This article first appeared in The Edge Malaysia Weekly on March 21, 2022 - March 27, 2022

YET another special Covid-19-related withdrawal from the Employees Provident Fund (EPF) Account 1 has been given the green light by the government last Wednesday (March 16). EPF members can prematurely withdraw up to RM10,000 from their retirement kitty and have the money credited into their bank account from April 20.

If anyone was surprised that the news was delivered via a televised address by Prime Minister Datuk Seri Ismail Sabri Yaakob, recall that his predecessor Tan Sri Muhyiddin Yassin had announced the last Covid-19-related EPF withdrawal (i-Citra, of up to RM5,000) via a televised broadcast on June 28 last year.

It was perhaps no coincidence that the fourth Covid-19-related EPF withdrawal — the third allowed access to Account 1 (70% of statutory savings) after i-Sinar and i-Citra — was announced in the same week as the 2021 Umno General Assembly (March 16-19), which had been rescheduled last year due to the floods. Sabri, one of three Umno vice-presidents, became the country’s ninth prime minister in August 2021.

Applications for the still unnamed special withdrawal can be made from April 1, exactly two years after the EPF began accepting applications for the first Covid-19-related withdrawal, the i-Lestari Account 2 scheme, which allowed up to RM6,000 to be withdrawn until March 2021. Muhyiddin announced i-Lestari in late-March 2020, within a fortnight of his appointment as the eighth prime minister.

It would seem that seasoned politicians deem allowing more EPF withdrawals to be favourable among the majority of the electorate. At least nine members of parliament had asked for yet another last one-off EPF withdrawal in the current parliament sitting (Feb 28-March 24).

EPF members who want to take out more money would certainly be relieved, if not outright elated. Those who did not need money and chose not to take out any retirement savings in the past two years may not bat an eyelid. Earlier fears of large withdrawals affecting dividends have largely been quelled, thanks to the stellar dividend rates of 6.1% (conventional savings) and 5.65% (shariah savings) declared for 2021 on March 2, which beat the 5.45% (conventional) and 5% (shariah) declared in pre-pandemic 2019.

There are also those who think the eco­nomy may see a consumption boost from savings taken out from the EPF, adding to the effect of the reopening of international borders on April 1.

What could possibly be so wrong with allowing more withdrawals from EPF Account 1?

Last Monday — two days before the televised address — Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz told parliament that the EPF dividend for 2021 would have reached as high as 6.7%, or 60 basis points (bps) more than the 6.1% declared, with the provident fund having RM5.4 billion more to distribute to members. “The loss of RM5.4 billion from this dividend has resulted in about 5.3 million members — who have never withdrawn their savings through any withdrawal scheme before — receiving lower returns on their savings. I would like to ask the Honourable Members, who also represent the contributors who did not have to withdraw their savings, ‘Is this fair?’” Zafrul reportedly said during the winding-up debate in Dewan Rakyat.

Zafrul also said that another RM10,000 one-off EPF withdrawal could see up to RM63 billion being withdrawn by 6.3 million members — a move that could hit returns on the EPF’s investments locally as well as abroad due to the board’s need to rebalance its portfolio and prematurely sell assets to accommodate the additional liquidity needs. The EPF, he says, could be forced to take (lower) profits in an uncertain market with sentiment being hit by the ongoing Russia-Ukraine crisis.

Given the EPF’s size and dominant position in the marketplace — holding 27% of Malaysian Government Securities (MGS), 21% of corporate bonds and 16% of local equities — a sudden increase in selling could hit the local equities as well as bond markets, Zafrul elaborated.

He also noted that the government’s borrowing costs have visibly risen, with coupon rates for MGS up 100bps on average from the third quarter of 2020. That 100bps increase, he added, meant that the RM83 billion worth of MGS issued in 2021 would incur RM830 million more interest cost per year — money that could have funded other programmes with tangible benefits to the people.

Zafrul did not say how he arrived at the RM5.4 billion additional income and the corresponding increase in dividend to 6.7% for 2021.

Nonetheless, our back-of-the-envelope calculation suggests that the EPF’s 2021 (blended) dividend would have been at least 6.2% to 6.6% — more than the 6.05% (blended, or conventional + shariah) and 6.1% (conventional) dividend declared by the EPF, if it indeed had RM5.4 billion more to distribute to members.

This is because the RM5.4 billion would reflect a 6.5% return from about RM82.5 billion that The Edge estimates to have been taken out via Covid-19-related withdrawals in 2021. That is realistic given the EPF’s three-year annualised return on investment (ROI) of 6.14% between 2018 and 2020.

Whether the final dividend rate is 6.2% or 6.7% depends on how much the EPF needs to pay every 1% of dividend if the growth of the assets under its management were not disrupted by the sizeable Covid-19-­related withdrawals.

Using the RM9.38 billion that the EPF needed to pay every 1% of dividend in 2021, the dividend rate for RM62.12 billion distributable income (RM56.72 billion + RM5.4 billion) would work out to 6.6%.

Using the RM10 billion that The Edge had previously calculated that the EPF needs to pay 1% of dividend in 2021, had there not been large Covid-19-related withdrawals, the RM62.12 billion would work out to a dividend of 6.2%.

Given that both numbers are more than 6.1%, we would give the finance minister — who has access to more EPF data that is not in the public domain — the benefit of the doubt on his claim of 6.7% dividend. After all, he is in the position to nudge the EPF to deliver a better investment performance than a 6.5% ROI.

According to the EPF, the first three Covid-19-related special withdrawals — i-Lestari, i-Sinar and i-Citra — saw RM100.9 billion being withdrawn by 7.3 million EPF members between April 2020 and February 2022. The amount not saved with the EPF rises to RM110 billion when including the RM9 billion released to members because of the reduction in the employees’ statutory contribution rate. (The government allowed statutory contributions to be cut from 11% to 7% from April to December 2020, and from 11% to 9% from January 2021 to June 2022.)

