EPF – the withdrawal syndrome

Lower contribution:The EPF has highlighted that as for deposits, it will see RM8bil and RM9bil lower contribution in 2020 and 2021, respectively

ON Monday, the Employees Provident Fund (EPF) released the new and improved mechanism to allow members to utilise their retirement savings held in Account 1 of their EPF account under a new programme named i-Sinar. This, of course, came about after much pressure from all walks of life, including both sides of the political divide, as the RM6,000 withdrawal announced earlier under Budget 2021 was only meant for the about 600,000 employees that have lost their jobs.

With the new mechanism, it is estimated that some two million members will be eligible to receive an advance from their savings in the EPF that is held in Account 1, as the scope of eligible members have now been expanded to active members who are given no-pay leave or have no other source of income.

The issue about withdrawal from our retirement fund has been hotly debated. At one end, we have desperately seeking members who want to tap on their savings in Account 1 as they need the funds now and at the other end, we have members who are calling for the balances in Account 1 to be left untouched as they are meant exactly for that purpose – retirement.

Balancing between the current urgent need and long-term objective is not an easy task for the EPF or the government. Under the current political environment, the issue has also become a hot potato for politicians to handle as they need to balance the demand of the people, especially the voters.

As we look back over the years, the EPF has been flexible in terms of withdrawal of funds by members but all these measures are mainly under the Account 2 initiatives. Of course, at present time, members are also allowed to withdraw from Account 1 for the purposes of investing in Members Investment Scheme whereby EPF members can withdraw not more than 30% of their total amount in excess of their basic savings in Account 1.

Early this year, due to Covid-19, the government also allowed members under the i-Lestari programme to withdraw RM500 per month for a period of 12 months to tide them over during this difficult period. Up to end-October, the scheme has seen some 4.71 million contributors withdrawing some RM11.18bil from their respective accounts. In addition, under Budget 2021, the Finance Minister has also proposed that Account 2 to be used by members for the purchase of life insurance and takaful protection products and for critical illnesses.

As can be seen from the above, the EPF has allowed members to utilise their savings in Account 2 for a variety of reasons. Members will now be allowed to apply for an advance from Account 1 before it is replenished back via future contributions, directly into Account 1, as clarified by the EPF.

With EPF savings being used, it is of no surprise that members are forsaking long-term retirement objective for short-term need and it is rather alarming when we look at the statistics of total savings of members one year before the eligible age of full withdrawal.

For example, based on the 2018 EPF Annual Report, there were 245,837 members aged 54 with average savings of only RM107,561. In this group, only 38.3% or 94,260 members are active and having an average savings of RM209,862, while the inactive members had an average savings of just RM43,938. Based on EPF’s current minimum basic savings amount required of RM240,000, on average, the aged 54 members are already falling short of having the minimum nest to survive for the next 20 years (i.e. between the age of 55 till the nation’s average life expectancy of 75) and benchmark against the minimum pension for public sector employees, which is at RM1,000 per month.

In fact, withdrawals at age 55 is the highest ranked reason for withdrawal from the EPF, accounting for about a third of total withdrawals in 2018. Based on the EPF’s RM240,000 minimum basic savings, just slightly less than 500,000 of the 7.36 million active members have savings in excess of RM250,000 or more, leaving some 93.2% of active members having less than the minimum amount. Of course, among these active EPF members, they represent all age group and the younger members still have time to build up their retirement savings.

Covid-19 has not only taken its toll on businesses and employees but also the EPF in the form of growing its investment asset base. For example, based on information provided by the EPF, the fund’s investment assets as at end-June 2020 grew by just RM4.9bil to RM929.6bil against RM924.8bil as at end-2019. The EPF, which has seen a sustained increase in net contribution for the longest time, may be in danger of recording for the first time a net withdrawal of funds either this year or in 2021 due to this new withdrawal schemes.

The EPF has highlighted that as for deposits, it will see RM8bil and RM9bil lower contribution in 2020 and 2021, respectively, due to reduced contribution rate for employees. There could also be some reduction, perhaps by another RM5bil, due to the absence of contribution for employees that are laid off, or in some cases, due to reduced pay or on unpaid leave. So, as far as EPF’s total contributions, this could be reduced by as much as RM13bil this year and RM14bil in 2021.

In terms of withdrawals, the i-Lestari programme will result in about RM16bil withdrawal this year and next year by another RM7bil, although the EPF has allocated some RM30bil for the programme. i-Sinar may see another RM10bil withdrawal next year, although the EPF has projected RM14bil in total applications. All in, on top of the normal withdrawals of about RM45bil, the EPF will see additional total withdrawal of about RM16bil this year and rising to RM17bil in 2021.

Hence on a net basis, the EPF will see a change in total contributions by about RM29bil this year and RM31bil in 2021. Thanks largely to an assumed growth of about 3%-4% for the rest of the contributing EPF members, based on natural growth in salaries and new contributors, the EPF will still see net positive contribution of about RM4.2bil this year and RM5.3bil next year.

Nevertheless, there is still a potential reversal of net fund inflow into the EPF should the above projections, either deposits or withdrawals, do not meet the targeted figures and this can have implications on EPF’s ability to manage its investments. Should this occur, EPF’s equity and bond market portfolio, which has an asset allocation of about 38.2% and 49.2% respectively, would need to be adjusted. However, with money market exposure of about 7%, the EPF would have sufficient balances to meet demand from its members.

Going back to the issue about retirement savings, there are variety of reasons as to why we do not have sufficient savings other than the many withdrawal schemes offered by the EPF. One of the reasons is that not everyone is an employed person from the time he/she enters the labour force to retirement. That perhaps explains why EPF’s active members comprise only about half of its total members. Second, our salaries are just too low to build up a nest to tide us over retirement life. Third is the discipline of the members itself. Studies have shown that most full withdrawals that were made at the age of 55 results in funds being depleted in a short time of even less than five years.

On the government’s solution to the needs of the people, it is clear that even in the i-Sinar programme, the targeted group is rather shallow as one has to be an active EPF member and in an affected group to be able to tap into the programme. To suggest that two million members may need this initiative may be an overestimation as that represent a quarter of the active EPF members. The initiative also does not cover unemployed and self-employed individuals and neither inactive members, what more day workers that are severely impacted.

For the government, allowing the EPF to be a cookie jar for selective active members to dig their hands into is a narrow-minded short-term solution. The government needs to do more for all working adult Malaysians and not mere active EPF members.

As it is, most EPF members, one time or another, have tapped into their retirement savings to fund their specific short-term needs. While the measures taken before are genuinely helping members in times of needs, especially in relation to housing withdrawals, we should not keep adding options to members to withdraw their lifetime savings. Let us focus on the bigger picture in solving income issues of all Malaysians and not just select few.

In addition, for some of these programmes, once withdrawn, can have a detrimental impact to the society as members may take EPF savings for granted and we would then be up against another syndrome – members getting EPF withdrawal syndrome – as they are so used to tapping into the piggy bank for their immediate needs.

Pankaj C. Kumar is a long-time investment analyst. Views expressed here are the writer’s own.

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