977 (b) 7% p.a. Federal Securities 1805.000 maturing 1992 (c) Fixed Deposit with Bank Negara 90.000 2370.273 1/ Federally paid administrative expenditure, amounting to $1,053,900 in 1972 are not included here. Source: Annual Report of the Social Security Organisation, 1972. 4 . ?A3LZ VI.7: HOLDINGS OF FEDERAL GOVERNMENT SECURITIES BY CONTRACTUAL SAVINGS INSTITUTIONS (Mf million) 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Total Amount Subscribed 223.2 171.0 258.3 287.9 580.o 4o4.5 430.0 395.0 635.0 lo45.0 1153.0 950.0 1092.0 of w%ich arount subscribed By: C-.trjctal Savings Insti- tutions 122.3 123.7 163.7 170.0 242.0 153.9 199.8 261.3 313.3 548.4 506.2 363.0 497.6 110.8 -1~ -.2 Y57 162.6 23-2-IT ~ 22.1 2 ~.0 50.9-W 385 V6 $t:er Pro.iJent Funds 2 9.5 5.4 5.0 7.2 7.3 6.8 10.8 11.5 3.0 9.2 10.1 13.8 2.4 Insura-.ce Companies 3 4/ 2.0 0.1 0.9 0.2 0.5 1.0 0.7 17.7 12.3 36.1 32.1 20.7 31.8 Tftal : tanling Holdings 1384.0 1557.7 1733.4 1932.5 2353.3 2711.1 3091.4 3479.5 4049.4 4835.6 5722.1 6444.2 7354.5 of which outstanding holdings By: Contre:tual Savings Insti- tutions n.a. n.a. n.a. 1363.1 1563.6 1726.0 1941.9 2223.1 2581.8 2979.8 3397.8 3781.1 4285.9 EF 8U9. Y1022.0 /11r9.. . 1615.1 1806.6 2038.8 2359.1 2709.3 3093.6 3451.9 3930.1 n.a. n.a. n.a. 28.8 38.0 49.0 61.7 76.2 92.5 99.9 103.8 105.7 102.3 Other Provident Funds n.a. n.a. n.a. 27.1 33.7 38.4 47.7 59.7 61.o 66.2 77.1 87.6 102.0 ife 7.surance Companies 19.4 19.4 18.8 19.1 22.1 23.5 25.9 48.4 69.2 104.4 123.3 135.9 151.5 Char.-e in Outstanding Holdings 218.0 173.7 175.7 199.1 420.8 357.8 380.3 388.1 569.9 786.2 886.5 722.1 910.3 of which change in outstanding holdings by: C-_.Iractual Savings Insti- tutions n.a. n.a. n.a. n.a. 200.5 162.14 215.9 281.2 358.7 398.0 418.0 383.3 5014.8 ETF119.0 .134.0 1X7.0 19.1 1N1.7 15. 191.5 232.2 30.3 350.2 3W-3 35 .3 177 T? n.a. n.a. n.a. n.a. 9.2 11.0 12.7 14.5 16.3 7.4 3.9 1.9 -3.4 ".er Provident Funds 2/ n.a. n.a. n.a. n.a. 6.6 4.7 9.3 12.0 1.3 5.2 10.9 10.5 14.4 Life I.surance Companies n.a. 0.0 -0.6 0.3 3.0 1.4 2.4 22.5 20.8 35.2 18.9 12.6 15.6 1/ Excludes Treasury Bills, which are not held by contractual savings institutions. 2/ Other provident and trust funds, and Social Security Organization. _/ InclLdes non-life insurance companies. / Includes state and local government securities. ource: Bank Negara Malaysia, Annual Report, various issues; Bank Negara Malaysia, Quarterly Economic Bulletin; various issues. T VL VI.8: HOLDINGS OF FEDERAL GOVERNMENT SECURITIES BY CONTRACTUAL SAVINGS INSTITUTIONS (as percent o-f total) 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Tztal Arount Subscribed 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 zf which :ourt subscribed by: Contractual Savings Insti- tutions 4.8 72.3 63.4 59.0 41.7 38.0 46.5 66.2 49.3 52.5 43.9 38.2 45.6 EF 96 69.-1 Ul.-1 56.5 40.4 3W.T 43~ 58.8 46.9 4W1 40-l 34~.-6 42.4 'ther Provident Funds V 4.3 3.2 1.9 2.5 1.3 1.7 2.5 2.9 0.5 0.9 0.9 1.5 0.2 Insura.nce Companies 3/1 0.9 0.1 0.3 0.1 0.1 0.2 0.2 4.5 1.9 3.5 2.8 2.2 2.9 T2tal Ou'standing Holdings 100,0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which outstanding holdings by: Contractual Savings Insti- tutions n.a. n.a. n.a. 70.5 66.4 63.7 62.8 63.9 63.8 61.6 59.4 58.7 58.3 EF 64.2 W6-~6 67.4 W.~7 62.~5 59.6 5~.i 8. 