Saturday 22 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on August 2, 2021 - August 8, 2021

KUMPULAN Wang Persaraan (Diperbadankan) (KWAP) was established 14 years ago to safeguard the retirement income of public servants. At its inception, its fund size was RM42 billion.

The fund’s total assets under management (AUM) now total a record RM150 billion, more than triple its initial size in 2007. KWAP is the country’s third largest fund manager by asset size. Its audited 2019 and 2020 financial results have yet to be tabled in parliament, but the fund size stood at RM136.5 billion as at December 2018.

This level of growth is no small feat considering the Covid-19 pandemic, which KWAP CEO Nik Amlizan Mohamed calls a “black swan” event that has left the economy and healthcare system debilitated.

“However, we were fortunate that we continued to do well because prior to the pandemic, our market was already volatile. So, we were getting ready for the volatility of the market,” she tells The Edge in her first interview with the media since taking the helm of KWAP.

In November last year, Nik Amlizan became the second woman to serve as CEO in the pension fund’s 14-year history, replacing Syed Hamadah Syed Othman after his two-year term ended on Oct 31, 2020. In the two years prior to that, she was chief executive of Lembaga Tabung Angkatan Tentera (LTAT), which had attracted controversy for financial mismanagement and irregularities in 2019.

“In August 2018, I was offered to head LTAT. After spending 11 years at KWAP, I thought, ‘Okay, a new challenge. That’s kind of exciting, isn’t it? (Like) a tour of duty’. But LTAT is very different from KWAP. I have never had any soldiers such as a four-star general as board members. That was a very enriching experience for me, I must say,” she recalls.

Nik Amlizan joined LTAT on Oct 1, 2018, and spent nearly two years cleaning up the armed forces pension fund’s books and transforming the organisation from a business-run entity to a proper fund management organisation and setting up investment policies and guidelines, investment risk parameters as well as enhanced governance structures.

She is no stranger to KWAP, having joined the pension fund in 2007 to assist in the setting up of its equity department. Her last position before she left in 2018 was chief investment officer. Still, it may be wrong to assume that returning to KWAP would be a walk in the park for her.

“The pressure is the same. Even when I was in the private sector [prior to joining KWAP the first time round], my stress level on a scale from zero to 10 had always been at 10. There is always pressure to outperform irrespective of the market conditions. That is from the investment perspective,” says Nik Amlizan.

In her role as CEO, she says the pressures are slightly different. “It is not just about generating investment returns and providing sustainable returns, but putting the right governance structure and proper checks and balances in place to ensure the returns will continue to be sustainable over the long term compared with investment-specific-related pressures. My pressure now is to ensure that the team is all on the bus heading in the same direction.”

KWAP has a 620-strong workforce.

The pension fund has not been without controversy. Back in 2011 and 2012, it released a total of RM4.15 billion in cash — its biggest ever loan — to SRC International Sdn Bhd, a former subsidiary of state fund 1Malaysia Development Bhd, even though the latter’s application had reportedly failed to meet KWAP’s investment policy requirements.

It was revealed that the federal government, as a guarantor to the RM4 billion in loans, has been helping to pay off SRC’s debt to KWAP, scheduled to end in 2022. Nik Amlizan says the payments are “still on track”, but declines to reveal how much the pension fund has received thus far.

Asked how KWAP ensures it is not pressured by anyone into agreeing to such loans in the future, she says, “We are undertaking continuous improvement in terms of strengthening our investment policy and guidelines. The risk team is independent of the investment team; they have an independent view. The review of our investment policy and guidelines is continuous.”

KWAP outperforms benchmark

In terms of time-weighted rate of return (TWRR), KWAP’s portfolios have outperformed their respective benchmarks, be it in equities or fixed income, over the last few years, and the newly appointed CEO is making sure that they continue to do so. In contrast, the benchmark FBM KLCI has fallen 5.6% since the beginning of 2021.

“Year to date, we have outperformed the benchmark. But of course, the market can change at any time. Generally, we are on track to meet our target of 5% to 6% per year over 10 years rolling,” says Nik Amlizan.

TWRR measures the compound rate of growth in a portfolio by taking into consideration the inflows and outflows of funds. In 2018, KWAP delivered a TWRR of -1.3% from 9.09% in 2017.

It had achieved a net income of more than RM6 billion at end-2019.

