EMPLOYEES PROVIDENT FUND (EPF) MALAYSIA

Employees Provident Fund (EPF)
Malaysia: Generic Models for Asset
and Liability Management
Under Uncertainty

A thesis submitted for the degree of Doctor of
Philosophy

by
Siti Aida Sheikh Hussin

Department of Mathematical Sciences
School of Information Systems,
Computing & Mathematics
Brunel University
August 2012

Abstract

We describe Employees Provident Funds (EPF) Malaysia. We explain about Defined Contribution and Defined Benefit Pension Funds and examine their similarities and differences. We also briefly discuss and compare EPF schemes in four Commonwealth countries. A family of Stochastic Programming Models is developed for the Employees Provident Fund Malaysia. This is a family of ex-ante decision models whose main aim is to manage, that is, balance assets and liabilities. The decision models comprise Expected Value Linear Programming, Two Stage Stochastic Programming with recourse, Chance Constrained Programming and Integrated Chance Constraints Programming. For the last three decision models we use scenario generators which capture the uncertainties of asset returns, salary contributions and lump sum liabilities payments. These scenario generation models for Assets and liabilities were developed and calibrated using historical data. The resulting decisions are evaluated with in-sample analysis using typical risk adjusted performance measures. Out- of- sample testing is also carried out with a larger set of generated scenarios. The benefits of two stage stochastic programming over deterministic approaches on asset allocation as well as the amount of borrowing needed for each pre-specified growth dividend are demonstrated. The contributions of this thesis are i) an insightful overview of EPF ii) construction of scenarios for assets returns and liabilities with different values of growth dividend, that combine the Markov population model with the salary growth model and retirement payments iii) construction and analysis of generic ex-ante decision models taking into consideration uncertain asset returns and uncertain liabilities iv) testing and performance evaluation of these decisions in an ex-post setting.

i

Contents
Abstract

i

Contents

ii

List of Tables

v

List of Figures

vi

List of Abbreviations

vii

Acknowledgements

ix

Chapter 1 Introduction and Problem Context
1.1

Introduction

1

1.2

Pension Funds in Asia and Employees Provident Fund

4

1.3

EPF Problem Formulation

15

1.4

Asset and Liability Management

17

1.5

Methodology

18

1.6

Summary of EPF Characteristics and the ALM Framework

19

1.7

Guided Tour

20

Chapter 2 Solution Methods
2.1

Linear Programming

22

2.2

Stochastic Programming

22

2.3

Two Stage Stochastic Programming

26

2.4

Multistage Stochastic Programming

28

2.5

Chance Constrained Programming

28

2.6

Integrated Chance Constraints Programming

30

2.7

Concluding Remarks

31

ii

Chapter 3 Scenario Models for Cash Inflows and Outflows

3.1

Modelling Paradigm for Uncertainties

32

3.2

Assets Return model

36

3.3

Population Model

43

3.4

Salaries Model and Contributions

48

3.5

Liabilities

49

3.6

Combining Cash Inflow and Outflow Scenarios

51

3.7

Concluding Remarks

53

Chapter 4 Deterministic Model for ALM

4.1

Introduction to deterministic model

54

4.2

Linear Programming ALM Model Components

54

4.3

Fixed mix Strategy

59

4.4

Results

60

4.5

Summary of the Expected value ALM Optimisation Model

62

4.6

Concluding Remarks

64

Chapter 5 The EPF Scheme Formulated as a Family of Stochastic Programming Models
5.1

A Review of Stochastic Programming Applied to ALM

65

5.2

Two Stage Stochastic Programming ALM Model Components

68

5.3

Chance Constrained Programming ALM Model Components

74

5.4...


References: (2005) A Scenario
Approach of ALM
Wantanabe, K. and Ziemba, W. T. (1994) The Russel-Yasuda Kasai Model:
An Asset Liability Model for a Japanese Insurance Company using