i-Sinar – A RM56bil question mark

People lining up to submit I-sinar category 2 application at EPF branch in Puchong.

THE Ministry of Finance recently announced that the Employees Provident Fund (EPF) will enhance the i-Sinar withdrawal scheme for members by removing the previously imposed criteria for members subject to remaining balance in the account itself.

In the previously approved i-Sinar programme, there were two distinct categories. Under Category 1, members under the age of 55 or below qualifies to withdraw if they have not contributed to the EPF for at least two consecutive months prior to the time of application or have suffered a 30% reduction or more in their base salary from 1 March 2020 onwards.

Under Category 2, members who have not reached age 55 are qualified to withdraw if they have experienced a reduction in total income of 30% or more since 1 March 2020. Total income includes base salary and other income such as allowances and overtime.

As application for i-Sinar opened on Dec 21 last year, EPF has, as at Jan 4, approved 2.5 million out of 3.88 million applications that has been received. For this group of members, the total approved amount is approximately RM19.62bil, translating to RM7,850 per applicant. The remaining 1.4mil applications, according to the EPF, falls under Category 2.

Eligible amount allowed that is allowed to be withdrawn is subject to members’ Account 1 balance. Members who have RM100,000 and below are allowed to withdraw any amount of up to RM10,000 while those members with balances of in excess of RM100,000 in Account 1, are allowed to withdraw a maximum of 10% of their Account 1 balance or up to RM60,000, whichever the lower.

The billion ringgit question

Without conditions attached, the question on everyone’s mind is how much will members withdraw under the revised i-Sinar scheme this year? As it is, we have already seen under the stricter criteria, some 2.5mil members are expected to withdraw close to RM20bil. With no conditions attached, it is likely we will see more EPF members to take-up the offer. Under the previous i-Sinar scheme, EPF estimated some eight million members will benefit from the scheme, but with the removal of conditions imposed, all 14.6mil members will now enjoy the right to apply to withdraw their savings under Account 1.

Based on EPF’s 2019 Annual Report, as summarised under table 1, there are some 7.63mil active members with total savings of RM675.9bil while the remaining 6.96mil members are inactive members.

As EPF had total of members’ savings of RM924.9bil as at end of 2019, these inactive members would have total savings of about RM249bil. Overall, EPF members have an average saving of about RM63,401 per member with active members average savings at RM88,631 while inactive members have on average some RM35,762 in savings.

Based on the above statistics, to gauge the level of withdrawal, certain assumptions are needed to be made based on the availability of balance in Account 1 (which is typically 70% of total balance) and the probability of withdrawal at different bands based on level of savings held, as well as an assumption as to how much will be withdrawn, as summarised in table 2.

Firstly, we all know that not all 14.6mil EPF members will be withdrawing their retirement fund nested in the provident fund. Second, the withdrawal amount will vary, depending on each member’s needs and of course what is the available balance.

Third, as the amount to be withdrawn is stricter for members who have less than RM100,000 in their accounts, it is natural that the withdrawal amount will be higher for those with savings in excess of RM100,000 up to RM1mil.

Fourth, members with RM1mil and above in savings are unlikely to withdraw, or even if they do, the probability is rather low as they have all the flexibility to withdraw under the “Withdrawal of Savings in Excess of RM1mil” withdrawal category.

Fifth, for the inactive members, EPF does not provide the breakdown of these members and hence they are lumped together as one.

It is assumed that these inactive members have basically either left the workforce, retired or simply have stop contributing on their own. Their needs can be varied. For some, the i-Sinar withdrawal scheme gives them an opportunity to tap into their savings in time of need, and for some, this may be totally unimportant as they don’t need any of the EPF savings for the time being to tide them over.

In addition, among the active members, there are also some 556,128 members above the age of 55 with some RM88.4bil in savings or an average saving of RM158,915 per person. This category of members do not qualify for the i-Sinar withdrawal as they can actually withdraw their savings anytime they wish anyway.

From the average figures that were compiled under table 1, table 2 provides the residual balance under Account 1 as that account is typically about 70% of total members’ savings. In terms of probability of members withdrawing, it is natural that members with lower savings will have higher propensity to withdraw as they are more hard-pressed to make ends meet. It is assumed that 80% of members who have savings less than RM10,000. As the average savings of this cohort is just under RM4,000 (refer to table 1), it is assumed that they will withdraw on average RM2,500 per person, which is about 90% of the balance in Account 1. This will result in total withdrawal of about RM3.79bil.

