This article first appeared in The Edge Malaysia Weekly on March 8, 2021 - March 14, 2021

ON Feb 27, private sector wage earners were happily surprised when the Employees Provident Fund (EPF) declared dividends for 2020 — 5.2% for conventional savings and 4.9% for shariah savings — even though both figures were lower than 2019.

Last year, not only did at least five million members save less money and tap into their retirement kitty to alleviate pandemic-related cash-flow strains, but even those who did not have to use those savings were concerned about dividends being hit by EPF’s holding more cash to cater for higher withdrawals. EPF, which needs to pay only 2.5% dividend and beat inflation by 2% on a rolling three-year basis, also had a low threshold to beat last year, with the Consumer Price Index (CPI) for 2020 at -1.4% — the first full-year negative reading since 1969.

Does this mean the expected hit from higher withdrawals and low-yielding near-cash holdings to EPF earnings and dividend will be seen one year from now when the dividend for 2021 is declared?

Depending on one’s perspective, there is a “good, bad and ugly” side to the additional challenge that EPF faces, owing to circumstances arising from the pandemic.

Calculations by The Edge show that, based on EPF’s growth trajectory in the past decade, it would need just over RM10 billion to pay every 1% of dividend for 2021. A year ago, The Edge (Issue 1308, March 2, 2020) had correctly estimated that EPF would need RM9.2 billion to pay every 1% of dividend for 2020. Our previous estimate of RM8.5 billion for every 1% for 2019 was also spot on.

The good news is that EPF should be able to pay at least 4% dividend for 2021 if it continues to generate more than RM40 billion net investment income this year, just as it has every year since 2017. That is still easily double the fixed deposit rate in the current low interest rate environment and for savings that are guaranteed by the government.

The bad news is that RM10 billion required in normal circumstances to pay every 1% of dividend to EPF members for 2021 means that it would need to make at least RM50 billion in net investment gains — more than its record-high dividend payout of RM48.13 billion in 2017, when it needed only about RM7 billion to pay every 1% of dividend — to pay a 5% dividend in 2021.

In short, the chances of the dividend exceeding 5% for 2021 is not high, though not entirely impossible (more on this later).

The total dividend of RM47.64 billion declared for 2020 (RM42.88 billion for conventional savings and RM4.76 billion for shariah savings), for instance, would be enough to pay only 4.7% dividend if the threshold for every 1% of dividend rises to RM10 billion for 2021.

The wildcard here is the RM90 billion withdrawals from the i-Sinar Account 1, which forms the bulk of the RM130 billion that EPF had released and is releasing to members and the economy from various EPF-related initiatives from April 1 last year — specifically, how significantly it affects the growth of members’ total savings and EPF’s cumulative assets, which crossed the RM1 trillion mark in market value on Dec 3 last year but ended 2020 at RM998 billion (RM925 billion at end-2019).

The impact of the RM90 billion estimated outflow from i-Sinar withdrawals, which are no longer subject to conditions from March 8 except for one’s Account 1 balance, can be partly mitigated if growth in monthly inflows and net inflows into EPF picks up significantly after the decline last year.

When releasing its 2020 full-year performance, the EPF said net inflows into EPF fell more than one-third, or 35.4% year on year, to RM20.1 billion in 2020 even as withdrawals jumped 30.1% to RM58.3 billion and total contributions or inflows gained only 3.3% y-o-y to RM78.4 billion.

According to data from Bank Negara Malaysia, which is no longer released on a monthly basis since July 2020, the 3.3% increase in net inflow into EPF last year is the second slowest (after 2.8% in 2016) in the past decade, during which annual gains averaged 7.8%. Last year’s 30.1% y-o-y jump in withdrawals matched the 31% spike seen in 2015, when global oil prices dipped below US$50 a barrel and Fitch Ratings had a negative outlook on the country’s sovereign rating — more than triple the usual annual percentage gain of 8.7% on average in the past 10 years.

The 35.4% y-o-y decline in net inflows to EPF was also the sharpest in the past decade, exceeding the 33% y-o-y fall in 2015. EPF saw a 47.9% y-o-y increase in net inflows of RM23.8 billion in 2018 and a 30.5% y-o-y increase, or RM31.1 billion, in net inflows in 2019, with the annual average in the past decade at 10%. A 10% y-o-y gain in net inflows this year would imply a net inflow of about RM22 billion into EPF, back-of-the-envelope calculations show. It is not immediately certain why Bank Negara no longer provides the data in its monthly statistical release. EPF, which provided the annual change, has yet to respond to requests from The Edge for the monthly data.

The rest of the RM130 billion that EPF said is “released (or would be released) into the economy” include RM20 billion from i-Lestari Account 2 withdrawals (RM18.1 billion had been disbursed to 5.16 million applicants as at Feb 19, 2021; RM85 million from the deferment of contributions from employers needing cash-flow relief; and RM13.6 billion from the reduction in the statutory contribution rates for private sector wage earners (from 11% to 7% from April to December 2020 and to 9% for 2021), which raises disposable income. The RM13.6 billion is likely to include estimates for 2021 as well as the latter nine months of 2020, given that the government had previously estimated the impact of reduced employees’ contribution at up to RM10 billion for 2020 and up to RM9.3 billion for 2021.

