There was probability the worker contingency fund would hit RM 1 trillion in belongings this yr, had been it not for the Covid-19 pandemic and the financial hardships that drove the federal government to permit the unprecedented withdrawal of funds that had been beforehand banned till members attain 55 years of age.

For individuals who needn’t withdraw cash from their EPF accounts, a key query might be whether or not a smaller fund dimension would imply a better return on funding and better dividends. Would the reverse be true?

The brief reply is that there’s prone to be a short-term influence and the magnitude of the blow will rely upon the extent to which the unprecedented withdrawals linked to Covid-19 cut back the general dimension of the fund and disrupt the funding operations of the contingency fund.

Over the long term, nonetheless, EPF financial savings are assured by the federal authorities and members will proceed to profit from the ability to compound curiosity because the tempo of withdrawals normalizes over time.

Even with out the Covid-19 withdrawal services, internet EPF inflows – which averaged RM 1.7 billion per 30 days earlier than Covid-19 – are prone to have declined with plenty of personal sector staff laid off and seeing pay cuts with Malaysia. economic system shrinking 5.6% final yr. Information on month-to-month EPF entries and exits are now not out there on the central financial institution’s web site.

On the finish of 2019, the EPF already held 30% more money than in 2018 “to fulfill members’ withdrawals, administrative prices and using investments”, whereas optimizing the returns on its holdings in cash market, in response to its 2019 annual report.

The EPF is predicted to carry more money in addition to extra liquid belongings akin to cash market devices, which give the least returns amongst its funding asset lessons at 3.78% in 2019 versus equities ( 7.08%), loans and bonds (5.44%). ), actual property and infrastructure (4.89%) and Malaysian authorities securities and bonds (4.59%).

On the time of writing, it was inconceivable to say how a lot retirement financial savings could be prematurely withdrawn in whole by members by means of the i-Sinar Account 1 service, which began to open to only 600,000 members when. of the primary point out of the price range. 2021 final November, however was prolonged to all who apply, with out situations (topic solely to Account 1 stability), on February 11. EPF has 14.59 million members, of which 7.63 million actively contribute. Readability about this might assist different members make extra knowledgeable selections about their financial savings.

Outgoing EPF CEO Tunku Alizakri Raja Muhammad Alias ​​brazenly resisted withdrawals from Account 1, citing longer-term penalties on the members’ retirement pool. He beforehand mentioned that greater than two-thirds of members saved lower than RM50,000 at age 55, which interprets to solely RM 208 per 30 days if one lives one other 20 years after retirement.

Alizakri has been with the group for seven years, together with two and a half years in his present place, and “will proceed to contribute to the general public service in one other capability”.

His final project at EPF might be the announcement of the 2020 dividend. The excellent news is that even members who subscribed cash final month will likely be entitled to the dividend, even when the speed has not but been set. declared, because the provident fund calculates dividends in proportion to the interval by which the cash is saved.

The dividend announcement is slated for late February, in response to the Finance Ministry’s Laksana report dated February 18, reviewing the controversial withdrawals from the i-Sinar 1 account. The elimination of situations for i-Sinar, as a way to facilitating the elimination of members from their account 1, ought to assist the inhabitants mitigate some challenges because of the Covid-19 pandemic, the report mentioned.

Datuk Seri Amir Hamzah Azizan, former CEO of Tenaga Nasional Bhd and son of late Petronas Chairman Tan Sri Azizan Zainul Abidin, will take up his function as CEO of EPF efficient March 1.

Some 18.5 billion RM has been launched to three.3 million EPF members because the opening of functions final December, in response to the EPF press launch of February 18, to not point out the variety of functions obtained and the full quantity of the requested withdrawal.

On January 6, EPF mentioned it had obtained 3.88 million requests from i-Sinar and accredited 2.5 million requests totaling RM 19.62 billion with the primary month cost of RM 10.07 billion being made. in levels from January 5. As of February 5 of this yr, round 5.12 million EPF members had additionally withdrawn a complete of RM16.96 billion by means of the i-Lestari Account 2 facility.

The EPF ought to have the ability to pay a dividend of at the very least 4%, and there’s even an opportunity that it’s going to beat the 5.45% it paid out to members with standard financial savings in 2019. The dividend from its standard financial savings could possibly be between 4.9% and 5.5% wc if its funding earnings in 4Q2020 corresponds at the very least to its lowest quarterly internet funding earnings of the primary three quarters of 2020. That is primarily based on The Edge’s estimate that EPF would wish round RM9.2 billion to pay 1% of the dividend for 2020, primarily based on the fund’s progress trajectory over the previous decade. This represents a rise of RM 8.5 billion in 2019, when EPF declared a complete of RM 45.8 billion in dividends by paying 5.45% to traditional financial savings and 5% to Sharia financial savings. .

