This article first appeared in The Edge Malaysia Weekly on July 17, 2023 - July 23, 2023

TWO key messages came across last week as the Employees Provident Fund (EPF) clarified confusion over plans to halt lump-sum withdrawals. First, existing EPF members are in no danger of being stopped from withdrawing their retirement savings with the EPF once they reach age 55 (up to 30% when they reach 50).

EPF chief strategy officer Nurhisham Hussein confirmed at a virtual briefing that an amendment to the EPF Act 1991 would have to be tabled in parliament before it can go ahead with its proposal to no longer allow lump-sum withdrawals for future members born in 2010 and later — basically those younger than age 13 this year who are not counted as part of the working population. It is hoped that plans to eventually move future EPF members to mandatory (versus optional) monthly payments instead of taking out their money all at once upon reaching 55 will help retirement savings last longer, given that the data shows most members drain their savings within five years.

Details are still sketchy, as the proposal is still at working level, even though the government has agreed in principle on the rationale. EPF head of strategy management Balqais Yusoff lets on, however, that a possible scenario is one in which members who attain retirement age would be allowed to withdraw up to half their savings while keeping the rest as monthly payments. The exact mix and thresholds have not been confirmed at this juncture, but would be disclosed once plans are finalised.

EPF members who are in favour of more premature withdrawals from the fund would be more interested in the EPF’s plans to revive a proposal for the setting-up of an Account 3, from which members can withdraw savings at any time. Nurhisham likened Account 3 to a savings account that can be tapped to meet potential emergency cash needs, a policy decision that he admits has trade-offs but is deemed necessary as the EPF seeks to encourage more Malaysians who are not covered by the public pension system, especially those in the informal sector, to save with the EPF for their retirement.

According to Nurhisham, dividends for savings in Account 3 are likely to be lower than those for Accounts 1 and 2, but the percentage for Account 1 — which is the amount that cannot be touched until age 55 — could be raised from the current 70%. As it is, Account 2 makes up 30% of members’ contributions. It is likely that Account 3 be accorded a low percentage such as 5% or 10% of members’ contributions, Nurhisham says, noting that this is still in discussion and may be implemented only within two years even though the EPF can implement it more quickly.

Hawati Abdul Hamid, deputy director of research at Khazanah Research Institute, agrees that the setting-up of Account 3 would help attract workers in the informal sector who are outside the current social protection coverage to join the EPF scheme but also highlights the potential moral hazard, should existing members empty out that account, which is meant for retirement savings for other non-essential purposes.

“One way to minimise this issue would be setting a very small percentage for the contingency or unconditional [Account 3], offering a lower dividend and making it an opt-in instead of opt-out option. Otherwise, maintaining the existing two-accounts arrangement could still be reasonable,” Hawati tells The Edge.

Pointing out the fact that old-age poverty is expected to rise in the future, she is in favour of the EPF’s proposal to move from lump-sum withdrawals to a monthly drawdown “to ensure basic income security and help smoothen consumption during old age”.

“Evidence suggests that Malaysian retirees would most likely finish their savings in five years. In a broader context, more effort is needed to help Malaysian workers earn better wages and get them to [make] mandatory retirement savings so that they would be accumulating enough savings to enjoy a decent life after retirement,” Hawati says.

See also “Save now to ensure an adequate nest egg in old age” on Page 57 (Infographic)

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