This article first appeared in The Edge Malaysia Weekly on March 7, 2022 - March 13, 2022

EPF members are probably elated over the 6.1% dividend they will get for 2021. Those who have more saved with the retirement fund would be even happier. Someone who has, for example, RM1 million, will receive RM61,000 in dividend. A yield of 6.1% is a very good return from low-risk savings, or any investment product for that matter.

When it comes to what the EPF pays its members, there should be nothing to complain about as historically, its dividends have always been higher than what savings in a bank would offer.

The problem is the fact that, over the years, EPF members have been allowed to withdraw funds meant for their retirement to help pay for current needs — most recently, to help tide them over during the past two years of the pandemic. A whopping RM120 billion was withdrawn.

Members with high savings — meaning they have highly paid jobs — have made minimal withdrawals and they will therefore have enough when they retire.

For the lower-income members, however, most will not have enough savings upon retirement, which is set at a minimum of RM240,000.

Debate has started, including internally within EPF, on how to address this serious problem. Ideas that have been put forward include tiered dividends and tiered contributions.

Both essentially discriminate the haves in favour of the have-nots and would obviously face fierce objection from those who will be negatively affected. Critics say any discrimination will be a breach of contract between EPF and members who will get lower dividends than others.

It is a thorny issue, but The Edge believes there should be rational and unemotional public discourse on how to fix the problem of inadequate retirement savings as this will be a serious social problem if not addressed.

Here, we have put together three different views and would be happy to hear from you. You can email us at [email protected].

By Asia Analytica

Much has been said about whether the Employees Provident Fund (EPF) should implement tiered dividends. We acknowledge the facts, merits and concerns.

The fact is, the majority of Malaysians are ill-equipped for retirement, even though they also have savings and assets outside of the EPF system. The provident fund estimates that 73% of its members will not be able to meet the already-low Basic Savings threshold of RM240,000 at age 55. Some 46% of contributors below 55 have less than RM10,000 in their EPF accounts.

This is the result of low wages in Malaysia, sadly, and is not something we can quickly address. Moreover, EPF was forced to be generous in allowing various kinds of withdrawals. A case in point is the RM101 billion in Covid-19-related withdrawals in 2020/21.

But rather than asking people to work harder or find better jobs, there is a stark reality that has to be confronted and acknowledged by all Malaysians: there is a huge wealth divide and there are no safety nets for the poor, which can ultimately affect the social fabric, peace, safety and security of the country and its citizens.

What do we do? Most people do not want to make difficult decisions. They will say use the public coffers, reduce government wastage and let employers pay higher EPF contributions. These do not answer the question in hand.

Yes, it is unfair and inequitable to those with high EPF savings to redistribute part of their dividends to the poor. For the rich, they will say it is another form of taxation — and they already pay higher taxes.

EPF has an excellent track record of yielding exceptionally high returns. Contributors have been enjoying annual returns of 5.2% to 6.15% over the past three years, well above the fixed deposit rates of about 1.75% to 3.25% during that period.

Despite EPF consistently yielding higher returns than most asset classes, it carries the lowest risk, has a guaranteed minimum annual yield of 2.5% and the entire savings are guaranteed by the government. Under section 28 of the EPF Act 1991, the government can advance the provident fund any sum needed for its payments.

By comparison, bank deposits are guaranteed only up to RM250,000 per depositor by Perbadanan Insurans Deposit Malaysia (PIDM). Investments in unit trusts are not protected and carry high transaction costs such as management fees, performance fees, sales charges and redemption fees — none of which are charged by EPF.

In an efficient capital market, assets with the lowest risk yield the lowest returns and vice versa. But in the case of EPF, it is the reverse. It is consistently the higher-yielding asset with the lowest possible risk.

It is this discrepancy that we believe can justify a tiered dividend rate, where the rich can afford to help the poor with just some of these “exceptional” risk-free returns they enjoy.

One could argue that any move to tiered dividends could lead to massive EPF withdrawals and potentially destabilise the equity market. According to the provident fund, more than RM270 billion can be withdrawn at any time by members who have reached the age of 55 or 60, or those who have more than RM1 million in their account.

We believe these concerns may be overblown. As long as depositors continue to earn above fixed deposit rates, EPF will continue to be a favourite investment option, due to the attractive risk-reward profile discussed above. Even if the provident fund’s assets shrink in size, that may not be too bad an outcome. It is usually easier to generate higher returns on a smaller pool of assets.