The quantity wanted to pay 1% of the dividend to its members has greater than doubled over the previous decade, reflecting the expansion within the dimension of its fund to RM 927.9 billion on the finish of 2019, from RM 376 billion. on the finish of 2009 when he solely wanted 3 RM. .43 billion to pay 1% of the dividend.

Steady earnings streams

Whereas the EPF should rebalance its portfolio to deal with the upper tempo of withdrawals, which the fund has been making ready for since March of final yr, the contingency fund portfolio ought to nonetheless have a big pool of funds. belongings offering constant and common earnings streams. That is because of the must concentrate on preserving capital.

In 2019, round RM21.6 billion, or 55% of EPF’s gross funding earnings, got here from curiosity and income from investments that generated regular earnings streams, up 8% from to RM20.02 billion in 2018, in response to knowledge in its annual report.

Dividend earnings represented 12.41 billion RM or 32% of gross funding earnings in 2019, up 4% from 2018. Solely 3.13 billion RM or 8% got here from capital positive factors of disposals, whereas about 5% got here from different funding earnings.

“The expansion in funding earnings from curiosity, earnings and dividends has been primarily pushed by the rise within the dimension of EPF’s funding belongings,” the provident fund mentioned.

As a perspective, the EPF credited RM 45.82 billion in dividends to members for 2019 and RM 47.3 billion for 2018.

In 2019, the rise of RM 1.75 billion, or 100% yr on yr, in capital positive factors on disposal outcomes from the rise in capital positive factors of its bond portfolio attributable to declining yields around the globe, notably in the USA and Malaysia. That is anticipated to proceed in 2020, in response to knowledge launched within the first three quarters of the yr. However which may not proceed this yr as yields do not go down as earlier than.

Whereas a bigger fund dimension means a better threshold for paying each 1% dividend, a smaller fund dimension doesn’t essentially equate to a greater probability of getting a greater return on funding (ROI). Gross funding earnings for 2019 mirrored a return on funding of 5.71%, its lowest since at the very least 2011 in a difficult market panorama that noticed a lot decrease returns from shares and a a lot bigger whole portfolio, though the three-year annualized return on funding was nonetheless commendable at 6.53. %, because of the larger yields obtained beforehand.

Between 2011 and 2018, ROI remained above 6.5% every year, reaching 7.47% in 2015, whereas whole funding belongings stood at RM 684.53 billion, in response to the information from the 2019 EPF annual report. Whole funding belongings grew to RM 924.75 billion at end-2019, from RM 833.76 billion at end-2018, with return on funding of seven.3% in 2017 and 6.57% in 2018 (see graph).

EPF can also be reaping the advantages of its diversification overseas, which started in 2006. The return on funding was additionally larger for international investments at 7.78%, in comparison with 4.9% for home investments, the returns on abroad belongings contributing 41% of gross funding earnings in 2019, up solely 30.3% of whole belongings on the finish of this yr.

EPF’s efficiency in 2021 might rely upon its means to earn higher returns from its fairness investments. In 2019, fairness earnings fell by a few fifth from 2018, however remained a big contributor to gross funding earnings at 47% or RM24.11 billion. The return on funding of equities stood at 7.08% in 2019, in comparison with 9.74% in 2018 when equities introduced in 57.6% of gross funding earnings whereas constituting solely 39.1% of its pockets.

The EPF admits it. “Equities will proceed to play an necessary function in rising the general returns of EPF’s funding portfolio, making certain that our major funding goal,” to protect and improve the worth of capital derived from member contributions “, is reached.”

For members who’ve little alternative however to dip into their retirement financial savings to fulfill their rapid wants, policymakers might want to redouble their efforts to construct a broader social security internet to cut back attainable social unrest. that might come up as society ages.

Already, The Edge’s substantive envelope calculations present that staggered dividends – even when policymakers determine to implement it later – won’t have the ability to present such a giant enhance to sufficient folks, with every greenback of return turning into more durable and more durable to earn. and low-income persons are extra prone to have used up their financial savings due to Covid-19-related withdrawals. This will already be seen by evaluating the information for 2018 and 2019. Whereas that is excellent news for larger savers, who’re prone to lose out, it additionally signifies that policymakers might want to assume extra about higher options earlier than they do. it’s not too late for too many.