“While I am bound by the fact that we haven’t tabled in parliament our annual reports for both 2019 and 2020 yet, I can share with you that for 2020, at the peak of the pandemic, our net income grew even larger to above RM8 billion,” she says.

“We also continue to have positive gross investment income. If you look at our track record, it should not be too far away from that.”

KWAP recorded its highest gross investment income of RM9.03 billion in 2017.

“We continue to reinvest whatever investment income we have to grow the fund size,” says Nik Amlizan.

Still, the growing size of funds has often raised concerns among investors about the funds’ ability to sustain their performance. On the part of KWAP, its AUM includes money invested under equities, private equity (PE) and fixed income, among other assets.

“We are guided by our strategic asset allocation (SAA), which is reviewed regularly to reflect changes in the investment environment, enabling us to optimise returns reflecting our risk tolerance. Our strategic allocation is a balanced portfolio between growth and income,” says Nik Amlizan.

“On the growth side, we have asset classes such as equities and PE while on the income side, we have fixed income. The SAA for this year should not run too far away from what you see in 2018.”

At end-2018, 42.6% of the pension fund’s total assets were in listed equities, 50.9% in fixed-income investments and the rest in alternative investments such as PE and property.

Additionally, KWAP’s conscious strategy to diversify into international and private markets is meant to improve portfolio efficiency in terms of accessing a larger universe of assets with more attractive returns and to reduce correlation among its existing assets, says Nik Amlizan.

“Currently, our international investments are about 18% [of total assets]. I am hoping that we can increase the international allocation because it has been giving us double-digit returns, but already, we are reaching the upper threshold of 19%,” she notes.

Despite the pension fund’s positive performance, Nik Amlizan points out that its operational cost is only 0.2% of its AUM. “Other equity fund managers would charge 0.5% of the AUM as the investment management fee. This shows that we run a very tight ship; I’m very particular about how we spend our money. There are definitely no frivolous expenses,” she says.

There are two levels in KWAP’s procurement process — procurements below RM100,000 will have to receive approval from management, while those above RM100,000 will have to go through its board procurement committee.

“Having said that, the usage of KWAP’s money is stated in the Retirement Fund Act 2007 (Act 662) — that it can only be used for paying pensions,” says Nik Amlizan.

Roughly 60% to 70% of KWAP’s fund size is derived from investment income

‘We have no attachment to our investee companies’

KWAP also takes pride in its agility to move in and out of stocks swiftly, thereby capitalising on certain events.

“The fiduciary duty of KWAP is to protect the fund that we manage. That is our main function. We have no attachment to our investee companies. We have no strategic holdings in any of our investee companies. We also have no nominee directors in any of our listed equity investments — zero,” says Nik Amlizan.

“We used to have, but we decided that it may impede us from going in and out of those investments if the need requires. Whatever we buy and sell, it is based on fundamentals.”

Some have questioned KWAP’s exit as a substantial shareholder of Serba Dinamik Holdings Bhd after the latter’s former external auditor KPMG PLT raised concerns about contracts and transactions worth more than RM3.5 billion, noting that the pension fund had failed to exercise its rights in promoting shareholder activism and addressing governance shortcomings of listed companies.

“[Serba] was one of the many companies that we invested in. The treatment is the same across all our investee companies. We have over 100 locally listed equities in our portfolio,” Nik Amlizan points out.

“Whenever there are corporate developments, we will go through the same process. The analysts will do their analysis, both from the financial and environmental, social and governance (ESG) perspectives, and give their recommendations. We will then have an internal discussion. We have separate teams that provide the assessments.

“If the investment is profitable, the fund managers may want to proceed to take some profit accordingly. And if it is to cut loss, we have a specific committee to deliberate on that proposal. We have all this in place already, with appropriate policies and guidelines that include a cut-loss policy and so forth. It is part and parcel of the investment decision-making process. It is not specific to any companies.”

From the governance perspective, she says KWAP engages with all its investee companies through company visits, meetings and analyst briefings. She also points out that she is a council member of the Institutional Investors Council Malaysia (IIC) as well as a board member of the Minority Shareholders Watch Group (MSWG). “It is not in our interest, our DNA, to tell companies how to run their businesses. We’re not in the business of running companies. But if they are not running it well, we speak through entities such as IIC and MSWG.”

