EPF’s third account, both a boon and a bane

Big change: The EPF office in Kuala Lumpur. Experts say the provident fund will likely have to hold more liquid assets to meet possible withdrawals following the creation of the new account. — Bernama

THE Employees Provident Fund’s (EPF) third account, which will enable members to withdraw their savings at any time, has received mixed reactions.

For members in need, the third account, which is now renamed Akaun Fleksibel (AF), will help them meet both foreseen and unforeseen financial commitments and perhaps put to end the debate of allowing members to access their long-term retirement fund in a measured basis and not more than 10% of all new contributions.

Members who are against the creation of the AF will argue otherwise as they believe that the EPF is meant for long-term retirement needs and there should not be any temptations that allow members to withdraw.

75:15:10

While the EPF has bumped up the Account 1 or Akaun Persaraan (AP) contribution to 75% and created the AF, the biggest loser is Account 2 or Akaun Sejahtera (AS) as the contribution towards building up a fund for education or healthcare and even housing will now be halved to 15% from 30% currently.

AS is an important account that allows members to build their reserves and provide the necessary funding to purchase property as well as additional lifestyle needs like education and healthcare, performing the Haj, collateral for personal loans, and even purchase of insurance for members and immediate family members as well as one-time partial withdrawal at age 50.

The lower balances in AS will have some implications for the lifestyle needs of members as well as, to a certain extent, on the property market as EPF members do access the AS to own a property.

No to opt-in

Among the other incentives under the revamped contribution rates is the opt-in, between May 11 and Aug 31 this year, that will allow members to transfer current AS balances of more than RM3,000 to AF whereby one-third of the funds will be transferred to AF, one-sixth to AP, and leaving the balance in the AS.

Those who do not opt in will start the AF with zero balance and will only accumulate when new contributions are made.

Positively, the EPF’s decision to bump-up the AP contribution to 75%, five percentage points higher than the current rate of 70%, is most welcome as we need to build-up our retirement nest.

The opt-in that EPF is providing to its members is currently seen as the elephant in the room as it is difficult to predict the total amount that will be transferred from the current AS balances to the newly set-up AF.

Based on EPF’s estimate, if all members were to opt in, up to RM54bil in total balances would be transferred to the newly created AF and it is estimated that up to RM25bil may be withdrawn from the AF account in the first year and between RM4bil and RM5bil per annum thereafter.

With the change in contribution rate, the opt-in, and the ability to withdraw funds immediately under the AF, EPF will likely hold more liquid assets to meet the withdrawal demands, especially those coming from the opt-in itself.

For the monthly contribution, EPF may be less under pressure as these are new monies and EPF would just need to set aside a certain portion for the immediate withdrawal needs.

The opt-in may have some immediate impact on the EPF and there may be a need to alter its Tactical Asset Allocation for the short-term before it sees a particular pattern in terms of the rate of withdrawal from the AF.

Logically speaking, perhaps having this AF is acceptable to most members but the opt-in should not be allowed as it defeats the purpose of the EPF mandate which is to ensure we have sufficient savings at retirement as well as meeting our lifestyle needs under AS.

Don’t touch your EPF

For those who do not touch their EPF savings, nothing changes and his/her AP balance will be growing at a faster rate.

Second, for those who withdraw from AF and leave zero or no balances, overall, they will lose out when it comes to retirement as their effective savings, based on employer and employee contribution of 23% or 24% will be reduced to 20.7% and 21.6%, respectively, per month, and this will reduce the compounding effect of their EPF savings and a lot less at retirement age.

Hence, despite the creation of AF, members should not touch their savings and withdraw them, especially for some flimsy excuse like paying for a gadget like the latest iPhone.

Lower dividend?

Logically speaking, as EPF will need to maintain some sort of liquidity to ensure it has the necessary funds if AF has a high withdrawal rate, balances in AF should attract a lower dividend as it acts more like a savings account instead of lock-up funds like AP or those in AS.

The interest rate differential between a fixed deposit and a savings account for monies deposited into a bank account exhibits this phenomenon.

However, the EPF would not want to discriminate against its members and will likely provide a single flat dividend for all members.

The fear is that if EPF decides to give a lower dividend for savings held under the AF account, those who don’t intend to withdraw too will withdraw as they can get better returns elsewhere and this can be detrimental to EPF’s overall objective of ensuring sufficient savings at retirement.

Other retirement nests

It is unlikely that most of the EPF members will have sufficient savings at the point of retirement to enable them to live over the next 20 years after the age of 55 based on Malaysia’s current life expectancy. The creation of AF may be a boon to some members but also a bane to others who do not wish to be tempted to use their retirement savings like an Automated Teller Machine (ATM), which can be detrimental to one’s retirement goal. Tapping into AF will result in lower retirement savings and perhaps cause a retirement crisis too due to insufficient income post-retirement.

Over the years, especially during the pandemic, the EPF has been a source of funds to many to the extent we do not have enough retirement savings. Based on statistics as at the end of 2023 and as provided by the EPF, the current median savings of all members and members in the 50-54 age group of RM10,898 and RM38,731, respectively, shows we have already dug deep into our future retirement fund to the extent that there is not much left for the vast majority.

Nevertheless, for some, the EPF is not the only retirement savings that they have, they may have other assets or investments that could tie them over as well as the age of 55 is no longer a retirement age. Some will continue to work for a good five years at least or even more if under contract, which can help them build up their savings for the golden years.

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