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This article first appeared in The Edge Malaysia Weekly on February 25, 2019 - March 3, 2019

IT would seem that the Employees Provident Fund (EPF) — the statutory guardian of the retirement kitty of private-sector wage earners — is perpetually stuck between a rock and a hard place. After proving critics wrong by announcing a stellar dividend despite the challenging operating environment last year, speculation has turned to how it managed the feat.

On Feb 16, the EPF declared a 6.15% dividend for its conventional portfolio and 5.9% for Simpanan Shariah — way above the speculated low of four plus per cent, purportedly on sizeable write-downs, given how badly equities performed last year.

Some critics pointed to 2016 when the EPF had a RM8.18 billion net impairment loss. That year, the dividend dipped to 5.7% from 6.4% in 2015 when net impairment was RM3.07 billion.

Most of the impairment (net of any write-backs) was from listed financial assets with a small portion coming from unlisted subsidiaries, associates and joint ventures. In 2015, the EPF saw a RM321 million net write-back on the unlisted investments that negated part of the RM3.4 billion net impairment on its listed financial assets.

Yet based on the 2018 preliminary figures released by the EPF last Monday, the implied net impairment to its total income for the year was little changed from the RM3 billion plus seen in 2015 and 2017.

For 2018, the EPF’s gross investment income was RM50.88 billion while total dividend payout was RM47.32 billion. It is not immediately known whether the EPF’s 2018 total income benefited from non-investment income. Audited accounts will be out in April when its 2018 annual report is released.

When asked, CEO Tunku Alizakri Alias declines to disclose the size of the impairment for 2018, noting that the year’s accounts still needed to be audited by the Auditor-General’s Department. Nonetheless, he assures that the EPF “has always insisted on adhering to global best practices”, had implemented the Malaysian Financial Reporting Standard 9 (MFRS 9) since Jan 1, 2018, and had indicated as much when announcing its results for the first, second and third quarters of last year.

“Under MFRS 9, all listed equity instruments have to be marked-to-market and recognised at fair value to reflect the actual market price of the assets,” Alizakri explains, dismissing as “mere speculation” that a change in accounting treatment boosted the EPF’s performance.

“To further allay any misgivings, we also have in place strict cut-loss policies governing our equities to ensure the continued health of our balance sheet. Thus to allude that the EPF had arbitrarily decided to not carry out impairment on its listed equities in order to declare a higher dividend for 2018 is just not true,” he adds.

As the EPF looks at investments from a long-term horizon, Alizakri says the retirement savings fund chose to classify its equity instruments using the Fair Value through Other Comprehensive Income (FVOCI) method as Fair Value through Profit & Loss (FVTPL) would expose it to volatility in earnings, especially due to temporary market cycles.

While the EPF no longer recognises impairment or capital gains on disposal on its listed equity holdings in its statement of profit and loss, adjustments are still made to its retained earnings to reflect the correct worth of its assets.

“There has never been, and there must never be, any political pressure or undue influence on the EPF to declare dividend figures,” Alizakri says, adding that this sentiment extends to “all aspects” of the EPF’s operational and investment activities.

“Everything we do is towards meeting our mandate to safeguard and grow our members’ savings as well as deliver excellent services. We unequivocally state that the EPF, as a statutory body with a strong set of governance structures, is apolitically proud to be able to serve our members who represent all races and political affiliations,” he comments. “The EPF has strict governance in ensuring that the dividend declared is in accordance with our long-established policies and the relevant accounting standards. The decision on dividend rates has to go through various committees, including the Board Audit Committee, the Investment Panel and the EPF Board before they can be declared.”

According to him, the EPF declares its annual dividend payout based solely on its net realised income for the year, which is derived from total gross realised income after deducting net impairment on financial assets (except listed equities), unrealised gains or losses from inter-company transactions, investment expenses, operating expenditure, statutory charges as well as dividend on withdrawals. “Therefore, we cannot arbitrarily declare higher dividends.”

It is not immediately known if there were any sizeable gains or losses from the EPF’s involvement in the Battersea redevelopment project, where Apple Inc’s London headquarters will reportedly be based from late-2020 or early-2021. There were genuine concerns over rising costs and thinner project development margins, especially following a delay in the Northern Line rail extension and opening of a new station that was supposed to drive more traffic to Battersea.

The EPF took a 20% stake in the Battersea project in 2012 with S P Setia Bhd and Sime Darby Property Bhd each taking 40%. Last December, PNB-Kwasa International 2 — which is 35% owned by the EPF and 65% by Permodalan Nasional Bhd — agreed to pay £1.583 billion (RM8.35 billion) for S P Setia and Sime Darby’s stake in Battersea Phase 2 Holding Co Ltd.

