This article first appeared in The Edge Malaysia Weekly, on February 22-28, 2016
Based on the Employees Provident Fund’s (EPF) performance in the first nine months of 2015, there is a good chance it has set another record in annual investment income and can keep its dividend rate above 6%.
Annualised figures show a 6% payout is possible for 2015 — unless there was a blip in 4Q2015. The more important question is, can the EPF match the 6.75% it announced last February? The announcement is slated for Monday (Feb 22).
So far, the EPF’s dividend rate has risen for six straight years, from 4.5% in 2008 to 6.75% in 2014, despite the amount needed to pay 1% of dividend rising from RM3.18 billion in 2008 to RM5.41 billion in 2014.
In 2014, the 6.75% dividend represented a record payout of RM36.66 billion — 2.6 times the RM14.29 billion paid out for 2008 — thanks to gross investment income rising to RM39.08 billion in 2014.
According to the EPF, its dividend payout was “derived after deducting the net impairment allowance on financial assets, unrealised losses due to foreign exchange rate and derivatives prices, investment expenses, operating expenditures, statutory charges as well as dividend on withdrawals”.
The retirement fund’s total income for the first nine months of 2015 was 6.72% higher than the RM28.6 billion recorded in the same period in 2014, its Nov 20, 2015, release shows.
While the EPF needs to preserve capital while growing retirement savings for its members, the fund said its “diversification programme and the continuous growth of investment assets globally helped offset the weaker performance of domestic assets”.
In fact, global investments comprised 27% of the EPF’s total assets as at September 2015 and contributed about 45% to the fund’s total income year to date, which cumulatively stood at RM31.58 billion. Total investment assets as at September 2015 increased by RM31.03 billion over nine months to RM667.56 billion.
This means that the EPF needs a gross investment income of about RM8 billion in 4Q2015 to beat the RM39.08 billion gross investment income achieved for the whole of 2014.
Excluding a blip in 1Q2013, when investment income was RM5.6 billion, the EPF’s quarterly investment income has stayed above RM8.6 billion for three years (since 4Q2012). The highest was RM11.41 billion in 2Q2015 before falling to RM9.54 billion in 3Q2015 — paving the way for the fund to best its 2014 performance, going by its track record over the past five years.
Before 2011, however, quarterly investment income was often below RM5 billion, data on the EPF’s website shows. This corresponded with the EPF’s shift in asset allocation from loans and bonds to equities, which in 2013 and 2014 contributed over 55% to total investment income while accounting for about 42% of total assets. In 2009, equities accounted for 27% of total assets and contributed about 28% to investment income.
Datuk Shahril Ridza Ridzuan, who had joined the EPF as deputy CEO (investments) on Dec 1, 2009, succeeded Tan Sri Azlan Zainol as CEO in April 2013. The current deputy CEO (investments), Datuk Mohamad Nasir Ab Latif, had reportedly said the 2015 dividend rate would be “good”.
Considering the volatile global environment, it would be no mean feat if the EPF managed to maintain its payout amount at a lower rate.
Moreover, the amount needed to pay 1% of dividend to EPF members has risen at an annual average rate of 10% over the past three years and is poised to climb alongside the growth in the fund’s asset base to become one of the largest pension funds in Asia.
Assuming a 10% growth in 2015, the EPF would need around RM6 billion to pay 1% dividend or at least RM36 billion (close to the payout in 2014) to pay 6% and RM41 billion to pay 6.8%, back-of-the-envelope calculations show.
To recap, local benchmark the FBM KLCI rebounded in the fourth quarter of 2015 but total returns for the whole year were down, as was the case for most major bourses. It is also worth noting that the ringgit weakened sharply against the US dollar and most major currencies in the later part of 3Q2015, dropping as low as 4.4812 to the greenback intra-day on Sept 29 — which was 28% weaker than the 3.4960 at the start of the year — before ending the year at 4.2943. A weaker ringgit would mean higher translated foreign currency earnings but money market investments could well have been hit.
Whether or not the EPF succeeds again in achieving record high income and dividend payout, there is no doubt that the task to grow income has become tougher and will only get harder going forward on heightened global uncertainties, a higher base and depleting growth sources.