This article first appeared in The Edge Malaysia Weekly on August 19, 2024 - August 25, 2024

HAVING led the Employees Provident Fund (EPF) as its CEO before being tapped to become finance minister II, Datuk Seri Amir Hamzah Azizan knows all too well the state of retirement savings adequacy among EPF members and the need to expand the country’s pension system to close coverage gaps.

“At the moment, the EPF is trying to convince the government to do things less [on a] voluntary [basis] and more mandatory,” Amir Hazmah tells The Edge when asked to elaborate on plans to get more Malaysians covered under the EPF umbrella.

“In the Madani framework, we are concerned about lifting the floor. Social protection is a big element, so we want to do more on this but it must be done properly. It cannot be done without thinking through the consequences along the way and distortions that can come in.”

Amir Hamzah admits that “a lot of work still needs to be done”, for example discussions over the amount of EPF contributions should it be made mandatory for Malaysians of working age (15 to 64) who are currently not obliged to make statutory contributions as they are not employed in the formal sector.

As it is, the government encourages all Malaysians, including formal sector wage earners as well as self-proprietors like doctors and lawyers who do not need to make EPF contributions, to make voluntary contributions of up to RM100,000 a year to EPF. Tax relief is also given to employers for contributions up to 19%, if they voluntarily contribute above the statutory rate of 12% or 13%.

The government has also seen some success in shoring up registrations with EPF via matching incentives for voluntary contributions under schemes like i-Suri (targeted at housewives registered under the e-Kasih poverty eradication database).

Under the i-Saraan scheme (targeted at the self-employed and those in the informal sector), the government provides a 15% matching incentive (capped at RM500 a year, RM5,000 lifetime) to Malaysians who voluntarily sign up as an EPF member from as early as age 14, being the minimum age for employment under the Child and Young Persons (Employment) Act.

According to data from the Ministry of Finance (MoF), more than 640,000 informal workers, or 16% of workers outside the formal sector, have signed up for the i-Saraan scheme — benefiting not only from the matching amount given by the government but the power of compound interest and dividends paid by EPF on savings.

Some RM138 million in incentives were paid out between 2010 and 2023, yielding RM3.46 billion in EPF voluntary contributions, MoF data shows. Put another way, each RM1 incentive given by the government has resulted in RM25 in contributions to EPF via i-Saraan.

Of the RM138 million in incentives deposited into EPF accounts, some RM54.7 million, or nearly 40%, was done in 2023 (yielding RM1.44 billion in voluntary contributions) while 24% or RM33.2 million was in 2022 (yielding RM33.2 million in voluntary contributions).

Interestingly, even during the Covid-19 pandemic years of 2020 and 2021, there continued to be year-on-year increases in voluntary contributions via i-Saraan to benefit from incentives given since 2018 when the government’s matching incentive was upped from 10% (RM120 annual cap) to 15% (RM250 annual cap) (see chart).

According to EPF’s statement dated Aug 13, the number of voluntary contributors reached 742,556 as at end-June 2024, with total voluntary contributions amounting to RM7.51 billion. In 1H2024 alone, i-Saraan recorded RM1.61 billion in contributions from 330,196 contributors, a 103% increase from RM789.3 million from 211,361 contributors in 1H2023.

“By extending its support to Malaysians as young as 14 years old, the EPF is resolute in its purpose of building retirement income security and uplifting future generations. This commitment aligns with the ‘Raise the Floor’ initiative outlined in the Ekonomi Madani framework, aiming to enhance the well-­being of Malaysians,” says EPF CEO Ahmad Zulqarnain Onn in a statement in conjunction with the release of its 1H2024 performance.

Introduced in 2010, the i-Saraan scheme was previously known as the 1Malaysia Retirement Scheme (SP1M), which started out with a 5% matching contribution of up to RM60 a year.

There was a noticeable jump in EPF contributions under i-Saraan in 2022 and 2023 when EPF began reaching out more aggressively to encourage more people to make voluntary contributions and benefit from the incentive.

In 2023, the annual incentive cap was revised from RM250 to RM300 a year. It was raised to RM500 effective Jan 1, 2024.  

The current government cap of RM500 a year for its 15% matching incentive for i-Saraan contributions means one would get the maximum RM500 by depositing RM3,334 a year. Only Malaysians below age 60 are eligible.

If you gave your 14-year-old RM3,334 a year (RM278 a month) for 10 years to claim the maximum RM5,000 incentive under i-Saraan, he or she will have just over RM50,000 by age 24, assuming a 5% annual dividend from EPF, The Edge’s back-of-the-envelope calculations show. Some 66%, or RM33,340 in savings, would have come from the young EPF member’s parents, with 10% or RM5,000 coming from the government and 24% from the power of compounding interest, assuming a 5% EPF dividend every year (see table). 

Even if he or she does not save any money in EPF after age 24, the savings will reach the EPF recommended basic savings of RM240,000 by age 55 if no money is taken out at any point before age 55, assuming a 5% dividend a year from EPF, our estimates show.

The size of matching incentive from the government could reach RM4 billion a year, if an estimated eight million Malaysians aged 20 to 60 are compelled to sign on as EPF members, back-of-the-envelope workings show. (The eight million is a rough estimate, given that 8.6 million active EPF members make up 50% of Malaysia’s 17.15 million labour force.)

But if every ringgit of incentives yields RM25 in contributions, there could be close to RM100 billion of inflows into EPF, which could be channelled towards investments in the capital markets or the economy.

In any case, there is a need to get more parties to bolster retirement savings for uncovered workers, including those who are deemed economically inactive. The earlier those who are not covered under any pension or provident scheme enrols under a sturdy umbrella like EPF, the earlier they get to enjoy the power of compounding interest. The government and society will also benefit as a lower number of the aged that needs government support also reduces the burden on public finances, thus freeing up resources for other more productive uses.   

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