Across-the-board tiered dividends may be difficult to achieve and may have a very marginal effect on savers, due to the very large base of contributors with low savings. Moreover, the young, those in their twenties and thirties, will naturally have low savings. But they still have a long time to grow their retirement funds and options, compared with those who are nearing retirement.

We propose as an alternative, a simple tiered system following the example of Singapore’s Central Provident Fund (CPF) that aims to benefit two main classes of people: an across-the-board higher interest rate for a minimum amount of savings for everyone and additional interest for older members with low savings.

On Feb 11, CPF announced its interest rates for members for the second quarter of 2022, whereby those below 55 years old would earn an interest rate of up to 3.5% per year on their Ordinary Account and up to 5% per year on their Special and MediSave Account.

These interest rates include an extra 1% paid on the first S$60,000 of a person’s combined balance. For those aged 55 and above, an extra 2% will be paid on the first S$30,000 of their combined balance, capped at S$20,000 for Ordinary Accounts, and an additional 1% on the next S$30,000.

To have better optics and make it more acceptable to all EPF account holders, we believe this alternative method practised by Singapore’s CPF could be better supported.

But make no mistake. It is still a progressive policy that pays a higher tiered dividend to those who have low savings.

Asia Analytica is a licensed investment advisory firm

By Malek Ali

The Edge has run several articles analysing whether tiered Employees Provident Fund (EPF) dividends is a possible way to address the current retirement savings crisis. But this assumes that EPF members have meaningful EPF balances to which tiered dividend rates can be applied and derive compounded benefits.

Given that the median savings of all EPF members below the age of 55 currently stands at RM13,000, no dividend rate, even if tiered, can increase this median savings amount to reach the basic retirement target of RM240,000 by age 55.

I would instead suggest we go back to the basics, which is how we can increase the absolute balances of EPF members, by exploring two steps that can be taken.

1. Raise, but cap, employer contributions

Suppose we raise the current employer contributions — currently 13% for salaries of RM5,000 and below and 12% for above RM5,000 — to a flat 20% for the first RM10,000.

But to mitigate the effect of this substantial increase, suppose we then also relieve employers from the obligation to make any more employer contributions for that part of monthly salaries that are more than RM10,000.

This effectively means a cap of RM2,000 for all employer contributions no matter what the salary of the employee.

You could, therefore, have an annual salary plus bonus of RM75 million but the company would only be obliged to pay employer EPF contribution of RM24,000 a year instead of presumably RM9 million.

This effective 54%-67% increase in employer EPF contributions for those earning RM10,000 and below would make a substantial contribution to the EPF balances of employees in that salary category, giving them a fighting chance of meeting the minimum EPF recommended retirement amount of RM240,000 at age 55.

There would, however, be two valid objections to this, which needs to be addressed.

Objection #1: Certain employers might not be able afford the increase in EPF contributions

Admittedly, the increase is substantial. What needs to happen next is for EPF to crunch its employee-salary-distribution-by-employer data and see the net effect on various categories of employers.

Small and medium enterprises (SMEs) and manufacturers with a low-skilled workforce are likely to bear the brunt, so the 20% employer contribution number might need to be adjusted downwards across the board to achieve a tolerable net effect.

The other way is to tier the employer contribution further — for example, 20% for the first RM5,000 in monthly salary, 15% for the next RM5,000, and zero thereafter, to achieve a palatable net increase.

The data can be crunched to fine-tune the percentage contribution, thresholds and tiers to make it work for employers.

Objection #2: It is an unfair treatment of high-earning employees as they would receive less employer contributions than before

First, I would push back this objection on a point of principle. Mandatory statutory contributions like EPF are there to ensure we have adequate retirement savings, not excess retirement savings. If you were earning more than RM10,000 per month, you should be on your way to achieving an adequate EPF retirement amount much earlier than most.

Secondly, even those earning greater than RM10,000 per month will benefit from the proposed 20% employer contribution rate for the first RM10,000 that they earn. In effect, employees will only lose out if they earn more than RM16,667 per month as the current EPF employer rate of 12% on that salary matches the proposed RM2,000 per month employer cap.

Thirdly, we can provision for extra disposable income for high-earning employees by exempting them from paying their employee EPF contribution on the portion of their monthly salary above RM10,000. This means that this group of high-income employees can take charge of their own retirement plan and invest accordingly.

Fourthly, it will be open for employees to negotiate voluntary employer contributions above the RM10,000 threshold, in accordance with the employee benefits and retention strategies of their employers.

