This article first appeared in The Edge Malaysia Weekly on December 21, 2020 - December 27, 2020

NOT many — not even billionaires — would willingly give up money, let alone professionals or retirees who are perhaps only a notch or two better than middle-income wage earners who may not be able to afford to retire. So, there is understandably keen interest in whether the Employees Provident Fund (EPF) will implement tiered dividends.

Those watching this space are not just the EPF’s 14.8 million members — particularly those who might be negatively affected by it — but also those who deem the move as beneficial to the lower-income wage earners.

Along with a number of constructive suggestions from the people who stand to lose out the most should tiered dividends be implemented, The Edge received strongly worded responses to the article “Tiered dividend necessary to help low-income EPF members” (Issue 1348, Dec 7), which essentially suggested that tiered dividends could be one way for the EPF to help members with lower incomes and retirement savings.

In short, tiered dividends means that a higher dividend rate is paid to low savings and a lower dividend rate is paid when savings grow above certain thresholds. 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 tax for redistribution.

Jeffrey Chew, founder of peer-to-peer lending platform Fundaztic.com and former CEO of OCBC Bank Malaysia, will be among EPF members who would likely see significantly lower returns on his savings with the EPF should tiered dividends be implemented. Nonetheless, Chew tells The Edge that the proposal “has real merits for social development of the country, given the low savings of the B40 and M40” income group.

After all, those who are able to accumulate over RM1 million with the EPF alone are “usually well-educated and financially savvy” and may well have income from sources other than the EPF, an observer says, adding that “people should not be using the EPF’s investment capability as a free ride”.

Speaking in his personal capa­city,  Chew reckons, however, that paying zero dividends to savings above RM1 million is “unrealistic” given that high savers will withdraw the savings and “the overall returns of the EPF will be lower by that quantum available as their assets under management (AUM)”.

Chew also suggests that policymakers explore the viability of taxing dividend income from the EPF at the current progressive income tax rate, which should exclude retirees in the lower-income group, as well as removing tax exemption of interest income on fixed deposits of above, say RM200,000, with financial institutions. “FD interest used to be taxed at personal tax rates in the 1980s and was then given a 5% rate in the 1990s and finally fully tax-exempted,” Chew adds, noting that the income derived can be used by the government to further help the lower-income wage earners.

To be sure, the pool of funds available to pay a higher dividend to savings in the lower range would likely only be significant if enough EPF members with higher savings remain convinced that the returns from keeping their money with the EPF remain relatively decent.

Fifty-four-year-old Chew, who is also Paramount Corp Bhd’s group CEO, is likely among the 39,610, or 0.54%, of 7.4 million active EPF members with more than RM1 million saved with the EPF as at end-2018.

Going by our calculations, someone with RM1 million in savings would have received a dividend of RM61,500 in 2018, at the blanket 6.15% rate paid to conventional savings. That amount would be reduced by nearly one-third to RM41,250 using our theoretical Tiered rate A (first published on Dec 7) that gives at least 3% interest for up to RM1 million in savings.

Someone with RM2 million in savings with the EPF, meanwhile, would have seen the RM123,000 dividend income from a 6.15% blanket dividend rate in 2018 reduced by 46% to RM66,343 if only the minimum 2.5% dividend is paid to savings above RM1 million under Tiered rate A.

Under Tiered rate D, which assumes a 3.3% dividend for savings above RM1 million — the average fixed deposit rate in 2018 — and 3.5% dividend for savings between RM800,001 and RM1 million, someone with RM2 million in savings would have seen dividend income of RM80,896 or 34% lower than the RM123,000 under the blanket dividend rate of 6.15%, our back-of-the-envelope calculation shows.

Someone with only RM50,000 savings with the EPF, however, would have seen a RM3,075 dividend at the blanket rate of 6.15% but would have RM3,750 under the 7.5% interest assumed under Tiered rate A and RM3,496 under Tiered rate D, which is still able to pay 7% despite paying the FD rate of 3.3% to savings above RM1 million.

While the RM675 additional dividend a year for those with only RM50,000 savings may look small, that extra RM675 interest from one year alone would become RM2,190 at 4% interest after 30 years. Our calculations show that if a tiered dividend system had been implemented from year 2000, a 21-year-old earning RM1,000 a month and who enjoyed a 5% salary increment over the past 20 years would have reached the EPF’s basic recommended savings of RM240,000 two years earlier (at age 43 instead of 45) and have about RM27,000 more savings by the age of 55, if the EPF continues to pay an average dividend of 4% in the coming decade.

Our assumed Tiered rate C, D and E — which breaks the savings range to eight tiers compared with seven under Tiered rate A and B (previously published on Dec 7) — also assumes a higher dividend rate for savings below RM500,000 (double the EPF’s basic recommended savings of RM240,000) to take into account middle-income savers who may well be relying on the EPF as their main source of income post-retirement.

One “concerned EPF saver” noted that RM1 million savings would give her RM50,000 in dividends a year if the EPF continues to pay a 5% dividend a year and that RM4,167 a month would only make her middle income at best.

At our assumed Tiered rate D, that RM1 million savings would have given her RM47,896 in dividends a year or RM3,991 a month instead. This is because everyone is paid the same rate of 7% for the first RM50,000 — which is different from the entire RM1 million being paid only a 3.3% dividend, which works out to RM33,000 a year or RM2,750 a month (see Table 2).

A number of observers asked that we impute a lower dividend rate for those above RM2 million or RM5 million instead of RM1 million.

We are also not able to differentiate savings above RM1 million into different tiers as we do not have enough data to do so. The EPF, however, would be able to do what third parties like The Edge cannot.

When asked, an EPF spokesperson would only say the fund hopes to address the questions on tiered dividends “in the near future” but is “unable to respond” just yet. It would not even say whether it had been asked to consider the suggestion by policymakers. The Ministry of Finance had yet to share its thoughts on tiered dividends as The Edge went to print.

The EPF also declined to provide the latest data on the monthly contributions as well as withdrawals to the fund, figures that used to be available on Bank Negara Malaysia’s website, but are no longer since August. As such, we cannot independently tell whether net contributions (monthly cash inflow into the EPF that used to average about RM2 billion a month), and by extension salaries in the private sector, have recovered significantly after the Movement Control Order (MCO) that ran from March 18 to May 3. This is significant as it could change the growth trajectory of the EPF’s fund size.

At the time of writing, the EPF has also not provided an update on how the expansion of the hotly debated i-Sinar Account 1 withdrawal facility to “up to eight million eligible members” would impact its fund size. A total of RM13.37 billion had been withdrawn from EPF Account 2 via i-Lestari since April this year by 4.83 million members as at Dec 4, according to the Ministry of Finance’s Laksana report dated Dec 16.

That the EPF’s fund size has grown to nearly RM1 trillion over the years is testament of the country’s relatively young workforce as well as the decent returns the fund had been generating from the mandatory contributions to the fund by Malaysians employed in the private sector. Because these contributions are mandatory, policymakers need to ensure that the right action is taken for the benefit of all members.

Even if the lower-income group does benefit from a slight leg-up from tiered dividends, the latter alone does not make the EPF’s job of protecting and growing its members’ retirement savings easier. It also does not mean that the government needs to do less to ensure that there is a wide enough social safety net to aid Malaysians who cannot afford to retire and need a hand in their old age.

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