The pension fund also has a clearly defined exit strategy, especially across its illiquid asset classes. “Right from the point of entry, in our proposal paper, we would have indicated our exit strategy. For example, for property investment, the holding period is between 5 and 10 years,” says Nik Amlizan.

“Similarly, for PE direct investments [in unlisted firms], it could be between 5 and 10 years. If the timing is good, we will work on exiting the company via an initial public offering (IPO), which takes about 1 to 1½ years.”

One of KWAP’s investee companies — Swift Haulage Bhd — recently filed a draft prospectus for an IPO on the Main Market of Bursa Malaysia. The pension fund has a 13.61% stake in the integrated logistics service provider. “We have been with Swift Haulage for three to four years now. Therefore, the time is ripe for exit consideration from a direct PE perspective,” she says.

“For a PE fund, [the exit strategy] will take longer, typically between 10 and 15 years. The first five to seven years will be the investment stage, where we will not get much returns, but the return trajectory gets steeper after that.” she adds.

No silver bullet to solving growing pension bill

Much has been said about the size of the country’s civil service, which at 1.6 million is deemed bloated by many, and places pressure on the national budget, given the civil service-to-population ratio of 1:20. This compares with a ratio of 1:50 for South Korea, 1:71 for Singapore and 1:110 for Indonesia, according to reports in 2017. It also gives rise to a lot of challenges for pension funds such as KWAP to run the contributory pension scheme.

Its 2018 annual report shows that there were 700,000 pensioners in Malaysia. However, the number of its contributing employers and their contributions dropped to 485 and RM2.9 billion respectively in 2018, from 502 and RM3 billion in the previous year. Contribution from the federal government stayed at RM500 million in those two years.

Roughly 60% to 70% of KWAP’s fund size is derived from investment income, another 30% to 40% from the contributions of employers, such as statutory bodies like universities and local authorities, and the rest are from the federal government.

Nik Amlizan concedes that the growing pension bill is a challenge to Malaysia, but also points out that it is a global issue due to an ageing population. “It is a matter that policymakers across the globe are looking at.

“The setting up of KWAP is actually part of the solution. We now have over RM150 billion to assist the government to pay its pension bill. There’s no silver bullet that will have the capacity to solve this issue. It is not something that can be resolved over the short term.”

Meanwhile, she has her work planned out for the rest of the year, and improving pensioners’ retirement experience is one of her missions. “When we make returns on our investments, what is the end game? The money, the returns cannot be the end. It must be used to enrich the pensioners’ retirement experience, which is the main objective. We must also continue to improve in terms of the services provided to our pensioners.”

The following is an excerpt from the interview with Nik Amlizan.


The Edge: Since taking the helm at KWAP in November 2020, how has it been for you?

Nik Amlizan Mohamed: As you know, I was with KWAP for 11 years prior to being offered to become the chief executive of LTAT in 2018. I joined KWAP back in 2007 as part of the pioneer team. I came from the private sector. I was headhunted to assist and set up its equity department.

At that time, it was a blank canvas and we had to set it up from scratch. We set up the policy and guidelines with reference to listed equities. We also recruited talent to join us. In 2014, I became the CIO of KWAP.

In August 2018, I was offered to head LTAT, and the rest is history. When I joined LTAT on Oct 1, 2018, the first thing I asked for was the 2017 annual report. Unfortunately, I was told the audit had not yet closed. After our appointment with the National Audit Department on Dec 3, 2018, we accepted the audit findings and the rest followed suit. I undertook the transformation there to change LTAT from a business-run entity to a proper fund management organisation with proper policies and guidelines, with appropriate investment risk parameters as well as enhanced governance structures.

Coming back to familiar faces at KWAP has been great, to continue with the journey. As you know, KWAP was set up as a portfolio manager with proper guidelines and processes in place. It has been relatively easy for me to come back and work together with my old friends [again].

The pandemic was the only unfortunate thing as I could not engage (with my team members) physically rather than on virtual platforms, where we have our daily meetings and virtual town halls during the first week of every month. I am happy to be back and to be of service to the nation once again, and to continue to drive the improvements that we can for the pension industry via KWAP. I am heartened by the energy and strength of the KWAP team members, more so during these past 1½ years of the pandemic.


Did you know you were coming back to KWAP?

No, I did not know I was going to come back. I worked until the very last day [at LTAT]. But I am very happy to be back as well. You sometimes need a break after serving in a place for so long in the investment [industry during my earlier stint at KWAP] and having exposure [when working at LTAT] to other parts of running a pension fund [such as] meeting customers. The transition from LTAT to KWAP has given me exposure in terms of reaching out to retiree associations. We will continue to have that kind of engagement.


