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

DESPITE beating expectations with a headline-grabbing 6.1% dividend for 2021 and the dividend payout hitting a new all-time high of RM56.7 billion, the mood was not all celebratory at the Employees Provident Fund (EPF) when it released preliminary numbers for last year.

Not only did the RM110 billion Covid-19-related special withdrawals — which mostly took place last year — result in EPF booking its first net withdrawal in 20 years, there continues to be pressure from politicians lobbying for a fourth round of EPF withdrawals, despite the threat of a looming retirement crisis.

That withdrawals exceeded contributions (net withdrawals) by RM58.2 billion implies gross withdrawals of RM130 billion last year — 2.2 times gross withdrawals in 2020 and nearly three times (normal) gross withdrawals in 2019. Gross contributions to EPF were RM71.8 billion in 2021, Bernama reported on March 3, citing the Ministry of Finance. (EPF did not provide a breakdown of gross contributions and withdrawals, and the monthly data has not been released on Bank Negara Malaysia’s website since mid-2020.)

To cater for the spike in withdrawals last year that changed its liquidity requirements, EPF had to make tough decisions, including holding back investments domestically and prematurely taking profits on overseas investments that it would have otherwise kept to enjoy further upside.

“If there was no withdrawal scheme, the likelihood is that we would have stayed a little longer in the international markets and probably had the potential to look at riding the market as it increased. But given that we’ve got the commitment, we’ve got to honour the commitment and, therefore, we repatriated at the time [when] we needed the cash,” EPF CEO Datuk Seri Amir Hamzah Azizan told reporters last Wednesday (March 3) when announcing the 2021 dividend of 6.1% for conventional savings and 5.65% for Shariah savings.

“We did not want to rattle the local market [therefore, we] brought back RM22 billion from our foreign investments. The investments were built up over quite a number of years and some of it, I must admit, was not at a stage of maturity but we needed the liquidity. So, the trade-off was there. It was probably not at the most optimal time. It [returns were] positive as seen in the results [but] we could have made a little bit more if we had let the investment mature and not [sold] because of [liquidity needs],” he elaborated.

Not only was RM22 billion brought back from overseas, EPF — whose equity holdings account for 15% of FBM KLCI’s market value, 25% of Malaysian government debt papers and 21% of domestic fixed income issuances — also had to give some local investment opportunities a miss.

“From an asset point of view, EPF wasn’t under a tremendous amount of strain. It was a matter of managing liquidity but [that] has consequences … Domestically, also, we had to make choices. Because we had to fund the RM110 billion, we reduced our exposure to the domestic market. All in, compared with where our position was last year, we are down by about RM16 billion [and] we could not really invest in the market because we did not have capital to put back in the market,” Amir explained, noting the local stock market’s relative underperformance, adding that EPF also did not provide fresh funds to its external fund managers last year. “Remember, we are a big player in the local market and when we stop, the local players also have to hold back because there was no liquidity to the play.”

With foreign investments being among key engines powering returns, whether these disposals (and missed opportunities) would materially impact EPF’s future earnings performance would be closely tracked.

Foreign investments accounted for 37% of EPF’s total investment assets and 56% of gross investment income in 2021, up from 31.14% of total assets and 49.8% of gross investment income in 2020.

Some 75% of its foreign assets consisted of equities in 2021, according to presentation slides shown.

Equities, which made up 44% of EPF’s RM1.008 trillion total investment assets, contributed 58% of the RM67.05 billion gross investment income in 2021 — a reflection of the high return on equity (ROI) of 8.96% for the asset class, with ROI for foreign-listed equities at 10.44%.

To allay concerns over the impact of these decisions on its portfolio, Amir said EPF is already positioning itself to make up for the lost opportunities so that its members’ returns would not be hit in the longer term.

What is important is that EPF be allowed to execute its strategy, Amir said, noting that Malaysia is not the only country to allow its people to tap their retirement savings to ease cash flow issues.

“Malaysia was not unique, other countries also tapped pre-retirement fund withdrawals but all those countries have also stopped withdrawals. Australia stopped in December 2020, Peru in June 2020, Chile in April 2021. In fact, in Chile, a fourth withdrawal was attempted but it was rejected by the senate [so] they went back to their core because [the] urgency was already gone. For Malaysia, our last scheme [i-Citra] ended last month.”

