This article first appeared in The Edge Malaysia Weekly on March 11, 2024 - March 17, 2024

IT was no small feat for the Employees Provident Fund (EPF) as it declared its highest-ever total dividend payout of RM57.81 billion for 2023 with higher year-on-year dividends for both conventional savings and shariah savings for its 16.1 million members. Yet, the spotlight seems to have fallen on the performance of its shariah portfolio.

The EPF declared a dividend of 5.5%, or a RM50.33 billion payout for conventional savings (+15 basis points versus 5.35% in 2022), and 5.4%, or a RM7.48 billion payout, for shariah savings (+65bps versus 4.75% in 2022) respectively for 2023.

The dividend for conventional savings was within The Edge’s expectations of above last year’s 5.35% but below 6%. The Edge was also right about the possibility of a new record high total payout. But shariah savings beat our expectations, with the fourth quarter coming in at 35%, or about RM600 million, stronger than the simple average in the first three quarters of the year, back-of-the-envelope calculations show.

There was no missing the marked improvement in dividend for shariah savings for 2023.

The EPF’s 1.8 million, or 11.18% of total members, with shariah savings — which has always seen lower dividends than conventional savings — saw the gap between the two types of savings narrow to only 10bps in 2023. This was the smallest gap in the seven years since inception in 2017, with previous gaps ranging from 25bps in 2018 to as wide as 60bps in 2022 (see Chart 1).

There was perhaps also some element of the EPF being a “victim” of its own success: size and stellar performance that built up expectations of EPF dividends being much higher than those declared by Amanah Saham Bumiputera (ASB), the flagship fund of Permodalan Nasional Bhd’s (PNB) unit trust management company Amanah Saham Nasional Bhd (ASNB).

ASB declared a total income distribution of 5.25 sen per unit for FY2023 (4.25 sen per unit cum one sen per unit bonus) or a RM9.3 billion payout in total to 10.8 million ASB unitholders. The 2023 performance was up to 0.65 sen better than ASB’s FY2022 distribution of 4.6 sen (3.35 sen per unit cum 1.25 sen per unit) plus an additional bonus of 0.5 sen per unit for balances up to 30,000 units for a total payout of RM8.9 billion for 10.6 million ASB unitholders with 186.4 billion units.

That puts the EPF’s conventional dividend of 5.5% at only 25bps above ASB in 2023 versus 75bps in 2022. EPF members who only saw headline record-high quarterly performance but did not notice that the provident fund had from the second quarter of 2023 included unrealised (paper) profits had naturally expected much stronger EPF dividends.

So, rather than congratulatory-type words for a job well done within tight constraints in a tough investment environment, the extra strong performance was met with some degree of scepticism. It was probably no real fault of the EPF but rather a combination of dashed hopes of an even higher EPF dividend stemming from record-high headline performance plus mistrust as politicians had spoken about better returns from the EPF’s shariah savings before and after the announcement was made.

“The SS = shariah surprise? I doubt there was cross-subsidy, definitely not the kind that some people think took place. Perhaps it is the general tendency for people to fill in the blanks with conspiracy theory,” says an observer who noted “heated” discussions over social media.

Last November, former deputy finance minister Datuk Seri Ahmad Maslan, for instance, told reporters that the EPF’s shariah savings asset will be completely separated from conventional savings assets effective Jan 1, 2024 — a move that he said will “give the shariah scheme the freedom [to invest], so there is a possibility that the [dividend rate], if not exceeding that of the conventional scheme, will be at least equivalent to it”. At least one politician commented on the EPF shariah dividend in the ongoing parliament session.

“The EPF does not do cross-subsidy. The tech sector helped shariah a lot, especially since they were a small fund,” a source familiar with the EPF tells The Edge.

Of the EPF’s RM57.81 billion record-high dividend payout in 2023, only 13% went to the shariah portfolio with 87% for the conventional portfolio made up of close to 90% of members.

The EPF only had to make about RM700 million more to boost its shariah portfolio dividend payout by 50bps in 2023, back-of-the-envelope calculations show. That sum would have only made an 8bps difference to the conventional portfolio.

For the EPF to pay a 6% dividend for the much larger conventional savings pool, however, the provident fund would have needed to make RM4.6 billion more than it already was to boost  dividend from the 5.5% declared for 2023.

