This article first appeared in Personal Wealth, The Edge Malaysia Weekly on August 16, 2017 - August 22, 2017

The proposed Employment Insurance System (EIS) — which aims to provide allowances to those who lose their jobs — is not expected to be a huge burden to private sector employees, say financial planners. However, it depends on how the system is implemented and run. 

“This will be an additional cost for employees and employers, just like contributions to the Social Security Organisation or Employees Provident Fund,” says Robert Foo, principal consultant and director at MyFP Services Sdn Bhd. 

“But for the type of clients that I deal with, the contribution will not cause a huge impact on their finances. So, I see the EIS as being more for those in the lower income bracket, those who literally have to live from pay cheque to pay cheque.”

The Employment Insurance System Bill, which was tabled for first reading in parliament last week, will require both employers and employees to contribute a fixed amount to the EIS on a monthly basis as determined by the contribution schedule, which is based on the employee’s salary band. For example, employees earning a monthly salary of RM4,000 and above will be required to contribute between RM19.75 and RM29.65 a month. This amount will be matched by their employers.

Under the proposed bill, employees can claim an allowance within 60 days of losing their jobs. However, they are not eligible for an allowance if the job loss was due to voluntary resignation, expiry of a fixed-term contract, unconditional mutual separation/termination or termination for misconduct. 

Those who are eligible for allowances will be paid according to a schedule. They will receive 80% of their last-drawn salary in the first month of unemployment, 50% in the second month, 40% in the third and fourth months and 30% in the fifth and sixth months. As the insurable income is capped at RM4,000, the maximum allowance that can be claimed in the first month of unemployment will be RM3,160.

“In terms of living income, RM4,000 is not a lot if the whole family depends on it,” says Foo. Because of this, individuals should not reduce the amount they have in their emergency funds or rely on the EIS to weather tough times, especially those in the lower income group.

“Instead of short-term measures, we teach our clients how to save, invest and put aside money for a rainy day, as well as how to have the right asset allocation to help them achieve their goals,” says Foo. “So, with a proper plan, situations such as job loss will not affect them much. The right way is not to just depend on the EIS but also build their own safety net, which is building their wealth.”

Felix Neoh, vice-president at Whitman Independent Advisors Sdn Bhd, recommends that individuals maintain their emergency cash reserve at six months’ worth of expenses regardless of the EIS. “Depending on how quickly one can be re-employed, the allowance may not be sufficient. However, if you consider the scheme as the icing on the cake rather than being fully dependent on it, then the payout of 30 to 45 times their annual contribution can be quite handy,” he says.

Jennifer Chua, senior associate at Standard Financial Adviser Sdn Bhd, suggests that the scheme be made optional like the government’s Private Retirement Schemes (PRS). She believes that individuals could potentially gain more by setting aside emergency funds in a savings account, for example.

“Individuals should consider having an emergency fund as one of their safety measures. So, they need to save 6 to 12 months’ salary, which should be a better safety net than the EIS,” she says. 

“As the EIS is capped at RM4,000 and the allowance you receive each month is small, if you have your own emergency fund, the additional money could be a bonus for you. If you save six months’ salary for your emergency fund, the EIS allowance could help you stretch that to eight months.” 

Other benefits under the EIS include allowances for early re-employment, reduction in income and training. 

When the bill was proposed in March, there were questions about whether the EIS will cause employers to retrench their workers to avoid contributing to the scheme. Donovan Cheah, partner at law firm Donovan & Ho, says employers are required to comply with the law when retrenching employees.

“In other words, they must meet the legal criteria to retrench employees, such as proving there is a genuine redundancy. Failure to do so could result in an unfair dismissal claim. Thus, the mere fact that the EIS is implemented may not be good enough a reason for employers to start retrenching,” he adds.

According to the bill, those who fail to comply with the requirements can be fined up to RM10,000, jailed up to two years, or both. Employers who reduce their employees’ wages because of the EIS will be slapped with the same punishment.

The need for such safety nets has increased as more retrenchments are expected in the future in line with the automation trend in many industries. “The new economy — the so-called Industrial Revolution 4.0 — is going to create a lot of redundancy in some of the traditional jobs. The government should be morally responsible to create a scheme that is funded by the people in the country, and the government as a whole should mitigate or cushion this kind of impact,” says Foo.

But for the implementation to be effective, the government should also contribute to the scheme and reporting should be made transparent, he adds. “There should be a mechanism to report to the government and an independent party, which includes the opposition, for example, because this involves the people. The collection from this scheme will total a few billion ringgit, so if you want to build something like that, you have to make sure that there is a transparent mechanism.”

Neoh agrees that transparency in the management of the funds will instil confidence among employers and employees. “It should remain a government-managed scheme. Corporatisation could result in profit-seeking companies trying to maximise profit at the expense of contributors,” he says.

The government hopes to implement the EIS next year.

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