Despite 2020 being a bad year in terms of the pandemic and economic downturn, on Feb 27, 2021, Malaysian retirement savings fund, the Employees’ Provident Fund (EPF), declared a dividend of 5.2% for conventional savings and 4.9% for syariah savings for 2020, amounting to a total payout of RM47.64bil.
This could be the main reason why EPF had earlier announced its readiness to allow an unconditional withdrawal of funds by those who are most affected by the economic downturn brought about by the Covid-19 pandemic.
The reason the fund has been able to give out a respectable dividend is because its investments overseas and on fixed income instruments in 2020 produced good returns. With some 14 million contributors, the fund achieved a net investment income of RM37.83mil for the first nine months of 2020, with its fixed income portfolio recording an income of more than RM22bil in the same period.
EPF’s fixed income instruments comprise largely government debt papers and highly-rated corporate papers which are actively traded with only a small portion held to maturity. With a low interest rate regime expected throughout the pandemic, its fixed income portfolio is sitting on good profits, as bond prices rise when interest rates fall.
In 2019, EPF disbursed a 5.45% dividend to its conventional account holders and 5% to shariah account holders. Although the 5.2% dividend for 2020 is lower compared with 2019's dividend, nevertheless, 2020's result is remarkable considering the volatile equities market.
On Feb 18, 2021, EPF reported that members below the age of 55 who have applied for the i-Sinar withdrawal facility will be given approval – subject to their available Account One balance – beginning March 8. Those who have RM100,000 and below in Account One can withdraw up to RM10,000; payments will be staggered over a period of six months with the first payment being up to RM5,000. Those with more than RM100,000 in Account One can withdraw up to 10% of that account, subject to a maximum amount of RM60,000.
Many have welcomed the move as timely because of the hardships faced by the rakyat during the movement control order 2.0 along with the rise in unemployment in the last quarter of 2020. This facility will help increase people’ disposable incomes which can be used to make ends meet. It will also help the economy by increasing private consumption expenditure – consumption is an important driver of growth, and increased rates will hopefully prop up the country’s GDP.
However, as previous articles and letters have expressed, the government needs to be careful with this unconditional withdrawal because the primary aim of the EPF is to ensure savings for the rakyat during their retirement. According to estimates by the Statistics Department, Malaysians are expected to live longer, on average until 75 years old. Although this life expectancy should not be generalised for everyone, one must prepare for old age with sufficient savings.
Hence, the unconditional withdrawal of EPF funds should not be allowed to continue indefinitely. It could perhaps run for three months, after which the scheme should be extended only if the economy remains sluggish and the fund’s performance in the first quarter of this year remains good.
Most importantly, people must be mindful that a portion of these funds are allocated for investment to ensure good dividends for contributing members that will increase their retirement nest egg. But due to this expanded withdrawal, the amount of funds will be less and, thus, will likely result in lower dividends in 2021.
The other concern about the relaxed i-Sinar withdrawal is the poor social safety net for workers in the informal sector. Statistics in 2019 showed that employment in the informal sector made up 8.3% of total employment in Malaysia, ie, 1.26 million. Anecdotally, since the pandemic began in March 2020, we have observed that more people are going or have gone into the informal sector.
Although informal workers have been encouraged to voluntarily contribute to retirement savings through EPF’s i-Saraan scheme, it appears that the number of people contributing is not encouraging. For instance, The Star reported on Sept 12,2020, there are less than 10% of 2.7 million self-employed individuals who contribute to the scheme and only 18% of these 10% contribute consistently (“Gig workers encouraged to join EPF’s i_Saaran”). Therefore, the revised i-Sinar scheme for informal sector workers would likely put their unstable savings at risk given their uncertain source of income.
Perhaps one measure to consider in encouraging more savings by informal workers in EPF is through a ringgit-to-ringgit matching contribution, as has been done in Singapore. Under the Matched Retirement Savings Scheme in that country, the government matches every dollar of cash top-up made to the retirement account of Central Provident Fund Board members, up to S$600 (RM1,832) annually.
In Malaysia, perhaps this kind of matching grant could also be given to parents whose children top-up their parents’ EPF savings or vice versa. The extra matching of monies would mean EPF will have more funds to invest despite withdrawals under the relaxed i_Sinar scheme.
JAMARI MOHTAR & SOFEA AZAHAR
Note: Emir Research is an independent think tank focused on strategic policy recommendations.