EPF set to start RM100bil Islamic retirement plan

EPF Chief Executive Officer Datuk Shahril Ridza Ridzuan

KUALA LUMPUR: The Employees Provident Fund (EPF) expects almost a quarter of its members to migrate to an Islamic retirement plan in its first year alone.

The EPF, a state-owned vehicle that manages US$178bil of assets including London’s Battersea Power Station project, aims to open the syariah-compliant plan in January 2017 and is targeting an initial size of as much as RM100bil, chief executive officer Datuk Shahril Ridza Ridzuan said in an interview.

There was strong demand and 1.5 million of its 6.7 million members should switch in the first year, he said.

Syariah retirement funds have been available since at least 2012 in Malaysia, the biggest market for Islamic bonds, and Indonesia is currently preparing rules to allow them. The number of Malaysians over 60 is forecast to more than triple by 2050 and the nation aims to have 40% of banking assets complying with tenets of the Quran by the end of the decade, from 27% now.

“EPF is laying another brick on the wall for the Islamic finance industry,” said James Lau, an investment director at Pheim Asset Management Asia Bhd. “They are positive for the industry and will further strengthen Malaysia’s position as a global syariah hub.”

Some 60% of the 30.5 million Malaysians are Muslims. The population will expand to 40.7 million by 2050, by which time the proportion of over 60s will rise to 24% from 9.2%, according to United Nations projections.

Malaysians are required by law to contribute to EPF. The vehicle accounts for more than 85% of assets in the country’s provident fund system, according to the Asian Development Bank.

EPF set up a syariah advisory council in 2010 and about 40% of its investments already comply with religious principles, according to a Jan 21 statement. Islam forbids interest payments and funds are restricted to investing in bonds and shares of companies that avoid activities deemed unethical including gambling.

The asset manager paid out RM38.24bil to its members in 2015, equivalent to a 6.4% dividend rate. EPF has a minimum guaranteed annual payout of 2.5%. The Islamic fund wouldn’t have a minimum dividend as they could’t be guaranteed under Quranic rules, said Shahril.

While the returns of the syariah-compliant and regular funds would vary on an annual basis, “statistically, they should converge in terms of performance in the long term because the overall asset allocation matrix on both pools basically have the same risk parameters,” he said.

Some 51% of EPF’s assets were in fixed income at the end of 2014 and 42% were in stocks, figures from the company show. It has started investing in property and it plans to increase private-market assets including real estate to 10% from 4% in the next five to seven years.

There are several private Islamic retirement plans in Malaysia offered by companies including Manulife Asset Management Services Bhd and CIMB-Principal Asset Management Bhd. EPF’s plan was intended to complement, not crowd out, the other vehicles, said Shahril. — Bloomberg

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