Employees Provident Fund (EPF) CEO Datuk Shahril Ridza Ridzuan (pic) spoke to Business editor (features) Jagdev Singh Sidhu recently outlining the retirement fund’s strategies and aspirations. Below are excerpts:
What’s happening at the EPF?
As the people we serve change and if you look at the demographics of Malaysia, half of our members now are below the age of 40. We need to change along with them in terms of what they expect from our service delivery and what the EPF means to them.
Tan Sri Azlan (Zainol) did a great job in transforming the EPF to become an efficient, business-driven organisation it is today. What we are doing is taking that base and bring it a step further.
We are looking at putting a lot of our services online and on mobile devices. The clients we are facing now are young and mobile and they’ll rather not step into our office and branches.
We have been pushing a lot of the electronic services to both employers and employees. We are making it compulsory for all new employers to make their submissions with us electronically. We are going to convert the existing employers to move onto electronic submissions.
We are also going to give them the option to pay electronically. Right now its linked to RHB, but we are working to get the other banks as well.
For us, it makes a difference. When employers submit their forms, we have to manually check for errors. Errors create a huge problem for us because we want to make sure the right amount of money is credited to the right person. With electronic submissions, everything is pre-checked. EPF spends a lot of money fixing errors caused by employers. It’s not fair to members because every ringgit that we save is money earned for our members.
We are also going to expand into electronic withdrawals for our members as well. We have started that with housing in a pilot project. Later on, when we link up with universities, hospitals and banks, when members want to make a withdrawal for medical or education or whatever, they can go to the hospital or university they are registered with and the organisations can pull the data from us on the eligibility of the member. Everything can be done electronically as well and it saves time and money for the members.
The idea is that over the next 5 years we want to get between 60% and 70% of our current processes online.
We manage between 12 and 13 million transactions a year.
A lot of it is investment withdrawals and that’s online already and that saves a lot of time and money.
If we can achieve that goal of 50%-70% in online transactions, we will then retrain our officers to become financial advisors.
That means the EPF branches will move from being process-driven to service centres with financial advisors.
The biggest issue we are faced with and we are working with Bank Negara and other agencies is the lack of financial education among the general population. Bank Negara is working with the Education Ministry to put elements of financial literacy into the new school curriculums. What we intend to do is to provide those financial advisory services in our branches in the next 5 years so that our members can start their financial planning from the time they start work. We can help them to understand how important it is for them to save and they can do pre-retirement planning as well so that when they retire they will know exactly what to do with their money.
By next year, we are going to have a pilot phase in the Klang Valley where we are going to turn two of our branches into these service centres and we will see what’s the demand and what kind of services people are looking for and use that pilot programme to rollout our services nationwide by 2015/16.
When you say half your members are below the age of 40, what kind of problems does that create?
It boils down to financial literacy. What we see basically is like any country, developed or otherwise, there is a high correlation between financial literacy and mathematics, income levels and family backgrounds as well.
What we and people like bank Negara are trying to do is to introduce more elements of financial literacy in the education system as well as in training with the employers as well.
We are looking at big employers to introduce modules of financial literacy for their staff. The whole idea is to get people from an early age to realise the importance of savings, compound savings, yields and growth.
The Gen-Y, and the millennials who are coming into the workforce in the next 10 years, you can see the shift in thinking between consumption versus savings.
The EPF has stressed on the need to manage retirement funds as the average now at the age of 55 is RM158,000. What can be done to improve that?
The amount of money saved at the age of 55 on average by our members is probably insufficient for their retirement plans. We are going to raise from next year the targeted minimum savings to RM196,000 at the age of 55. The way that is calculated is that is pegged against the minimum pension the Government gives to their civil servants which is RM850 a month.
We are looking at RM850 a month for 20 years. That’s the sum we feel people should be working towards as that is a certain base level of income for your retirement.
The kicker question is how do we get to that? That is an issue that is linked to wages itself. With the minimum wage coming in now we expect to see is an upward pressure on wages to move up as the economy becomes more efficient and generate productivity.