Can you share your aspirations and plans for KWAP?

To give you some context, KWAP’s main function is to assist the government with regard to pensionable civil servants. Our role is twofold. First, we are here to provide optimum returns within the risk parameters or risk budgets that have been given to us. Second, we are an agent for pension payments on behalf of the government. We are here to process as well as disburse the monthly pension payments. We are an agent, that is to say we are not the owner of the fund; the government has appointed us to ensure the payments are accurate, timely and exactly as per the terms set by the government. The government gives us the monthly funding and via KWAP, we make the monthly payments to the pensioners.

We have a service level agreement with the government. It has set a mandated performance threshold of 90%. I am happy to tell you that over the years, we have been way above that, at 95% to 96%.

One of my other aspirations for KWAP is for us to focus on the pensioners’ retirement experience. We must enrich their retirement experience. We must also continue to improve in terms of the services provided to our pensioners. We want to be a retirement partner of both the government as well as the pensioners. In that sense, we want to be there to enrich the retirement experience for members rather than just managing a pension fund.

While we cannot do any physical engagements currently, we are reaching out to our pensioners through our MyPesara app, which to date has garnered over 160,000 downloads. On this social media, we share virtual engagement sessions on retirement planning and healthcare, among many others. This is one of the ways we have been adding value. MyPesara app is our way to improve interaction with our pensioners. We also have some partners listed on the app that offer products and discounts to our pensioners. We are hoping to be able to have other offerings in the future, including insurance coverage.


Has it become more challenging to grow your investment income because of the pandemic?

I always say this to my team members. This is why we were appointed, why we joined KWAP, to help and be part of the solution. We must continue to grow the fund size within the risk parameters given. If you look at any fund management house, any asset manager, any pension fund in the world, you will hear the same answer, yes, it’s a challenge. But that’s why we were hired, right?

In the last two years, even with the pandemic, our fund size has continued to grow. For us, what’s important is for the fund size growth to be based on assessments that match the MFRS (Malaysian Financial Reporting Standards) requirements, for example. What matters more is the TWRR (time-weighted rate of return), which as I said is based on Global Investment Performance Standards. Gross income only looks at one side of the coin.


Has the government drawn down KWAP funds to pay pensioners? KWAP funds have not been touched for that purpose, is that correct?

If you look at our 2018 annual report, there was a withdrawal. In 2018, the fund size stood at RM136 billion, after a withdrawal of RM4.5 billion that year. Coming back to the objective of KWAP being set up, it is to assist the government to pay the pension bill. What better time than now to assist the government. This is the time we need to assist each other in any way we can.


You mentioned that you contribute to the Employees Provident Fund?

We decided that we would be self-funded. Thus, all of our staff at the point of KWAP’s inception in 2007 ... the stakeholders, the board and management had decided that KWAP staff would be on the EPF scheme. It was because most of us were not from the civil service, except for some who had moved from the Accountant-General’s office to the newly set up KWAP in 2007. They were pensionable, but they opted out. If they qualified for pensionable status at the point of the move, they will get their pension upon retirement. Also, at that point in time, we wanted to attract talent from the private sector. Most of us were already on the EPF scheme, hence we continued with that.


As KWAP is also a shareholder of banks, is it concerned about the blanket automatic loan moratorium, as the banks’ profits could be affected, which in turn may affect the returns of funds such as KWAP?

The moratoriums are necessary given the pandemic. We are all together here, in the same boat. It’s important that banks also join hands in these challenging times. Clearly, businesses and individuals are affected and need a reprieve. It’s about ensuring the sustainability of the sector and the people that rely on it, and it makes sense from an ESG perspective. Clients are going to stay with the banks that supported them when they needed it.

When we look at the targeted loan moratorium in 2021, we are not concerned that it will have the same effect as the 2020 blanket moratorium. The operating income for banks is improving with the absence of overnight policy rate cut, better economic recovery and full repricing of fixed deposits.

On the back of an economic recovery and the progress of the national vaccination campaign, we believe banks will be able to ride on the credit up cycle recovery. The resumption of dividend payments should follow suit in 2021. The improving sentiment for the banking sector and the resumption of dividend payments should generate positive returns for the funds.


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