Of that RM110 billion taken out from the EPF, about three-quarters, or roughly RM82.5 billion, was from 2021, our back-of-the-envelope calculation show. That’s because in 2020, RM14.55 billion was withdrawn from i-Lestari Account 2 by 5.1 million members and RM13.6 billion was not saved by 5.2 million members from reduced contributions, according to notes appended in the EPF’s 2020 annual report.

The estimated RM82.5 billion from Covid-19-related withdrawals formed the bulk of an estimated RM130 billion gross withdrawals in 2021, which resulted in the EPF booking its first net withdrawal in 20 years of RM58.2 billion, with gross contributions reportedly at only RM71.8 billion in 2021. The estimated RM130 billion is 2.2 times gross withdrawals in 2020 and nearly three times (normal) gross withdrawals in 2019.

It is understood that at the EPF’s request, Bank Negara Malaysia no longer releases a monthly breakdown of EPF gross contributions and withdrawals on its website — a useful indicator of private sector wages — since May 2020. Coincidence or not, this period corresponded with the start of payment for the first Covid-19-related withdrawals, i-Lestari Account 2 scheme, from May 1, 2020.

To be sure, arguments over how much more returns the EPF could have had if not for the sizeable withdrawals may well be moot as only the EPF knows just how much premature selling it had to do to fulfil the withdrawals. Some might even argue that the board got more than today’s market prices, having sold before Russia attacked Ukraine.

Others, however, may say the RM22 billion that the EPF brought back from overseas could have been used to pick up oversold blue chips and value assets overseas to deliver future gains to members.

Foreign investments accounted for 37% of the EPF’s total investment assets and 56% of gross investment return in 2021, up from 31.14% of total assets and 49.8% of gross investment income in 2020.

The EPF also said its domestic market exposure was down RM16 billion year on year in 2021.

So, what is certain is that the EPF did have to make tough decisions due to the outsized withdrawal commitments even though its total assets still grew by about 1% y-o-y to RM1.008 trillion as at end-2021, from investment activities.

When announcing its headline-grabbing 6.1% dividend for 2021 and its all-time high payout of RM56.7 billion on March 2, EPF CEO Datuk Seri Amir Hamzah Azizan had said it was important that the EPF be allowed to execute its strategy to deliver on its mandate to help provide retirement security for members and mitigate old-age poverty by offering the best-possible inflation-adjusted returns.

“As the country rebuilds the economy and more people have returned to work, the EPF believes that this should be the last facility allowed under the special withdrawal initiative. The EPF would like to reiterate its concern around members’ retirement adequacy and hopes this will be a precursor to the rebuilding of retirement savings and reforming of the nation’s social security system,” the EPF said in a March 16 statement following the announcement of the latest facility for members who are still financially impacted by the pandemic.

“The EPF is intended to ensure that contributors have a decent retirement income and, hence, we should not keep on dipping into EPF savings to relieve short-term needs,” concurs Lee Heng Guie, executive director of the Socio-Economic Research Centre (SERC), a non-profit think tank under the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCIM).

“While exceptions were allowed during the unprecedented Covid-19 pandemic, it must not become a recurrence as it depletes the savings of financially vulnerable households [that should have access to other means of aid],” Lee adds.

An EPF member taking out the maximum allowed under each of the earlier three schemes would have withdrawn RM71,000 prematurely — RM6,000 under i-Lestari, RM60,000 under i-Sinar and RM5,000 under i-Citra. That excludes any reduction in statutory contributions.

Maximum withdrawals would be RM21,000 for members with less than RM100,000 savings as under i-Sinar, they can only withdraw a maximum of RM10,000.

That RM21,000 would have grown to RM22,281 today and doubled to RM42,000 by end-2034, assuming a 5% dividend every year. Similarly, the RM71,000 would have doubled to RM142,000 by end-2034. This is why Amir asked that members delay withdrawals as far as possible so that they have more money saved for their old age.

In February last year, EPF’s then CEO Tunku Alizakri Alias had said before his departure that members’ savings were “declining alarmingly” — nearly 1.6 million active EPF members had almost emptied their Account 1 (70% of total savings, and previously off-limits until age 55) while three million members had used up all their savings in their Account 2 (30%).

When announcing the earnings dividends for 2021 on March 2, his successor Amir did not say how many EPF members had emptied their accounts but noted that some 2.6 million members have less than RM1,000 saved with the EPF, an 86% increase from 1.4 million as at April 2020.

Among EPF’s 15 million total (active and inactive) members, only 2% have adequate savings (at least RM2,700 living wage a month for 20 years) while 16% have the bare minimum of RM1,000 to spend a month for 20 years — down from 21% in 2020, according to slides shown by the board during the event.

That half of EPF members aged 40 to 54 had less than RM50,000 saved as at end-2020 — before being made worse by the outsized withdrawals — spells a greater urgency for reforms to correct deep structural issues surrounding the country’s social protection framework to avert a looming retirement crisis.

Experts, including those at Bank Negara and the World Bank, have long called for policy action to future-proof the country’s social protection system — including bolstering the government’s fiscal capabilities — to improve the well-being of ageing Malaysians as well as enhance their capability to withstand financial shocks.

“Insufficient savings is an issue, but the deeper problem [that also needs addressing] is low wages …  after four withdrawal schemes over two years, there won’t be much left if another global recession happens in the next few years,” an economist says.

Whether or not it boosts the popularity of those supporting it, the latest round of EPF withdrawals certainly raises the need for the government to bolster its fiscal space to cast a wider social safety net as Malaysia ages.

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