This article first appeared in The Edge Malaysia Weekly on January 17, 2022 - January 23, 2022

HERE is a piece of news to consider amid misguided calls to allow more premature withdrawals from the Employees Provident Fund: dividends from the EPF for 2021 look set to top the rate in 2020 (5.2% conventional, 4.9% shariah). There is even a chance of conventional dividends reaching their highest in three years — above 2019’s 5.45%, possibly even touching 6% — The Edge’s back-of-the-envelope calculation shows.

The EPF’s total absolute dividend payout also looks set to reach a new all-time high in 2021 — beating 2017’s RM48.13 billion — even though the EPF’s fund size may stay flat or slightly smaller year on year due to Covid-19-related withdrawals, The Edge’s estimates show.

The three-fold good news is because in the first nine months of 2021 (9M2021), the EPF’s net investment income of RM47.67 billion (RM48.02 billion gross) was already more than the RM47.64 billion paid out to EPF members in 2020.

Even though 3Q2021 gross investment income of RM13.97 billion was the lowest quarterly showing in six quarters (since 1Q2020), the outperformance in 1Q2021 was still enough to push 9M2021 numbers ahead y-o-y. (See quarterly earnings table.)

In 9M2020, the EPF’s net investment income was only RM38.14 billion (RM44.6 billion gross) while the full-year figure for 2020 came in at RM52.58 billion (RM55.74 billion gross). For the record, write-downs had only totalled RM0.35 billion in 9M2021 versus RM6.46 billion in 9M2020.

Even if there may be larger portfolio write-offs in 4Q2021, it is safe to assume that the EPF would likely not do too badly in the remaining quarter of the year. This is given that the EPF is an institution that puts priority on capital preservation even as it seeks to grow members’ retirement savings at least 2.5% annually and beat inflation by at least 2% on a three-year rolling basis.

As it is, the EPF’s highest-ever total dividend paid to members (conventional + shariah savings) in absolute terms was RM48.13 billion in 2017 when the dividend rate was 6.9% (conventional) and 6.4% (shariah).

Based on past records, the EPF should announce its 2021 dividend rate by mid-March or as early as the end of this month.

The good dividend headlines should bring some relief to policymakers who have had to contend with criticism for allowing premature withdrawals from the retirement nest egg totalling RM101 billion to relief hardships faced due to Covid-19.

Overseas investments — which made up 36% of the EPF’s RM988.55 billion total assets as at end-September 2021 — contributed close to RM28 billion or 58.2% of total gross investment income in 9M2021. This is higher than its 49.8% contribution to gross investment income for the whole of 2020, where overseas assets made up 35.14% of total assets.

Based on its disclosed portfolio performance, it is worth noting that in 2021, the EPF was no longer enjoying exceptionally high returns from its fixed income portfolio as seen in 2020 when monetary loosening shored up returns in the bond markets.

Income derived from equities contributed 62% of gross investment income in 9M2021, significantly above the 49% contribution in 9M2020. This is despite making up only 43% of total assets as at end-September 2021 versus 46% by fixed income, which contributed 30% of gross investment income for 9M2021. (See portfolio split table.)

Real estate and infrastructure, which made up 6% of assets as at end-September 2021, contributed 7% of gross investment income for 9M2021 — slightly higher than 6% in 9M2020. The difference is about RM700 million in absolute terms, our back-of-the-envelope calculation shows.

As at end-September, the EPF’s total investment assets stood at RM988.55 billion, about RM10 billion below RM998 billion as at end-2020.

The Edge had previously reported that the EPF may see a rare net outflow of funds in 2021 due to the special Covid-19-related withdrawals. As Bank Negara Malaysia no longer discloses month-on-month data on EPF contributions and withdrawals since July 2020, details would only be known when the EPF releases its 2021 annual report if figures are not released by the EPF earlier.

In 2020, there was still a net inflow into the EPF despite Covid-19-related withdrawals via the i-Lesteri Account 2 scheme (RM14.5 billion in 2020) with contributions of RM78.41 billion versus RM58.29 billion withdrawals, according to the EPF’s 2020 annual report that was tabled in parliament for approval in late December 2021.

While the EPF would have crossed the RM1 trillion mark earlier if not for Covid-19-related withdrawals, the threshold for the EPF to pay every 1% of dividend to its members also did not climb as fast because of it. (See dividend chart.)

EPF CEO Datuk Seri Amir Hamzah Azizan told The Edge in June 2021 that the threshold to pay every 1% of dividend to its members in 2021 likely stayed the same as 2020 due to Covid-19-related withdrawals.

In 2020, the EPF needed RM9.2 billion to pay every 1% of dividend to EPF members, significantly higher than only RM7.02 billion needed in 2017 when the EPF’s total distribution hit a record high. In 2019, every 1% of dividend only required about RM8.5 billion.

The growing threshold to pay every 1% of dividend as the EPF’s fund size grows alongside the usual annual net inflow in statutory contributions from private sector wage earners is why the EPF has had to diversify its portfolio in alternative but relatively safe assets to generate better returns.

The EPF’s record-high total payout of RM48.13 billion in 2017, which was enough to pay 6.85% (blended) dividend four years ago, would have only been enough to pay 5.7% in 2019 and just under 5.2% in 2020. The EPF would have needed RM10 billion to pay 1% of dividend in 2021 if not for the Covid-19-related withdrawals, our back-of-the-envelope calculation shows.

With the country’s economy projected to rebound between 5.5% and 6.5% in 2022 and the government putting its foot down on not allowing more premature EPF withdrawals, the EPF’s fund size should resume its growth trajectory this year. This means that the EPF would need to work even harder to continue delivering stellar returns for its members, especially if low-hanging fruits had already been plucked during tough times.

In its statement dated Jan 11 commenting on third-quarter results, the EPF had noted that risks to Malaysia’s growth outlook remain tilted to the downside on external and domestic factors amid lingering pandemic-related concerns.

“Concerns over inflation and the tightening of monetary policy will continue to cause uncertainty and volatility in both the equity and bond markets,” Amir said in the statement.

Despite challenges, he said the EPF is “hopeful of seeing market sentiments improving in the near future. As a long-term fund, we remain committed and guided by our strategic asset allocation that helps us to ride out volatilities while taking advantage of declines in valuations of fundamentally strong assets”.

For this year, Amir reiterated that the EPF would accelerate its efforts to help members rebuild their retirement savings as well as reposition itself to remain relevant to more Malaysians, including those in the informal sector and contract service workers.

See also “Would multimillionaire EPF savers help poorer members?” on page 57

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