This article first appeared in The Edge Malaysia Weekly on March 15, 2021 - March 21, 2021

THERE is no question that many who are not covered by the public pension system in Malaysia may not be able to afford to retire. The hardship brought about by the Covid-19 pandemic has only made an existing problem worse. Some low-income earners in the informal sector have had to pawn most of their worldly possessions — even their mobile phones — to survive. They did not even have the option of tapping the Employees Provident Fund (EPF) because contributing to the fund is only mandatory for private-sector wage earners, as affirmed by findings in recent studies commissioned by two United Nations agencies. Researchers, including those at the World Bank, have long stated the need to expand the country’s social safety net, especially as society ages.

Even among private-sector wage earners in Malaysia, only 22% or 3.3 million of the EPF’s total members, and 36% or 2.7 million active members achieved the EPF’s basic recommended savings amount before Covid-19 hit. Less than one in five members (three million) and 28% (2.1 million) among active members are expected to achieve the basic savings amount after the unprecedented withdrawals allowed to alleviate Covid-19-related hardship, the EPF’s former CEO Tunku Alizakri Alias told reporters on Feb 27. He added that some 30% or 1.6 million members may withdraw almost all of their savings in Account 1 (via i-Sinar) while 60% or three million members have used or will use up all savings in Account 2 (via i-Lestari).

With such low levels of savings, is the tiered dividend payment scheme still relevant in helping more EPF members save enough for retirement? The short answer is yes, but it is not the only way, and implementing a tiered dividend scheme alone will not be enough (more on this later).

A tiered dividend structure essentially pays a higher effective dividend rate to members with a lower amount of savings by paying a lower effective rate to members with a higher amount of savings. This is to give those who need more help in saving for their retirement a leg up. The rationale is similar to a progressive tax, where those with a higher taxable income fall under a higher tax bracket, and hence pay more taxes for redistribution.

The Edge’s extrapolation of the RM675.9 billion saved by 7.63 million active EPF members as at end-2019 shows that it is possible to pay an effective dividend rate of 6.3% to members with savings below RM50,000 if savings above RM1 million are only paid a 3% dividend.

This does not mean that someone with RM1 million savings with the EPF is paid only paid 3% on the entire RM1 million (RM30,000) instead of the 5.45% (RM54,500) that was paid to all members with conventional savings for 2019.

A tiered dividend structure means everyone, including the person with RM1 million savings, will get 6.3% on the first RM50,000 saved. The difference in the effective dividend rate is because a lower rate would be given on the subsequent RM50,000 (RM50,000-RM100,000) and an even lower rate to the RM100,000 after that (RM100,001-RM200,000) and so on based on the total available dividend pool available for distribution that year (see Table 1).

Instead of RM54,500 in dividends under the existing blanket single-tier 5.45% rate declared for 2019, RM1 million savings will receive RM44,507 in dividends using tiered dividend rate E and RM44,902 using tiered dividend rate D, The Edge’s back-of-the-envelope calculations show (see Table 2).

In Issues 1348 (Dec 7, 2020) and 1350 (Dec 21, 2020), The Edge’s extrapolation of the EPF’s 2018 savings among active members showed that instead of the blanket single-tier dividend of 6.15% for conventional savings in 2018, it is possible to pay an effective dividend rate of more than 7% to members with savings below RM50,000 if savings above RM1 million are only paid the minimum dividend of 2.5% (see Table 3).

There is no denying that those with higher EPF savings will subsidise those with lower savings, given the difference in effective dividend rates versus the current blanket distribution.

Using tiered dividend rate D, someone with RM1 million savings would still have RM44,902 in dividends for 2019 (which works out to a simple average of RM3,742 per month over 12 months) — which works out to an effective dividend rate of 4.5% — even though it is RM9,598 (RM800 a month) less dividends for that year under the blanket rate of 5.45% for 2019.

Conversely, because tiered dividend rate D is able to pay a 6% rate for savings up to RM100,000, someone with only RM100,000 savings would have received RM6,002 in dividends for the whole year instead of RM5,450 — RM552 extra for 2019, or a simple average of RM46 per month that year. That would give the person RM546 instead of RM500 a month — a significant difference to those with a lower income.

And that’s not counting the compounding power of having more savings earlier. As the EPF points out, RM1,000 saved 30 years ago would have tripled to RM3,040 by the end of 2020, based on the stellar dividends that the provident fund has been able to generate in the past three decades. If that money had been kept under the mattress, it would only be worth RM445 after taking into account inflation.

Once a member’s savings reach the threshold where he or she is deemed to no longer need a leg up, the person would move to a level where the smaller amount received via a tiered dividend structure would aid those who require more help.

Whether this redistribution is fair is or not depends on one’s perspective.

Readers of The Edge who sent strongly worded feedback on previous articles on the tiered dividend are not entirely wrong — it is true that retirees have worked hard to save money for retirement and should be allowed to enjoy the fruit of their many years of labour. They also rightly point out that people who have only RM1 million savings can hardly be considered rich, even though they are better off than people who cannot afford to retire.

It is also true that even if the entire RM1 million continues to receive a 5% dividend from the EPF, the average dividend income stream is only RM50,000 a year or RM4,167 a month — hardly an amount for one to be considered wealthy. At the prevailing low fixed deposit rate of around 2%, however, that RM1 million would only earn RM20,000 (RM1,667 a month).