EPF did not say how that RM90 billion estimate for i-Sinar withdrawals were arrived at, but most of this sum have yet to be paid out, given that disbursements began only in January this year. What is known is that RM19.62 billion had been approved for 2.5 million applicants of i-Sinar as at Jan 4, with the first month payment totalling RM10.07 billion.

That the initial payment for i-Sinar averaged RM4,028 per person (RM19.62 billion divided by 2.5 million applicants) implies that approved applications had come mainly from members with lower savings in Account 1. This is given that the maximum first month payment is capped at RM5,000 per applicant for members with savings of less than RM100,000 in Account 1, which implies a subsequent maximum payment of RM1,000 a month for the following five months to reach RM10,000 over six months.

Meanwhile, EPF members aged below 55 who have more than RM100,000 in Account 1 can withdraw up to RM10,000 the first month and subsequently up to RM10,000 a month in the remaining five months, given withdrawal criteria of up to 10% of savings or up to RM60,000 from their Account 1, which generally constitutes 70% of total savings.

According to data appended in the EPF’s 2019 annual report, there were 5.74 million active EPF members with less than RM100,000 in total savings as at end-2019, 6.4 million active members with up to RM150,000 in total savings (70% in Account 1 means a member could have up to RM42,857 if Account 2 is the remaining 30% and no withdrawals have been made) and 1.9 million members with less than RM10,000 in total savings.

This implies that RM46 billion to RM64 billion could be withdrawn from Account 1, assuming the maximum of RM10,000 per account — easily half of the RM90 billion in i-Sinar withdrawals estimated by the EPF, back-of-the-envelope calculations show.

Tunku Alizakri Alias, in his last official public announcement as CEO of EPF on Feb 27, told reporters the fund is “very concerned” about the adequacy of retirement savings among its members, which deteriorated post-Covid-19 because of withdrawals to solve immediate needs.

Before Covid-19, only 22%, or 3.3 million of the total of EPF members, and 36%, or 2.7 million active members, met EPF’s basic recommended savings but the low adequacy rate skidded further to below 20% (three million) among total members and 28% (2.1 million) among active members with the Covid-19-related programmes.

Worryingly, Tunku Alizakri added, some 30%, or 1.6 million EPF members, may withdraw almost all of their savings in Account 1 whereas 60%, or three million EPF members, have or will use up all their savings in Account 2.

The low balance in a member’s Account 1, which could be as little as only RM100, post i-Sinar withdrawals, means that those who most need help to boost their savings adequacy would need even more help than before.

The extremely low balance also means that tiered dividends, which in theory are meant to give low-income earners a bigger savings boost relative to those who have already well exceeded the EPF’s basic recommended savings of RM240,000 by age 55 (RM1,000 a month for 20 years considering the average Malaysian lifespan), would not be able to give meaningful aid to those who need help the most.

If a sizeable withdrawal from i-Sinar causes EPF’s fund size to remain the same or shrink, however, there is a chance that the income available for dividend distribution would be shared among a smaller pool of savings. In other words, the threshold to give every 1% dividend could be lower than the RM10 billion that The Edge estimates for 2021 in normal circumstances.

Whether EPF can beat its current record dividend payout of RM48.13 billion in 2017 is likely to depend on just how well its equities portfolio performs this year, especially if its fixed income portfolio does not continue to perform above average as it did in the past two years, owing to what Tunku Alizakri described as “active management”, which boosted returns when bond yields fell. Some 47.1% of its gross investment income came from equities, which make up only 42% of total assets and enjoyed a 7.76% return on investment (ROI) in 2020, up from 7.08% in 2019 but below 9.74% in 2018 and 11.46% in 2017.

Foreign assets, which make up 33% of its assets, also achieved 8.64% ROI.

There might also be a boost from its real-estate and infrastructure portfolio, which contributed RM5.66 billion, or 9.3%, of its record-high gross investment income of RM60.98 billion for 2020 — at least RM2 billion higher than its usual annual rakings in the past 15 years for this segment, which comprises only 5% of total assets.

The smallest return came from the RM69.86 billion worth of assets (7% of RM998 billion asset base — above the 3% in its strategic asset allocation) in money market instruments — which brought in only RM1.19 billion, or 2% of total gross investment income, and 2.07% ROI in 2020 (below 3.78% ROI in 2019) — held for liquidity management, owing to potentially higher withdrawal needs.

Investment managers at EPF would need to work harder to find more capital gains, especially if the stream of steady income — which made up 56% of total gross investment income in 2020 versus 66% in 2019 — comes in below what is required to deliver at least 2.5% dividend to EPF members. Meaningful quarterly disclosures should help shore up confidence among EPF members who are concerned over dividend prospects, owing to Covid-19 initiatives.

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