2. Increase employee contributions to 12%

So far, all the discussion has been on the employer side. But employees need to do their bit too. An increase of 1% in employee contributions to 12% would signal some delayed gratification and sacrifice too on the part of employees.

The net effect of these two actions I have suggested is to increase the total EPF contribution rates from 23%-24% currently to potentially 32% for the majority of active EPF members.

I must confess, this proposed solution is not original. Singapore’s Central Provident Fund has an employer and employee contribution threshold of S$6,000 (RM18,500) in monthly salary, above which no more contributions are applicable.

Most businesses are still trying to recover from the ravages of the Covid-19 lockdowns and disruptions, so the timing for implementing something like this needs to wait until the general economy recovers.

Let’s use the time to crunch the data on how to make this work in terms of the percentage quantum of employer contributions, thresholds and tiers to achieve the right balance between the cost impact to employers and the retirement security of their employees.

Malek Ali is the founder of Fi Life and BFM 89.9 and a CFP professional

By Tan Sri Soo Thian Lai

The Federation of Malaysian Manufacturers (FMM) is of the view that the current Employees Provident Fund (EPF) schedule of contribution — which includes a tiered contribution where the employer’s contribution is at 13% for those earning RM5,000 and below and 12% for those earning above RM5,000 — is a fair and equitable system. In addition, both employer and employee contributions do not remain stagnant and increase on a yearly basis given that wages are adjusted annually in tandem with the changes to the Consumer Price Index.

Dividends also increase, adding to the accumulated savings in the members’ EPF accounts. In this regard, FMM does not see the need to upset the existing contribution schedule to accommodate the proposed higher tiered contribution as well as increasing the tier threshold to RM10,000. In addition, we are of the view that the current conditions of deductions and contributions towards the retirement savings of EPF members are already meeting future needs.

We also urge EPF to continue with its prudent and good investment practices that have yielded good dividend payouts over the years and it is hoped that it will continue to further strengthen and enrich the retirement savings of its members in the future. In addition, the government should be more cautious about allowing contributors to make “unprovisioned” withdrawals to avoid a situation where members’ savings become depleted, leading to the call for “creative” and somewhat unpopular solutions.

In the current circumstances of the pandemic, where business conditions remain fragile for many manufacturers, it must be recognised that any increase in business cost will have a multiplier impact on the economy.

Industries continue to face risks posed by the pandemic and the current Omicron variant, which continue to impact global supply chains, logistic connectivity, commodity prices, energy prices, labour supply and so on, which could gravely derail business recovery efforts.

As such, any proposal to increase the minimum wage to RM1,500 from the current RM1,200 would have an undesirable impact on the economy, especially in the present circumstances, as the wage adjustments would precipitate increases at the higher wage levels as well.

Manufacturers are generally concerned about an immediate increase to RM1,500 but are receptive to a gradual increase under the current minimum wage review to a quantum that would be decided by the National Wages Consultative Council (NWCC) to address the increase in the cost of living.

With the necessary controls on cost increases in place by the government as well as concerted efforts by the industry to defray cost increases internally, employers can continue to ensure that employment will not be affected, including being able to provide the yearly and/or contractual adjustments to wages, although it may be minimal for most, depending on business performance.

On the subject of foreign workers, first, it is important to correct the notion that foreign workers are “cheap”. Employing foreign workers comes at a very high cost and regulatory compliance. The priority is to hire locals first. Employment of foreign workers is done out of necessity and not based on convenience. It is a fact and an issue faced by industries that locals are not keen on certain jobs, especially in the 3D (dangerous, dirty, difficult) sectors.

Given that more of our school leavers aspire to earn a paper qualification in pursuit of better and more fulfilling jobs as well as elevating one’s social status, filling the position of unskilled jobs with locals becomes a great challenge.

It must be recognised that even when the country progresses to more high technology and high-value-added activities, there would remain certain processes that continue to require low-skilled labour.

As has been announced, the government will be introducing the multi-tier levy mechanism, which will be a market-driven mechanism to allow the forces of demand and supply to determine outcomes and effectively influence market behaviour without distortions; provide clarity and certainty to approvals; reduce bureaucracy; and remove opportunities for abuse and corruption. The use of foreign workers is to address the demand and supply for the current labour requirements, mostly for labour-intensive operations. It is a matter of time before the journey of automation and technology will gradually reduce the dependence on foreign workers.

Tan Sri Soo Thian Lai is president of the Federation of Malaysian Manufacturers

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