EPF contributions grossly insufficient for retirement needs


YESTERDAY, I commented that the 10.5 million members of the Employees Provident Fund (EPF) must be prepared to receive relatively low dividends (between 4% and 5%) on their contributions for the next few years. 

This is because of the low interest rate regime that is expected to prevail in the foreseeable future and also the lacklustre performance of the local stock market.  

Three quarters, or RM150bil, of EPF funds are placed in fixed-income instruments (mainly government securities, bank deposits and loans) and the remaining 25%, or RM50bil, invested in the KLSE. 

EPF members are understandably concerned over the declining dividend rate because whatever they have in the EPF represents their hard-earned savings.  

For most, their EPF contributions form their biggest financial asset, with the exception of a house, if any. 

It is the dream of every worker, on retirement, to be financially secure and able to enjoy a fairly similar lifestyle that he/she has been used to. 

This is where the EPF comes in. 

The EPF is 51 years old, and we have to thank the government of the day for setting it up. Not many Malaysians know that the EPF is one of the oldest state-sponsored pension funds in the world, and even today, very few countries have such a fine institution. 

The EPF has served its members and the country well. It was set up to provide some form of financial security to its members on their retirement; at the same time the funds are used to finance the country's economic development. 

But looking at the statistics, I am concerned that many EPF members may be living with their heads in the clouds. 

Currently, the average contributor on reaching 55 years of age has about RM77,000 in his/her EPF account. If you take out the big contributors (the CEOs and senior corporate executives), this figure drops to RM33,000. 

Also, an EPF survey conducted in 1995 showed that almost 70% of members who withdrew their contributions on reaching 55 spent all their EPF savings within three years. 

The EPF estimates that a person who retires at 55, and wishes to get a monthly income of RM500 for his/her needs, would require to have RM150,000 in a fixed deposit. 

The under-provision for retirement is a very serious issue for Malaysia in the years to come as more and more Malaysians reach retirement. 

A generation ago, parents could expect to live with their children and be provided for. But society is changing fast.  

Most parents who have adolescent children today cannot expect financial support from their children, let alone live with them under one roof when they retire. 

The EPF, as the nation's largest provident fund, is examining various ways to help improve the retirement cover for its members. 

One possibility is to have a multi-tiered contribution system where lower income members and their employers would have to pay higher contributions than the present rate. But this would mean lower income workers would have to tighten their belts. 

The best way, of course, is to ensure that EPF contributions are invested in a manner that gives the best returns with the best security. 

These two objectives are at odds with each other. Higher returns normally entail higher risks. So a neat balance is required. Hence EPF funds are invested in the ratio of 75% in fixed income assets and 25% in equities. 

I mentioned yesterday that some individuals may feel they can do better with their EPF savings than the EPF itself. 

I understand the EPF is also studying the feasibility of allowing members to take out some of their savings (say up to 70%) to be invested in property or equities, but with certain safeguards. 

Another area the fund is looking at is investing in completed commercial or industrial buildings that give a decent yield (7% or 8%). This is good provided the purchases are done at arm's length and the buildings are not purchased at top prices. 

The EPF has also instituted several measures to protect its investments in the share market, including getting its nominees on the board of companies where it has a big stake or where some monitoring may be necessary. 

On paper, the EPF has suffered a loss of RM10bil from its equity investments, and for the first time, it is making provisions for such losses. A sum of RM500mil is provided for this in the 2002 accounts. This is a prudent decision. 

EPF chairman Tan Sri Halim Ali and CEO Datuk Azlan Zainol are determined the EPF and its investments are managed in a professional manner and that mistakes of the past are not repeated.  

So far, they are doing a good job, and the government appears to be giving them a relatively free hand. 

The basic problem for the EPF is that it is a whale in a small pond. With assets growing at RM10bil a year, it is finding great difficulty in putting its funds to the best use within Malaysia. 

Currently, the government does not allow the fund to invest overseas. This is because the authorities do not want a big outflow of funds that would deplete the nation's precious foreign exchange re- serves.  

A strong level of reserves is crucial in maintaining the ringgit/US dollar peg, which has served Malaysia very well. 

Thursday's commentary

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