Slightly more than 90% of people in formal employment who are contributors to the EPF earn less than RM5,000 a month. Hopefully that percentage will come down in the future as more people earn more than RM5,000 a month. That will definitely help at arriving at the target. RM196,000 is the amount that will provide you with a minimal comfortable retirement. That’s assuming people will not have any other savings but people over their working life withdraw money from us to buy a house and that house will add value as well.
But you have started to tweak how much a person can withdraw for unit trusts?
That is linked to the minimum savings concept. As long as you have savings above the required amount set according to age (please refer to table below) you can withdraw that excess for your investment scheme.
The reason for that is the EPF is basically a balanced fund and is designed to provide a lot of certainty as to the capital you are going to retire with. When you take out the money for unit trusts, you will always draw the risk that should you retire in a year when the market is down and the amount of capital you have at that point in time is going to be affected as well.
The idea is to have a certain minimum safe savings with the EPF. Anything above that is really up to the membership.
Part of financial literacy is for people to recognise what are their goals and what is the amount of risk they are willing to take to achieve those goals.
Are you still doing deals in Malaysia?
We are in the process of acquiring strategic parcels of land which we believe will act as a great inflation hedge and as an income earner for the EPF for the next 15 to 20 years. A classic example is RRI. But we also doing co-investments with other parties but that is more selective. There we are ccareful to look at the deal and to see whether it makes sense for us financially and whether we can manage ther risks of moving into those kind of properties.
We actually own a significant portion of the Giant Hypermarkets in Malaysia which we bought over the physical hypermarkets and those are leased back to Giant. We also own the Sogo shopping centre. The guys who run Sogo are fantastic operators.
The PLUS Expressway?
So far so good. In terms of achiveing the investment thesis we had when we went in. It seems to be achieving that. Obviously there is a bit of a balancing act because when we took over Plus, we were able to restructure the toll.
We should be able to achieve our targeted IRR returns of about 10-plus to 11%, which I think is a fair return for this kind of project. The Malaysian public gets a lower toll burden over the life of the project.
It’s stuff like this and Battersea that is going to paint a nice outlook in terms of returns?
Our investment in Sungai Buloh is RM2bil but our fund size is RM568bil. As a percentage it is small but that is the philosophy of EPF. We have a diversified portfolio. Some of which is RRI where we hope to get better than normal returns because we are taking slightly more risk in terms of development. The rest is stable returns. If we make great returns on RRI, yes it will help the fund on the whole but it won’t move the needle that much.
Apart from Battersea, you have gone into other UK properties and Germany and even Australia. What’s the thinking behind those moves?
We moved into those property markets for a few reasons. The markets we have moved into really have unique characteristics compared with the Malaysian market. For one, we can get very long leases. and they are all triple A clients.
In Malaysia, if you own an office building you can get long leases but the general lease terms in Malaysia tend to be 3+3 years.
There is always an element of uncertainty on your leases but place such as the UK or Australia, because of the way the markets there have developed, you get a lot less risk in your lease structures and the leases themselves are structured in a way where the tenants take care of all the costs in terms of the upkeep of the building. As a landlord, you know for sure with a great certainty what your net returns are going to be.
With property prices in the UK at a high, does it make sense to do deals there?
For us it’s been about risk and return. We started moving into the UK three years ago and we got good deals at that point. Then there were few people looking at the market. Today, there are too many players in the market and we have not done an office deal in the UK for nearly a year now because primarily we cannot find any good deals.
In the UK, in the past one year we are focused on assets other funds are not looking at yet. We have done hospital deals which have turned out very well for us but not an office deal for some time.
We buy out the hospitals and lease them back to the operators themselves.
It is a space no other funds are looking at and we have got some good deals in the space.
How much money have you allocated for property from your funds under management?
The property side of our investments is relatively small. Property as a whole is about 3% or less of the total assets. The thing about property is that it is very visible. When we look at the assets we invest in, we do more trading in one day in the equity markets than the amount of property we will buy in an entire quarter. Because of that, we have been very careful about the property assets we acquire. We think the right size for us in terms of these hard assets will be 5% at this point.