This article first appeared in The Edge Malaysia Weekly on December 4, 2023 - December 10, 2023

THERE is good news for the country’s 16 million Employees Provident Fund (EPF) members set to receive dividends for 2023 within the next three months. Based on the EPF’s investment performance in the first nine months of this year, most members can look forward to 2023 dividends coming in at 5% at the least this year.

There is a very good chance of dividends at least matching or coming in above last year’s 5.35% for conventional savings, back-of-the-envelope calculations by The Edge show. This forecast is based on the provident fund’s investment performance in the first nine months of 2023, the fact that the overall fund size is growing again without large special pandemic-time withdrawals, as well as its past track record.

The EPF’s total dividend payout for 2023 even stands a chance of edging past its current record-high payout of RM56.72 billion in 2021 if the EPF maintains its momentum in the fourth quarter (see Chart 1).

As it is, total dividend payout for 2023 is almost certain to beat 2022’s RM51.14 billion. Last year, RM45.44 billion, or a dividend of 5.35%, was paid to EPF members with conventional savings while the remaining RM5.7 billion, or a dividend of 4.75%, was paid to EPF members with shariah savings.

Dividends for shariah savings may remain muted, however, given that the EPF says only RM5.15 billion income had been generated for the shariah portfolio as at the first nine months of 2023 (9M2023) — short of what is needed to match last year’s dividend rate when annualised, all else remaining equal.

Though decent, the 2023 dividend rate is unlikely to top 6% or the 2021 EPF dividend rate of 6.1% (conventional savings) and 5.65% (shariah savings) — unless realised investment returns for the fourth quarter of this year are exceptionally higher than the past three quarters, our estimates show.

According to its recent quarterly financial release in mid-November, the EPF’s net investment income for 9M2023 of RM47.86 billion includes RM4.62 billion unrealised mark-to-market forex gains.

These mark-to-market forex gains were first mentioned in its 2Q financial release in mid-August, when it said RM4.79 billion of the RM33.19 billion total investment income for the first half of 2023 “were generated from mark-to-market gains of securities that have not been realised”, noting that those gains “were mainly due to fluctuation of foreign exchange rates”. There was no mention of mark-to-market forex gains in the first quarter.

Assuming the RM4.79 billion unrealised mark-to-market gains in the first half of the year were all in 2Q2023, the EPF’s realised net investment income in the quarter may have been closer to RM13.24 billion and not RM18.03 billion. If so, its RM14.67 billion net investment income for 3Q2023 would be a quarter-on-quarter improvement rather than the lowest showing in four quarters (see Chart 2).

With the size of unrealised mark-to-market gains down about RM170 million, from RM4.79 billion in 1H2023 to RM4.62 billion in 9M2023, the EPF’s investment income (excluding the unrealised gains) for 9M2023 should still be just above 9M2022 but below the corresponding period in 2020 and 2021 (see Chart 3).

The EPF, which can only pay dividends from realised income and not paper profits, did not say in its quarterly earnings release whether those unrealised forex gains — which boosts headline numbers — are slated to be realised to contribute to the distributable income pool for 2023.

As witnessed in 2021, an exceptionally strong 4Q is not impossible for a trillion-ringgit-size fund such as the EPF.

The surprisingly high 6.1% dividend rate for 2021 notwithstanding, recall that the mood was not at all celebratory at the EPF when the announcement was made in March 2022, as it had to make tough decisions — including holding back domestic investments and prematurely taking profits on overseas investments — to cater for large Covid-19-related withdrawal schemes.

The EPF, which went through two tough years in 2021 and 2022, in which total withdrawals exceeded total contributions, should be seeing net inflows into its fund again this year. Gross contributions from members were RM73.58 billion as at September 2023, compared to RM63.61 billion recorded in 2022, helping shore up the EPF’s investment assets to RM1.092 trillion. Some 37.7% of its assets were invested abroad, contributing RM24.66 billion, or 51.5% of its headline investment income, in 9M2023 (including unrealised gains).

A bigger fund size means the EPF would need even more money to pay every 1% of dividend to its members.

While the RM56.72 billion payout was enough for a dividend rate of 6.1% (conventional) and 5.65% (shariah) in 2021, for example, that same dividend payout would have been enough to pay only 5.9% (conventional) and 5.2% (shariah) to EPF members in 2022, our calculations show.

In a previous interview with The Edge, EPF CEO Datuk Seri Amir Hamzah Azizan admitted a lot more work is necessary to generate consistent returns but added that with a good long-term Strategic Asset Allocation model, it is not impossible to continue generating good returns as the fund grows.

It is worth noting that even if the entire RM4.62 billion unrealised gains for 9M2023 were excluded, the EPF may have realised RM2 billion to RM3 billion more from equities in 9M2023 versus the previous corresponding period (see Chart 4). That should be positive for dividends, given that equities, especially investments abroad, usually provide higher returns on investment (ROIs) to boost the EPF’s overall portfolio. In 2022, for instance, ROI for foreign equities was 9.27% and continued to be “the driver of returns” for the EPF’s equities portfolio, which made up 42% of its total assets and contributed 55% of its total investment income last year. In 2022, ROI for foreign investments was 8.72% compared with 4.83% from domestic investments.

Even if the EPF were to declare a dividend of only 5% for 2023, it is still better than the 12-month fixed deposit rates of between 2.5% and 3.5% — a factor that should prove useful even as the provident fund steps up efforts to get members to save more than the statutory requirement for themselves and their loved ones, as well as encourage more self-employed individuals and those in the informal sector to make voluntary contributions. The limit for voluntary annual contributions was recently raised to RM100,000, from RM60,000.

EPF members should know that under the EPF Act 1991, conventional savings with the EPF are guaranteed a minimum annual dividend rate of 2.5%. It is understood that the same guarantee does not apply to shariah savings with the EPF, owing to profit- and risk-sharing principles. To safeguard retirement savings, the EPF also strives to beat inflation by 2% on a rolling three-year basis.

Amir Hamzah appeared to be tempering expectations when commenting on the EPF’s 3Q showing: “While we had a good third quarter, it is not indicative of the performance in the fourth quarter, which remains a concern, given the escalating geopolitical risks that threaten the global financial system amid heightened risks of higher inflation and slower growth.”

He added that it was “crucial” for the EPF to closely monitor global developments to gauge the potential impact on its portfolio.

Among other things, he noted how global equities and fixed income markets saw negative total returns in 3Q2023 and that “higher for longer” policy rates and sticky inflation require the EPF to be both vigilant and adaptive when navigating global financial markets.

“As we navigate this economic landscape, our focus remains on prudent risk management and strict adherence to our long-term Strategic Asset Allocation model, which has consistently proven its efficacy and has been instrumental in fortifying our resilience amid market uncertainties,” he said in the statement. 

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