This article first appeared in The Edge Malaysia Weekly on March 2, 2020 - March 8, 2020

HAVING enjoyed stellar dividends of 5.65% to 6.9% from the Employees Provident Fund (EPF) every year over the past decade, many Malaysian private-sector income earners were perhaps understandably taken aback by the 5.45% dividend declared for its conventional savings (SK) scheme on Feb 22. The 5% dividend declared for the shariah savings (SS) pool was also the lowest in the three years it had been in existence.

While any number below 2009’s 5.65% for SK would have already made the declaration the lowest in at least a decade, the total dividend declared for 2019 of RM45.82 billion (RM41.68 billion for SK and RM4.14 billion for SS) was also lower than the RM47.3 billion for 2018 and its record-high dividend payout of RM48.13 billion for 2017.

The 2019 dividend lowers the floor comparison to the 4.5% the EPF declared amid the global financial crisis in 2008 — the year the FBM KLCI fell a whopping 39% or 568.28 points from 1,445.03 as at end-2007 to 876.75 as at end-2008.

If the EPF maintains its dividend payout at 2019’s level of RM45.82 billion for 2020, there is a chance of either one or both of its dividend declarations slipping below 5%. That is not the bad news.

The provident fund will need to make at least RM46 billion to keep the dividend payout above 5% for 2020, a back-of-the-envelope calculation shows. To deliver a 4.5% dividend for 2020, the EPF needs to make RM42 billion, going by average annual increases the past decade. It needs RM37 billion to pay 4% — the amount that paid 5.7% dividend in 2016.

This is given that the amount the EPF needs to pay 1% of dividend (SK + SS) is likely to increase to RM9.2 billion for 2020 — up from RM8.48 billion in 2019 (RM7.65 billion for SK and RM828 million for SS). The Edge had previously estimated that the EPF would need RM8.4 billion to pay 1% dividend for 2019 (Issue 1304, Feb 3).

For the SK portion alone, the EPF likely needs about RM8.3 billion to pay 1% of dividend for 2020, up from RM7.65 billion in 2019. The SS pool will likely require RM950 million for 1% of dividend for 2020, compared with RM828 million in 2019.

The challenge of keeping up high dividend payments grows with the EPF’s gargantuan fund size, which is set to reach RM1 trillion by 2021. The EPF’s total investment assets stood at RM924.75 billion as at end-2019, up 10.9% from RM833.76 billion as at end-2018.

The EPF received RM31.1 billion net contribution in 2019 — that’s RM2.6 billion every month and RM59,000 every minute, according to its press statement. Total (gross) contributions amounted to RM75.9 billion or RM144,000 per minute and withdrawals, RM44.8 billion or RM85,000 per minute, for 2019.

In 2009, the EPF only needed RM3.43 billion to pay 1% of dividend. That means that the RM45.82 billion dividend declared for 2019 would have been enough to pay more than the 13% dividend in 2009. Even if one only counted the RM41.68 billion declared for SK, the amount would have been enough to pay more than the 12% dividend in 2009.

It is worth noting that the EPF’s annual dividend declaration did not exceed RM40 billion a year before 2017.

The EPF, which needs to generate consistent and sustainable returns to preserve its 14.6 million members’ retirement kitty, only needs to deliver at least a 2.5% nominal dividend and beat inflation by at least 2% on a rolling three-year basis.

Stimulus impact

It remains to be seen how much the EPF’s net contributions would actually fall for 2020, with the government recently cutting the minimum statutory rate of contributions from employees by 4% to its lowest in 40 years of 7% from April 1 to Dec 31, which forms part of the RM20 billion economic stimulus package announced by interim Prime Minister Tun Dr Mahathir Mohamad last Thursday to counter the negative impact of the novel coronavirus (Covid-19) outbreak. The consumption boost is reportedly up to RM10 billion, if all members choose the lower contribution.

When the government allowed a 3% reduction to 8% for 2009 and 2010 amid the global financial crisis, the potential consumption boost was reportedly up to RM4.8 billion if all contributors chose to keep the lower rate.

Some 2.31 million or 43% of active members actually opted for the reduced contribution rate of 8% as at end-2009 while some 2.5 million or 45% of active members opted for the reduced rate as at end-2010, according to EPF data.