He called for public support towards rebuilding retirement savings adequacy, which had been severely eroded for those in the lower-income groups, thanks to the pandemic. He asked employers as well as private sector workers in the informal sector to save with EPF to take advantage of the long-term compounding effect as well as returns from the fund’s investments.

Already, the three rounds of special withdrawal schemes to tide members over during the pandemic have “set back 10 years” of progress made on raising retirement savings adequacy.

Only 27% of EPF’s 7.7 million active members achieved its recommended threshold for basic savings as at January, down from 30% in December 2021 and 36% in December 2020.

“The last time members’ basic savings was 27% was [a decade ago] in 2012,” Amir said. “The EPF really has to focus on rebuilding back [savings]. We don’t begrudge [members] the [three withdrawal schemes]. We had to step in because members were also suffering [at the time]. But now, the EPF has to go back to our mandate, help members rebuild their retirement savings and get to a stage where they will have a better future when the time comes for them to leave the workforce.”

“[We now have] 6.1 million members with less than RM10,000 in savings [up 28% from 4.7 million members in April 2020]. I don’t know how to live on RM41 a month. It is not viable,” he adds, referring to how savings of RM10,000 works out to only RM41 a month over 20 years — significantly short of EPF’s recommended basic savings of RM240,000 that is derived from having a minimum public pension of RM1,000 to spend every month over 20 years.

Some 2.6 million members have less than RM1,000 saved with EPF, up 86% from 1.4 million as at April 2020.

Among EPF’s 15 million total (active and inactive) members, only 2% have adequate savings (at least RM2,700 living wage a month for 20 years) while 16% have the bare minimum of RM1,000 to spend a month for 20 years — down from 21% in 2020, slides presented by the EPF show.

Even before the outsized withdrawals last year, many Malaysians aged 40 and above who were nearing retirement age were likely to fall into poverty in their old age due to inadequate savings, a closer look at EPF data from 2020 shows.

In 2020, only 1.7% of the 14.9 million EPF members had more than RM500,000 saved. Half of the members aged 40 to 54 had less than RM50,000 saved each.

Those aged 40 to 54 accounted for 26% of 7.6 million active EPF members in 2020, while those above the age of 55 but were still actively contributing made up 8.9%.

The time for policy action to avert a retirement crisis is fast running out, with Malaysia already being deemed an ageing society with 7% of the population aged 65 and above in 2020, according to World Bank estimates, and set to become an aged society by 2044 (14% of the population aged 65 and above) and a super-aged society by 2056 (20% of the population aged 65 and above).

For its part, Amir said EPF remains steadfast in delivering on its mandate to provide retirement security for its members and mitigate old-age poverty by offering best-possible inflation-adjusted returns. Efforts will be stepped up to raise financial awareness as well as EPF coverage of the labour force from 47% in 2021 to 55% by 2025, which translates to having 1.5 million to two million more members. EPF also targets to help at least 36% of its members (400,000 to 500,000 more) achieve basic savings, he says.

Asked whether tiered dividends is something EPF would consider to help raise savings adequacy among members with lower savings, Amir replied: “I think it’s a question that the EPF has thought about. The EPF needs to do a lot more thinking to make sure that we don’t rush into doing certain things. If you look at how EPF has behaved over the years, it is a very measured type of approach. We are going to go through much more detailed studies to see whether we do it — not just [studies on] allocation but we should also tie it to how a scheme design is done. If the scheme is designed properly to form a conduit, when we want to induce people to move to a certain behaviour, then we can put a tiering to help that. At this juncture, we are not ready. We have not thought through enough to actually do it [dividend tiering] and we don’t want undue consequences because we are not ready. But we are open to work towards something that finds a balance.” (Read also our Special Report on Pages 60 and 61.)

Amir asked that current and potential members take advantage of free investment advice from EPF to better plan for their old age and consider making additional voluntary contributions for themselves as well as their loved ones, be it spouse or children. “Deferring withdrawal by five years [from 55 to 60] will increase retirement savings by 50% [due to the compounding effect and dividends],” he pointed out. “Deferring withdrawals by 10 years [from 55 to 65] will double [one’s] retirement savings pool.”

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