5W3 5U.0 54.1~ .53.6 53.4 n.a. n.a. n.a. 1.5 1.6 1.8 2.0 2.2 2.3 2.1 1.8 1.6 1.4 C.ther Provident Funds 2f n.a. n.a. n.a. 1.4 1.4 1.4 1.5 1.7 1.5 1.4 1.3 1.4 1.4 Life Insurance Companies 2.2 1.2 1.1 1.0 0.9 .0.9 0.8 1.4 1.7 2.2 2.2 2.1 2.1 C- in Outstanding Holdings 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 )f .h change in outstanding ho1lirts by: C-intractual Savings Insti- tutions n.a. n.a. n.a. n.a. 47.6 45.4 56.8 72.5 62.9 50.6 47.2 53.1 55.3 EF4. 77.1 3.7 5 43.2 l¯ 3'1 9 56~2 44.5 43. 4 52.5 TPF n.a. n.a. n.a. n.a. 2.2 3.1 3.3 3.7 - 2.9 0.9 0.4 0.3 -0.4 ther Provident Funds n.a. n.a. n.a. n.a. 1.6 1.3 2.4 3.1 0.2 0.7 1.2 1.5 1.6 [.Life :nsurance :!ompanies n.a. 0.0 -0.3 0.2 0.7 0.4 0.6 5.8 3.6 4.5 2.1 1.7 1.7 fExcles Treasury Bills, which are not held by contractual savings institutions. 2f Other provident and trust funds, and Social Security Organization. 3/ Includes non-life insurance companies. 4/ Includes State and local government securities. Source: T.able VI.7. TABLE VI.9: CONTRIBUTION OF CONTRACTUAL SAVINGS TO GOVERNMNT DEVELO4ENT EXPEIDITURE 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Chane in -itstanding holdings of feleral gvernment securities by: C-ntract,;al savinas institutions ($mn) 200... 20.5 162.4 2l5.9 281.2 3158J.7 39a kLa 383.3 504.8 of .ich, _pz 119.1 181.7 145.3 191.5 232.2 320.3 350.2 384.3 358.3 478.2 n.a. 9.2 11.0 12.7 14.5 16.3 7.4 3.9 1.9 -3.4 ther Provident Funds n.a. 6.6 4.7 9.3 12.0 1.3 5.2 10.9 10.5 14.4 Life Insurance Companies 0.3 3.0 1.4 2.4 22.5 20.8 35.2 18.9 12.6 15.6. Goverr.ent Developmental Expenditure 477.2 478.1 512.3 488.1 531.9 850.1 1007.4 986.2 1591.0 1615.4 % contributi:n of contractual savings n.a. 41.9 31.7 44.2 52.9 42.2 39.5 42.4 24.1 31.2 to devel-pment expenditure of which, EFF 25.0 38.0 28.4 39.2 43.7 37.7 34.8 39.0 22.5 29.6 7?? n.a. 1.9 2.1 2.6 2.7 1.9 .7 .4 .1 -.2 rther Provident Funds n.a. 1.4 .9 1.2 2.3 .2 .5 1.1 .7 ..9 Life Insurance Companies 0.0 .6 .3 .5 4.2 2.4 3.5 1.9 .8 1.0 Other provident and trust funds, and Social Security Organisation. 2/ E4 laiez Lefence and Security and General Administration from the government's definition. Includes developmental expenditure in agriculture ar:i r-jraL development, industrial and mining development, transport, telecommunication, utilities, education, health and family planning, h7,ising, social and community services. Source: Bank Negara Malaysia, Quarterly Economic Bulletin; various issues. APPE!NDIX TABLE A: DATA USED IN ANALYSES (Section V) (m$ million) Savings Private Gross Through Savings Disposable Private Savings Time and through Life Incomie Savings Through GPS - CS Deponits Insurance (PDY) 1/ (GSP) The EPF (CS) (NCS) (STD) (LIC) 1961 5121 649 77.1 571.9 25 1962 5454 734 80.6 653.4 82 1963 5784 750 86.6 663.4 52 1964 6180 87h 90.7 783.3 183 1965 6750 1172 99.2 1072.8 139 19.0 1966 7188 1316 106.3 1209.7 140 31.3 1967 7542 1321 111.2 1209.8 216 18.7 1968 7841 1424 85.6 1338.4 253 28.8 1969 8555 1836 78.3 1757.7 263 30.9 1970 88B3 1692 133.8 1558.2 239 33.6 1971 8909 1736 182.9 1553.1 434 37.3 1972 9620 206o 217.1 1842.9 472 41.7 1973 12410 3232 211.8 3020.2 774 92.7 1974 11818 3411 220.4 3190.6 820 50.7 1975 15122 h098 275.8 3822.2 990 81.6 / Private Disposable Income was obtained as private consumption plus gross private sarings. 