The actual amount released to boost consumption, however, is not immediately known. Net contributions received by the EPF, however, amounted to RM9.72 billion in 2009 — down 3.2% year on year from RM13.84 billion in 2008 as total contributions slipped to RM34.4 billion in 2009 from RM35.6 billion in 2008, according to Bank Negara Malaysia data. In 2010, net contributions increased 12.1% y-o-y to RM12.2 billion with total contributions rising to RM38.61 billion — above that of 2009 and 2008 even as the employment situation improved.

The EPF had 14.6 million members as at end-2019, of which 7.6 million were active (contributors) — more than the 5.79 million active members it had in 2009 and 6.04 million in 2010.

Lower returns from equities

Seeing the value wiped out from global equity markets last week on renewed concerns of a global recession as the world braces for a Covid-19 pandemic and investors’ knee-jerk reaction to the ongoing upheaval in Putrajaya, EPF members will likely be looking out for the first-quarter earnings performance, which is usually released in late May or by early June every year.

Two key factors to watch out for are the income earned from its foreign investments and that earned from its equity investments.

According to the EPF, global or foreign investments make up 30.3% of its investment assets but contributed 41% to its gross investment income of RM50.29 billion in 2019. That would be enough to pay 2.4% of dividend, a back-of-the-envelope calculation shows.

“The EPF has always held that overseas holdings are an essential and important part of its overall portfolio, and has already announced on several occasions its intention to continue these diversification efforts to reduce concentration risks,” EPF CEO Tunku Alizakri Alias said in a statement.

Equities, both foreign and local, make up only 39% of the EPF’s investment asset allocation but contributed 46.7% to its gross investment income in 2019. That is, however, lower than the 55% to 60% seen from 2013 to 2018.

In 2017, when the EPF declared its highest ever total payout of RM48.13 billion, more than RM31 billion or more than 59% of total investment income had come from equities — although making up only about 42% of asset allocation.

For capital preservation, about 49% of its assets are invested in fixed income instruments such as Malaysian Government Securities and other equivalent bonds and loans. These generated 43.1% of total investment income in 2019 — higher than the 32% to 40% seen in 2013 to 2018.

Investments in real estate and infrastructure — used for a mix of capital preservation and enhancement as well as for inflation hedge — formed 5% of asset allocation but contributed 6.3% to gross investment income in 2019.

Its investment in money market instruments for capital preservation and liquidity management was 7% of asset allocation in 2019 but contributed 3.9% to gross investment income, our estimates based on data from the EPF’s press release show.

The devil is in the detail

It is not immediately known why the total dividend declared of RM45.82 billion for 2019 was about RM1.5 billion lower year on year when the EPF’s gross investment income (GII) in 2019 of RM50.29 billion was only about RM600 million below the RM50.88 billion in 2018.

The EPF’s full-year financial statement will only be released when its 2019 annual report is out later this year.

The provident fund cancelled a scheduled briefing last Monday (Feb 24) — the same day Mahathir resigned as Malaysia’s seventh prime minister and was subsequently appointed as interim prime minister by the Yang di-Pertuan Agong Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah.

According to the EPF’s statement dated Feb 22, dividend payouts “are derived from total gross realised income for the year, after deducting net impairment on financial assets, realised losses from listed equities, unrealised gains or losses from intercompany transactions, investment expenses, operating expenditures, statutory charges and dividend on withdrawals”.

To be sure, the operating environment was tough, as mentioned by Alizakri in his statement: “Certainly, 2019 exemplified what it means to be living in a VUCA (volatile, uncertain, complex and ambiguous) world. Many issues in the global markets remained unresolved, but we also saw some new issues cropping up. There were three rate cuts by the US Federal Reserve, the US-China trade spat escalated and continues to be unresolved, and there were uncertainties surrounding the Brexit negotiations. On top of this, we did not expect the Hong Kong protests to be prolonged and that certainly added pressure on an already fragile Far East market. In addition, the domestic markets did not support the income-generating capabilities of the EPF as 70% of the fund’s assets are in Malaysia, with a major part of our assets in domestic equities.”

The EPF, he said, expects 2020 “to be just as or even more challenging than 2019”, noting how the full impact of the Covid-19 outbreak is likely to drag down already soft global growth with the US-China trade war “seeing no signs of ending”.

Even so, Alizakri assured members that the EPF recognises the increasing pressures of the new decade: “For 2020 and the years ahead, we will continue to focus not only on delivering financial dividends but also on our obligation to provide social dividends for our members. We want our members to be empowered with the knowledge and tools to enable them to live more fulfilling lives while pursuing a better future.”

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