The Edge would have accorded the theoretical lowest rate of dividend on savings above RM3 million or RM5 million, as suggested by some readers, but publicly available data from the EPF does not give a breakdown of savings above RM1 million.

The Edge also does not have access to information on members’ monthly income but the EPF would have that data to ensure that only those with a lower income benefit from any redistribution, if it is implemented.

While the EPF has not paid a dividend of less than 5% since 2005 — dividends averaged 6.1% in the past 10 years, reaching as high as 6.9% in 2017, but were just 5.2% for 2020 — the provident fund only guarantees a minimum 2.5% dividend for conventional savings. That 2.5% minimum rate per year, calculated annually on Jan 1 based on the daily aggregate balance in the past year, is guaranteed under Section 27 of the EPF Act 1991. Savings with the EPF are also guaranteed by the federal government.

A special cash injection for redistribution would be one way the government can allow a higher dividend to be paid to people with a lower income, without taking away any or too much money from the middle-income earners, who are not very rich but not considered poor. This, however, would require the government to have greater fiscal space, which can happen once it builds up more sources of sustainable income streams and transforms the country’s economy to one with more globally competitive corporations and high-income paying jobs.

An overall higher salary for private-sector earners would certainly help boost the adequacy of retirement savings. The Edge’s back-of-the-envelope calculations have shown that a 21-year-old who earned RM1,000 in year 2000 would have reached the EPF’s basic recommended savings of RM240,000 (RM1,000 a month for 20 years post-retirement) by age 45, based on the EPF’s dividend payment and if he or she enjoyed a 5% salary increment every year and did not withdraw any money saved with the EPF.

One of Alizakri’s last statements as CEO of the EPF was that members should have a say if there is a change in the existing “everybody gets the same dividend [rate]” to tiered dividends. For the record, both the government and the EPF have not publicly said a tiered dividend structure is being considered for implementation, and understandably so, given the sensitivities surrounding the matter.

“Tiered dividend is a very complex structure; it has both its pros as well as disadvantages [but] would actually suggest that there will be ways for [the EPF] to deliver dividends to members in very different ways in the future,” Alizakri stated on Feb 27 without specifically saying whether the EPF is for or against the move. He did, however, assure members that savings with the EPF “will always be managed in [the] best way possible” with “best returns for the type of fund [of its kind]”.

It would be too late to help some EPF members save enough for retirement even if a tiered dividend scheme is implemented now, or even just before Covid-19 hit.

Yet the fact that many more may have emptied their EPF savings does not change the fact that the huge withdrawals related to Covid-19 are slated to end by the first half of this year. There are many young people who are just starting out and have yet to enter the workforce and could still benefit if the system were to be implemented, with greater access to data to ensure that only the right people benefit, while not overly burdening those who are not really rich.

Just over 50% of EPF members were born after 1981 or are aged 40 and below this year.

Applications for i-Sinar — which no longer has eligibility conditions apart from balance-dependent withdrawal limits — are open between March 8 and June 30 this year. EPF members below the age of 55 with RM100,000 or less in their Account 1 can withdraw up to RM10,000 over six months (first payment maximum RM5,000) while members with more than RM100,000 can withdraw up to 10% of their balance subject to a cap of RM60,000 over six months (first payment maximum RM10,000).

At the time of writing, the EPF had yet to revert on questions seeking clarity on the average profile of members who have asked and are asking to withdraw more money from the fund.

Based on The Edge’s analysis of the first-month payment for i-Sinar applications that had been approved before withdrawal criteria were removed, most of those withdrawing money from their Account 1 had lower savings. This is given that the initial payment for i-Sinar averaged RM4,028 per person (RM19.62 billion approved to 2.5 million applicants with first-month payments totalling RM10.07 billion as at Jan 4).

To have emptied their Account 1 by withdrawing only RM10,000 from it, the EPF member could only have had a maximum of about RM14,300 saved up (under Accounts 1 and 2) but is likely to have a lot less as they probably had already tapped the 30% savings that were in Account 2. As at end-2019, there were 1.89 million active EPF members with less than RM10,000 in total savings — their RM7.51 million cumulative savings imply just under RM4,000 in savings each on simple average, data appended in the EPF’s 2019 annual report shows.

It remains to be seen if the profile of members withdrawing EPF savings from their Account 1 has changed with the removal of withdrawal criteria from March 8. Just as there was news of EPF members being relieved to be able to use their EPF savings to repay debt, have some money on hand for emergencies or buy something as simple as a meal of Kentucky Fried Chicken for their family, there were also reports suggesting that people were withdrawing money from the EPF to bet on getting higher investment returns elsewhere. One 32-year-old, who was among those queuing when three goldsmiths at a mall in Shah Alam were offering discounts, told a news portal that he was using money from the i-Sinar EPF Account 1 withdrawal “to invest in gold”.

If the majority of withdrawals are made by low-income earners for everyday necessities, the need for policymakers to implement the necessary changes to help change the situation of low adequacy of retirement savings is greater than before. Making sure that people above the age of 55 are able to find other sources of income and part-time jobs post-retirement from active service would likely have to be a part of the solution, whether or not a tiered dividend payment scheme is implemented.

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