The great EPF dividend debate

FINANCE Minister II Datuk Seri Amir Hamzah Azizan took to LinkedIn recently to defend the Employees Provident Fund’s (EPF) dividend for 2025, saying critics had “missed the point entirely”.

It looked like a response to former finance minister Lim Guan Eng, who linked the lower dividend to a so-called “two-tier economy”, where Malaysia’s economic growth gains do not flow evenly across society.

Lim’s argument is a neat political line, but it seems to unfairly shift the blame onto the EPF.

The simpler answer for the slightly lower dividend is market performance.

Returns in 2025 were lower than in 2024. The FBM KLCI rose by just 2.3% in 2025 versus 12.9% in 2024.

And the index is a key representation of how the Malaysian stock market performed last year.

After all, FBM KLCI’s market capitalisation of RM1.2 trillion represents over 57% of entire Bursa Malaysia’s market capitalisation.

So let us be fair from the start.

A 6.15% EPF dividend in that environment is not a poor result.

It is a credible one. EPF deserves credit for delivering more than 6% when market conditions were clearly less supportive than the previous year.

But giving credit is not the same as suspending scrutiny.

Amir Hamzah is right that total payout matters. EPF’s 2025 distribution rose to RM79.6bil. That is meaningful. It reflects the scale of the fund and the size of member balances.

Still, members do not retire on headline payout figures. They retire on the rate credited into their accounts.

A bigger total payout can simply mean the fund is bigger. It does not, by itself, prove members received the best return EPF could reasonably deliver.

That is where the real debate begins.

EPF’s 2025 numbers raise an uncomfortable but valid question about asset allocation. The fund kept about 61.7% of assets in Malaysia and 38.3% overseas.

Yet domestic investments generated RM39.3bil in income while overseas investments generated RM39.9bil, even from a smaller base.

A rough estimation by StarBiz 7 showed that the return on investment (ROI) for EPF’s local assets was about 4% in 2025, well below the ROI for foreign assets which was about 7%.

The implication is difficult to ignore. Overseas assets produced stronger returns. And this is not the first year this has happened.

So why should EPF continue to carry a heavy local bias if returns are better elsewhere on a risk adjusted basis?

Yes, there are important caveats. EPF manages liabilities in ringgit.

Currency movements can cut into foreign gains. A stronger ringgit reduces translated returns. Local markets also offer familiarity and a strategic role in national capital formation.

All true.

But none of that changes the central point.

EPF is a retirement fund first. It should not be treated as the market’s automatic stabiliser whenever foreign funds leave Bursa Malaysia.

If local assets offer a better opportunity, EPF should buy local. If global assets offer better returns, EPF should have room to increase exposure. And historically, foreign assets have delivered stronger growth.

The priority must be member outcomes, not market optics.

As mentioned earlier, the FBM KLCI grew by just over 2% in 2025. On the contrary, the US’ S&P 500 grew by 16% last year, even though notably slower than 2024’s 23%.

So, had more assets been invested in US equities, would the 2025 dividend rate have been higher?

The second issue is Account 3, and this is where EPF needs a clearer policy explanation.

Account 3 or the Flexible Account was introduced for emergency access. That objective is debatable yet politically understandable.

Sure, households need liquidity buffers, and this is where the Flexible Account comes in.

But money that can be withdrawn anytime cannot be invested the same way as money meant to stay untouched for retirement.

That is why the earlier idea of a lower dividend rate for Account 3 made sense.

A more liquid pool usually forces a fund to hold more cash, money market instruments and shorter duration assets.

Those are safer for withdrawals, but they usually earn less than long-term investments.

If EPF pays the same dividend rate across all accounts, including the most flexible account, then there is at least some degree of cross subsidisation.

In plain terms, members who preserve long term retirement savings may be helping to support returns for those depositors who actively take out their savings.

That weakens incentives to save long-term.

Of course, some will say Account 2 is also withdrawable. True, but the nature of withdrawals is different.

Account 2 withdrawals are generally tied to prescribed purposes such as housing, education and healthcare. They are more structured and more predictable.

Account 3 withdrawals can happen for any reason, which makes liquidity management more uncertain.

EPF should revisit a differentiated dividend structure for Account 3. It would better reflect the economics of liquidity, improve fairness between members and reinforce the purpose of EPF as forced retirement savings.

This matters even more now because Malaysia is ageing.

The country needs stronger retirement discipline, not a growing culture of EPF withdrawals for every festive season or short term pressure point.

Politicians calling for ad hoc withdrawals may win applause today, but they are also encouraging weaker retirement balances tomorrow.

EPF did its job in 2025 and deserves recognition for that. But the institution should also be allowed to do its job properly.

That means giving it more flexibility to allocate capital where returns are better, and designing account incentives that protect long-term savings rather than blur the line between retirement money and spendable cash.

If the goal is retirement security, these are not hostile questions. They are the only questions worth asking.