2/ Source: World Bank, World Tables, updated as of March 1977; Table IV.2 (Text p. 22); International Monetary Fund, International Financial Statistics, various issues. APPEUDIX TABLE B MALAYSIA: GENERAL INDICATORS OF THE MALAYSIAN ECONOMY 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 A. T7P r2r=s Nat'1 Product (mn) 6649 6681 6916 7354 7822 8593 9177 9652 10068 10973 12155 12501 13641 17443 21234 21747 Fer capita 1P (Š) 820 800 800 820 850 920 940 961 973 1035 n69 1169 1239 1543 1829 1824 Ar.r1:1 ' Change in C-PIP - 0.5 6.0 6.3 6.4 9.9' 6.8 5.2 4.3 9.0 5.9 2.8 9.1 27.9 21.7 2.4 B. Savir--s ,r:-:= ::'l Gavings ($mn) 1430 1148 1029 1016 132 1494 • 1538 1585 1764 2254 2492 2062 2326 4269 5272 4825 A:r.-al i -hange in GNS - -20.3 7.7 -1.3 11.4 32.0 2.9 3.1 11.3 27.8 -1.5 -17.3 12.8 83.5 23.5 -8.5 Gi/GUP ratio 21.5 17.0 14.9 13.8 14.5 17.4 16.8 16.4 17.5 20.5 22.0 17.6 18.2 25.3 25.5 22.8 C. Canital Formation Total Iross K-Formation 997 1157 1123 1235 1299 _14;1 1_498 1602 1670 I57M 246' 391 34 LM3 6063 5 ($mn) (a) Private GKF '9 759 642 667 726 781 904 888 922 939 1459 1675 1779 2243 3223 3320 (b) iblic GKF 208 398 551 568 573 630 594 622 625 620 693 852 1308 1552 2157 2518 (c) Increase in Stocks - - - - - - - 92 123 12 315 -136 -63. 228 683 -667 GIV/I'P ratio 15.0 17.3 17.2 16.8 16.6 16.4 16.3 16.6 16.6 14.3 20.3 19.1 22.2 23.1 28.6 23.8 D. Population 2/ (,000) 8U3 8368 8644 8914 9156 9422 9728 10034 10324 10600 10877 160 11450 11750 11702 12030 1 (171 and 1962) figures may not be compatible since for 1960,1961, we have used March 1970 issue of Quarterly Economic Bulletin, Bank Negara Malaysia. ~ (162 ar.d 1970)J - for 1962,1969, we have used Sept. 1974 issue (revised figures for 1962)- for 1970,1975, we have used March 1976 issue (revised figures for 1970). _/ Pefer World Tables, World Bank. APPENDIX TABLE C: ESTIMATED SAVINGS DATA (M$ million) Gross Gross Household Gross Net (4) (2) (5) (3) Private Household Savings in Contractual Contractual Percent Percent Savings Savings Financial Savings Savings Form (net) (W) (2) (3) (4) (5) (6) (7) 1954 477 ho4 207 n.a. n.a. n.a. n.a. 1955 648 521 278 . n.a. n.a. n.a. n.a. 156 602 492 202 n.a. n.a. n.a. n.a. 1957 309 203 -76 n.a. n.a. n.a. n.a. 1958 474 415 237 n.a. n.a. n.a. n.a. 1959 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1960 n.a. n.a. n.a. 72.6 72.6 n.a. n.a. 1961 649 519 189 77.1 77.1 14.9 4o.8 1962 734 587 213 80.6 80.6 13.7 37.8 19r3 750 600 218 86.6 86.6 14.4 39.7 874 699 254 90.7 90.7 13.0 35.7 19.5 1172 932 340 118.2 109.9 12.7 32.3 1966 1053 843 306 1.37.6 127.1 13.1 41.5 1967 1057 846 307 129.9 116.9 12.3 38.1 196a 1139 911 331 114.4 96.7 10.0 29.2 1969 11469 1175 427 109.2 89.3 7.4 20.9 1970 1354 1083 393 167.4 144.o 12.4 36.6 171 1389 1111 4 220.2 191.7 15.9 47.5 1972 1648 1319 479 258.8 224.8 15.7 46.9 1973 2586 2069 751 304.5 229.4 11.8 30.5 1974 2729 2184 793 271.1 221.8 9.9 28.o 19-5 3279 2624 953 357.4 275.8 10.9 28.9 Source: 1954 - 1958 figures from "Saving of the Federation of Malaysia, 1954-58: A Preliminary Survey"; ECAFE Bulletin, June 1962, pp. 17-33; 1961-1975 figures for Gross Private Savings from World Bank, World Tables, updated as of March 1977; 1961-75 figures for Gross Household Savings and Household Savings in Financial Form extrapolated from Gross Private Savings using constant ratio (average ratio of Gross Household Savings to Gross Private Savings and Household Savings in Financial Form to Gross Private Savings for years 1954-58); Gross Contractual Savings figures from Table IV.1