This article first appeared in The Edge Malaysia Weekly on February 19, 2018 - February 25, 2018

WHEN the Employees Provident Fund (EPF) announced its highest dividend payout in 21 years on Feb 10, some curious claims accompanied what was actually no mean feat — growing the retirement savings of private-sector wage earners/contributors.

Among these was how former prime minister Tun Dr Mahathir Mohamad declared the lowest EPF dividend since Malaysia was formed (4.25% in 2002). Dr Mahathir was also in office when the EPF declared the highest ever headline dividend of 8.5% between 1983 and 1987, but we digress from what is actually worthy of more thought.

For the record, the EPF’s 6.9% dividend for 2017 is the highest since the 7.7% dividend declared for 1996, the year before the Asian financial crisis. The 6.4% maiden dividend declared for its Simpanan Shariah portfolio for 2017 was also 2.61% above inflation rate of 3.79% last year (the difference largely being the lack of shariah-compliant equities in the financial sector that did well last year).

That the EPF now needs RM7.02 billion to pay 1% in dividend to nearly 15 million members — double the RM3.43 billion just eight years ago in 2009, and triple the RM2.17 billion needed in 2004 — also speaks volumes of the capability and responsibility of the EPF fund managers and key decision-makers, led by chairman Tan Sri Samsudin Osman and CEO Datuk Shahril Ridza Ridzuan.

The total payout of RM48.13 billion for 2017 (RM44.15 billion for conventional and RM3.98 billion for shariah) is also more than double the RM19.37 billion payout in 2009 (5.65% dividend) and RM10.29 billion in 2004 (4.75% dividend).

Contrary to conspiracy theories of how the EPF is going all out to not allow withdrawals (purportedly because the fund has no money), the provident fund is one of the largest retirement funds in the world — one that has the “happy problem” of having a lot more money than it can comfortably invest in relatively low-risk assets to preserve capital as well as grow returns to at least beat inflation by 2.5%.

As Samsudin says in a recent statement, the savings of EPF members have grown an average of 10.98% a year since 1990 to reach RM768.51 billion as at end-2017 (RM700.75 billion is under Simpanan Konvensional [SK] and RM67.76 billion under Simpanan Shariah [SS]).

“This is a challenge in managing a large fund like the EPF as we need to generate consistent and sustainable returns for the long term. This is partly the reason why we need to diversify into overseas markets as the increase in global asset value helps us realise size-able gains from different markets and asset classes, which will contribute to the overall performance,” Samsudin says.

Returns from abroad have indeed boosted overall returns — only 28% of the EPF’s total investment assets of RM791 billion at end-2017 were overseas but they contributed 41.45% to the fund’s RM53.14 billion gross investment income. Shahril told reporters last Monday that the EPF plans to increase its global assets to 32% this year and is looking to add one or two new markets (30 currently), including Latin America.

In 2011, global assets made up 13% of the EPF’s portfolio. In 2015, they made up 25% of its portfolio but contributed 48% to gross investment income.

It is also worth noting that the EPF’s gross investment income has increased an average of 11.9% a year since 2007, which is equivalent to 7.3% gross return on investment — commendable given the EPF’s nature as a balanced fund with half of its assets in fixed income instruments, which carry lower risks (therefore providing lower returns).

Similarly, the EPF’s investments in equities (including foreign) brought in RM31.48 billion or 59.2% of gross investment income while the asset class only accounted for 42.2% of portfolio allocation.

Conversely, nearly half of the EPF’s assets are in fixed income investments, such as Malaysian Government Securities and other debt paper, but the asset class contributed only 32.8% to gross investment income last year. This has been the case for a number of years.

It is interesting to note that the EPF had 60% to 74% of its assets in fixed income instruments from 2004 to 2011, a figure that has been brought down closer to 50% since 2013. Shahril, who became CEO in April 2013, joined as deputy CEO (investments) in late 2009.

Meanwhile, investments in real estate and infrastructure, with a steady income stream, brought in nearly RM3 billion or about 6% of gross investment income last year, while making up only 4.1% or RM32.17 billion of total asset allocation. That is up from RM2.5 billion in 2016 and RM1.7 billion in 2015.

If it is so tough for the EPF to find new “safe” assets to invest in, why not just let people take their money out?

Members who have reached the age of 50 and have more than RM1.05 million in savings (even if he or she is not yet 55) only need to produce their MyKad and do not even need to fill up an application form to take their money out (including from Account 1), according to information on the EPF’s website.

Those aged 50 to 55 are free to withdraw part or all of their savings under Account 2 while members who have reached 55 are free “to withdraw any amount at any time”, and the application can be made one month prior to reaching that age. Members can also opt for monthly withdrawals until the age of 100.

For its part, the concern is to ensure its members’ retirement savings last as long as possible — reflected by the EPF’s recommendation that every member should have at least RM228,000 in their account when they reach the age of 55. The latter works out to RM950 per month from 55 to 75 years old, in line with the average life expectancy. What is sad is that at least half of EPF savers may not attain that goal and many are likely to run out of savings within five years.

But there is a limit to how much the EPF can help grow retirement savings if contributions from members remain low due to meagre wages — which is what is really worth considering by policymakers and thought leaders, rather than which prime minister presided over the highest or lowest EPF dividend. 
 

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