For the next group of depositors of between RM10,001 and RM100,000, whom are allowed to withdraw up to RM10,000 under the new i-Sinar scheme, it is assumed that 70% of the 3.85 million members will opt for it an withdraw an average of RM8,000 per member. This translates to just 27% of the average savings held by this cohort in Account 1, which is just under RM30,000 per member, as shown in table 2. Total withdrawal by this group of members works out to be at RM21.57bil

For members who have savings of between RM100,001 up to RM600,000, the i-Sinar program allows members to withdraw 10% of the savings in Account 1 or up to RM60,000, whichever the lower. Here, the members have an average saving of just over RM145,000 in their respective Account 1, and hence it is assumed that they will withdraw RM14,000 per member, being slightly below the 10% threshold. This group of depositors are seen withdrawing some RM12.27bil from their EPF savings.

Members having savings in excess of RM600,000 up to RM1mil are rather less susceptible to tapping into their EPF account during this hard time. Nevertheless, some members would still do so and it is expected some 30% of members will opt for the option. Here, based on the average savings of RM528,000 in Account 1, members are seen withdrawing about RM50,000 each, which is again slightly below the 10% threshold. Total withdrawal amount from this cohort is seen at just about RM1.2bil. For members with savings in excess of RM1mil, it is unlikely i-Sinar program has any real attractions to them. After all, this cluster is able to withdraw their EPF savings in any case. Hence, only a 2% probability is assigned to this group and their withdrawal sum under the i-Sinar program is assumed at the maximum of RM60,000 that is allowed.

The last batch of members are the inactive members whereby EPF do not provide the detail breakdown and hence analysing the data is more of a guessing game. Nevertheless, with almost seven million members, this group cannot be ignored. Assuming an average of about RM25,000 in Account 1 and half of these inactive members do opt for the i-Sinar option and withdraw just about 20% of their respective average balance, this cohort is expected to have a significant withdrawal of about RM17.4bil in total, as shown in Table 2.

Based on the above analysis, we could potentially see total withdrawal of some RM56.3bil from the open-for-all i-Sinar incentive this year, with about 8.6 million members out of the total 14.6 million members taking advantage of the option to assist them making ends meet during this difficult period. On average, the total withdrawal per member works out to be at about RM6,551 per member, which is still 16.5% lower than the current average of RM7,850 per member under the stricter conditions of i-Sinar withdrawal.

A word of caution – Firstly the data above is based on the 2019 EPF annual report and before dividends for the year was credited to the account. Second, the data includes members who are above the age of 55 (a total of 556,128 members having some RM88.4bil in total savings) and the calculations on table 2 could not possibly exclude this cohort as they could be having total EPF savings across the various saving bands. In addition, at the time of writing, EPF has not released the official statement on this new i-Sinar withdrawal scheme and it is purely based on the announcement by the Ministry of Finance.

What is the impact to EPF with this new i-Sinar plan?

This column on Nov 21 last year highlighted that EPF would likely see its members contribution drop to about RM65bil in 2020 before rising again to RM67.3bil this year. In terms of withdrawal, taking into consideration the previously approved i-Lestari programme, EPF would have seen about RM16bil withdrawal last year and another RM7bil is expected for this year. Hence, total withdrawal in 2020 may have hit about RM61bil, after taking into consideration the normal annual withdrawal from the EPF of about RM45bil. For this year, with RM7bil from i-Lestari programme and another RM56.3bil expected from the no-strings-attached i-Sinar programme, total withdrawal may rise to as much as RM108.3bil. Hence, from an expected surplus of about RM4.2bil in 2020, EPF may see net withdrawal of about RM41bil this year.

What will this do to EPF’s strategic asset allocation?

There are some unfounded fears that EPF may have no choice but to start selling their investments in the market. This column begs to differ from this argument. EPF is a world class pension fund and with its Strategic Asset Allocation (SAA) and diversified portfolio, it has the resources to meet the shortfall expected this year.

One of the buffer zones that EPF has created over time is the funds it has in the money market. As at Sept 30 last year, EPF had some 7% of its assets under money market, translating to about RM66bil. This is about four percentage points above its SAA for money market fund and hence it has the room to reduce its money market allocation by about RM38bill rather easily and enough to meet the i-Sinar withdrawal. Hence, impact of financial markets, if any, will likely be minimal.

Nevertheless, this is based on the assumptions adopted by this column and if the i-Sinar draws more attention among members, it may have some impact on markets as EPF would then need realised some of its portfolio exposure. This could also have an impact on EPF’s ability to generate decent dividends for members as the flexibility of timing its exit is not at EPF’s pleasure. This is akin to a fund manager subjected to redemption from investors and hence have no choice but to crystalise its investment into cash to meet the short-term liquidity demand.

In conclusion, while the relaxation of the i-Sinar scheme is seen as a welcome relief for members to help them to make ends meet, there are longer term consequences for not only the pension fund but the whole idea of EPF’s as our retirement nest. As it is, members today do not even have sufficient savings at the point of reaching the age of 55 and with up to 60% of members potentially opting for this relaxed i-Sinar option, the retirement objective, i.e. having at least RM240,000 in basic savings, will be a lot tougher to achieve for most retirees.

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