 

Boost from overseas allocation

Still, the EPF’s success in generating income overseas is a key reason it was able to pay strong dividends in recent years. In 2015, for instance, 48% of the EPF’s earnings were from overseas despite having only 25% of its assets invested outside Malaysia.

In 2017, when the EPF paid its highest dividend in 21 years of 6.9%, overseas income made up 41.45% of gross investment income (GII) despite global assets making up only 28% of its assets. In other words, foreign income alone was enough to pay more than 3% dividend to all members in 2017.

While the EPF’s earnings from abroad were not so high last year, foreign investment across all asset classes still contributed 37.52% to its gross investment income. While the proportion of its foreign assets fell to 26.7% last year from 28% in 2017, the absolute value was still estimated to be about RM1 billion higher year on year.

Its estimated income of about RM19.1 billion from abroad last year was enough to pay about 2.5% dividends to all EPF members — down from 3.1% or RM22 billion in 2017 — which is also reflected in the year-on-year decline in the EPF’s conventional dividend of 6.15% last year versus 6.9% in 2017. Dividend for Simpanan Shariah also slipped to 5.9% last year from 6.4% in 2017.

 

Some 55% to 60% of income from equities since 2013

The EPF’s success in equities investment is the other factor supporting its strong dividends in recent years. Before 2010, less than one-third of its assets were in equities, which at most generated 35% of gross investment income. From the 27% allocation for 2009 equities rose to as much as 44% of the EPF’s asset allocation in 2015 before easing to 39.1% last year.

Not only did the proportion of asset allocation to equities decline to 39.1% last year from 42.2% in 2017, it was the first time in at least 15 years that there was a year-on-year decline in the absolute amount of investments the EPF had in equities to about RM326.3 billion last year from RM334.2 billion in 2017.

It is not known if the significant decline in several top local EPF holdings had any bearing on these figures.

At the time of writing, the EPF had not released its top 30 equity holdings as at Dec 31, 2018, but a simplistic tabulation of 35 stocks that were among the EPF’s top 30 holdings in the past four quarters and its shareholding level from stock exchange filings as at end-2018, shows that the value of the 35 stocks had fallen roughly RM7.5 billion year on year as at end-2018 — if one were to make a simplistic assumption that its shareholding was the same as a year ago. The largest declines were in Telekom Malaysia Bhd, Axiata Group Bhd, Sime Darby Plantations Bhd, Tenaga Nasional Bhd, CIMB Group Holdings Bhd, Malaysian Resources Corp Bhd, IJM Corp Bhd, Digi.com Bhd and Maxis Bhd while the largest gains were in Public Bank Bhd, Hong Leong Bank Bhd, PPB Group Bhd and RHB Bank Bhd.

The EPF did not disclose the size of its steady income stream for last year, which was enough to pay nearly half of its dividend payout for 2017, back-of-the-envelope calculations show.

Last year, the EPF’s gross investment income stood at RM46.26 billion (conventional) and RM4.62 billion (shariah), adding up to RM50.88 billion. This was slightly below the 2017 figures of RM48.54 billion (conventional) and RM4.6 billion (shariah), for a total of RM53.14 billion.

Total dividend for last year was RM47.32 billion (conventional: RM43 billion, shariah: RM4.32 billion), lower than 2017’s RM48.13 billion (conventional: RM44.15 billion, shariah: RM3.98 billion). The amount needed to pay every 1% of dividend increased from RM7.02 billion in 2017 to RM7.72 billion last year.

It is impossible to please everybody, yet Alizakri hopes that those who are disappointed with the EPF’s dividend for last year measure the fund’s performance against the very challenging market conditions it faced, especially in 4Q2018. The 6.15% dividend (conventional) is 3.65% above its target of at least 2.5% nominal dividend and 3.93% above its second target of delivering at least 2% real dividend on a rolling three-year basis.

“We have been able to not only preserve but also enhance the value of our members’ savings by 87.5% through the dividends that we have distributed over the past 18 years (since 2000). In other words, if you had placed RM1,000 in savings with the EPF on Jan 1, 2000, the value of your savings on Dec 31, 2018, would have grown to RM1,875. If you had held on to your cash at home, you would have seen an erosion of that same amount of money by 35.2% to be worth only RM648 today,” he says.

For members hoping to see stronger EPF dividends for this year, Alizakri has this to say: “I wish I had the power to guarantee that EPF dividends will be stronger this year as I would then have the power to dictate world events and influence global markets. The only promise I can give you is that we have in place solid processes and the best people to ensure that the EPF is in a position to take advantage of opportunities as well as to manage any crisis in as quick and efficient a manner as possible. Our members can also be further comforted that our robust and time-proven Strategic Asset Allocation will equip us with the ability to withstand short-term volatility and deliver a commendable performance to our members.”

 

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