For the record, the RM50.45 billion absolute dividend payout for conventional savings in 2021 is still slightly higher than the 2023 payout of RM50.33 billion. The 2023 shariah savings payout of RM7.48 billion, however, is above the 2021 payout of RM6.27 billion.

When asked to comment on talk of cross-subsidy, the EPF tells The Edge that its shariah portfolio “recorded significant equity write-down in 2022 at RM2.54 billion, which has led to much lower dividend of 4.75%. The higher write-down has subsequently resulted in improved portfolio health for shariah, which then allowed more opportunity to realise gains as markets recover. Higher capital gains from better portfolio position and rally in shariah-compliant technology equities in the US, coupled with lower write-down in 2023, has contributed to higher improvement in shariah dividend compared with [conventional savings]”.

That RM2.54 billion write-down, had it not happened, would have been enough to shore up the EPF’s 2022 shariah dividend by as much as 210bps from 4.75% to a record high of 6.8%, our back-of-the-envelope calculations show.

Asked about the difference in treatment for shariah assets in 2017 versus 2024, the EPF explains: “In 2017, the application for shariah policy by the EPF entailed the segregation of assets into shariah and conventional portfolios. The shariah portfolio, which was managed according to shariah principles, was co-owned by Simpanan Shariah (SS) and Simpanan Konvensional (SK) to benefit from the economies of scale in managing the shariah portfolio together. In January 2024, we split the shariah portfolio further into SS and SK portfolios so that they could be managed according to their independent strategies and allow each portfolio’s returns to be optimised in the long run. The move is also a proactive move to ensure that assets under both SS and SK are well diversified across asset classes, markets, countries and currencies to ensure sustainable returns.”

When announcing the EPF’s 2023 dividend last Sunday (March 3), EPF CEO Ahmad Zulqarnain Onn told reporters that its shariah portfolio benefited from the rally of US technology equities, including the likes of the “magnificent seven” — Microsoft, Apple, Nvidia, Tesla, Google’s parent Alphabet, Meta and Amazon.

Taking over the helm of EPF on Feb 19 this year, Ahmad Zulqarnain was formerly president and group CEO of PNB (between July 2020 and Feb 16, 2024), one of the largest fund management companies in Malaysia with over RM300 billion in assets under management (AUM). He succeeded Datuk Seri Amir Hamzah Azizan who was appointed as the minister of finance II after leading the provident fund for nearly three years between March 1, 2021, and Dec 12, 2023.

With contributions to the EPF normalising post-pandemic, and in the absence of large special withdrawals, the EPF’s fund size grew again to reach RM1.136 trillion as at end-2023, up 13% from RM1.003 trillion as at end-2022. Contributions exceeded withdrawals by RM52.2 billion in 2023, resuming their growth path after two years of net withdrawals in 2021 (RM52.4 billion) and 2022 (RM3.2 billion).

In January 2024, the government credited RM708 million, or a RM500 one-off contribution, to 1.4 million EPF members aged between 40 and 55 who had less than RM10,000 in their Account 1 as at Feb 24, 2023 (as tabled in the revised Budget 2023 in February 2023).

Some 62% of the EPF’s RM1.136 trillion investment assets are invested domestically, generating RM31.71 billion, or 47% of total investment income. Global assets — which include those US tech stocks that boosted shariah dividends — generated RM35.28 billion, or 53% of total investment income, while making up only 38% of investment assets in 2023. It is not immediately certain how much the ringgit’s performance had boosted returns.

For 2023, the EPF’s total investment income was RM66.99 billion (including RM5.72 billion in unrealised mark-to-market gains), up 29% from RM51.91 billion in 2022. The EPF, which targets beating inflation by 2% over a rolling three-year basis, delivered 2.89% and 2.51% more than its target in 2023 for conventional and shariah savings respectively.

Overall, the EPF needed about RM10.5 billion to pay every 1% of dividend to members in 2023. This is up from RM9.4 billion in 2021, its previous record-high payout. This means that the EPF would need to generate at least RM15 billion every quarter to be able to deliver a close to 5% dividend in 2024, our back-of-the-envelope calculations show.

Those closely tracking EPF returns would be watching out for details on the setting up of EPF Account 3, which allows more flexibility in withdrawals. Details are expected to be tabled in parliament as early as April this year. What is certain is that the EPF’s performance will continue to come under close scrutiny, given the provident fund’s significance to its members as well as its heft in the capital market. 

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