M’sian SMEs share how the potential 20% EPF contribution rate would affect them & employees

In May 2023, Malaysian Prime Minister Anwar Ibrahim stated that the Cabinet would discuss a proposal to raise employers’ contribution of the Employees Provident Fund (EPF) to 20%.

This comes after requests were made by the Union Network International-Malaysia Labour Centre to the government to consider such an increment, amongst other things.

Currently, employer EPF contribution rates are 12% to 13% depending on the salary of an employee. This means if the 20% contribution rate is implemented, it would be a 54% to 66% increase from the current rates.

News of the potential increment has died down, but there hasn’t been word that the idea has been removed from the table.

Should the contribution be raised, though, some of the most affected parties may be SMEs who would have to restructure their financials to account for it.

To understand the situation better, we reached out to some SME entrepreneurs to ask how the possible increment would affect them, and how they’re preparing for it.

The entrepreneurs we spoke to were:

• Chong Nge Seng: The founder of an artisanal gelato brand, Piccoli Lotti.
• Jason Chen: The executive director of CzipLee, a homegrown stationery chain.
• Devin Wong: Co-founder of Fore!, a local brand of golf apparel. He also manages a dental laboratory called Omegaden.
• Joey Gan: The market lead of PRecious Communications, an integrated communications agency.

The pros and cons

All of the entrepreneurs we spoke to seemed to agree on the importance of ensuring adequate retirement savings for their employees.

At the same time, however, they also pointed out how crucial it is to consider the impact on small businesses if this were to be done through increased contributions from employers.

For one, Devin believes that the proposed increase may hinder his teams’ ability to invest in growth, create jobs, and sustain the business in a competitive market.

Similarly, Jason shared that the increment may be a good thing for individual employees, but not for SMEs. He said that now is not the right time to implement such an increment due to the rising cost of operating a business as of late.

“The increment will definitely affect the cash flow of our business and hence the financial stability,” the executive director of CzipLee said. “With our industry still in the recovery phase, every available liquidity is important.”

Perhaps if the team had already fully recovered from the impact of the past few years, he’d be singing a different tune. Joey from PRecious Communications said that the team would be “happy to contribute more if the business is good and sustainable”. 

However, due to the current landscape of the industry, that isn’t exactly the case. Hence, the PR company must proceed in a more sustainable and careful manner, which requires cautious planning.

While Picolli Lotti’s Nge Seng also agreed that the increment is beneficial to the employee over the long term, it’s the journey to see the long-term results take effect that’s a struggle.

“Businesses need to survive to pay salary. We may not get to the long-term bit,” Nge Seng shared.

He also continued, “There is currently no fundamental basis to hike up the EPF rate. Are they assuming SMEs have excess liquidity and we are somewhat hoarding it on our yacht?”

Gearing up for the possibility

Although the interviewees agree that this increment may be detrimental to their companies’ financial stability, none of them have actively taken measures in preparing for it.

On PRecious Communications’ end, Joey shares that the team is still “taking it in and following the development”.

Similarly, Devin also said that since the proposed increase is yet to be confirmed, his teams have not made any specific plans just yet.

“It is crucial for us, as responsible business owners, to wait until the law is confirmed and officially announced before making any significant adjustments to our operations or financial plans,” the Fore! founder pointed out.

Should the law be confirmed, he shared that the team will carefully assess the impact it may have on the business, evaluate different scenarios, and develop an appropriate plan of action accordingly.

“Our priority will be to strike a balance between the financial stability of the company, the welfare of our employees, and compliance with the law.”

Meanwhile, Nge Seng shared that he’s not even sure how to plan for such a change.

“It’s a cost increase plain and simple. The layman will say just be more efficient or find ways to be more profitable,” he said. “We are trying to do that on a daily basis already, genius!”

Help needed

Some entrepreneurs look to the government for possible relief such as reduced corporate tax or higher tax deductions for affected employers.

While Joey said that the implementation of a tax incentive is a viable measure, she thinks that in the early stages, it may be better to offer employers the opportunity to opt in gradually.

Jason shared a possible solution whereby this increment should only be enforced for employees who have been with the company for a certain period of time.

Nge Seng said that it may be more beneficial for the government to find ways to help SMEs pay better wages, rather than up the EPF contribution directly. This would also increase purchasing power of the nation.

Devin, on the other hand, thinks that internal measures such as a thorough review of the business operations would help identify areas where the team can optimise efficiency and reduce costs without compromising employees’ welfare.

Another consideration is engaging in open and transparent communication with employees to explain the potential challenges and seek their input and understanding.

“By fostering a culture of shared responsibility, we can encourage employees to be active participants in managing their own financial well-being while emphasising the importance of collaboration and support,” Devin said.

Where the onus lies

Over the past few months, varying opinions has arisen over the proposed increment.

Some believe the move would have a net positive effect as it helps with employees’ savings, while employers can claim it as tax deductions.

However, a counter-argument is that employees should be the ones handling their own savings.

“Yes, the employees should be the ones handling their own savings,” Jason said. “However, this increment could be a catalyst for the employees to increase their work performance in lieu of the possibility of them getting a salary increment.”

An increase in salary would also increase the amount of money being contributed by the employer.

With that rhetoric, CzipLee shared that an EPF increment would be for the better in the long run, as it will benefit both the employees and employers.

But Nge Seng thinks that in the medium term, the increase in EPF will benefit neither employees nor employers. This is because it takes away resources that could otherwise be invested back into the business through incentives, training, and staff promotion.

“My worry is that people will begin to think that with the increments they have more to spend. Then the increments lose their meaning,” Joey pointed out.

“Employees need to know that they still have to save and be mindful of their spending outside of their EPF contributions. Everyone has a role to play in order to ensure that it’s a win-win for all.” 

Devin agreed that employees should be more vigilant over their own finances, but recognised that not everyone may have the necessary resources and literacy to do so.

Thus, employers need to keep that in mind and aid employees on that front.

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Ultimately, it’ll likely be a while before any decisions to increase EPF employer contributions are made.

On May 30, the Human Resources Ministry secretary-general Datuk Seri Zaini Ujang said that the 20% proposal is still being looked into as its implementation involves many procedures, the Malay Mail reported.

Hopefully, the government will speak to SMEs to learn their struggles and find ways to support them before making any drastic decisions.

As Devin put it, “I believe it’s essential for policymakers to consider the potential impact on small businesses when making decisions that affect employer contributions.”

• Read other articles we’ve written about the EPF here.

Featured Image Credit: Devin Wong, co-founder of Fore! / Jason Chen, executive director of CzipLee / Joey Gan, market lead of PRecious Communications / Chong Nge Seng, founder of Piccoli Lotti