EPF needs greater latitude to diversify abroad

Analysts fear the EPF’s savings may not be enough for depositors upon retirement

by ALIFAH ZAINUDDIN / pic by MUHD AMIN NAHARUL

THE Employees’ Provident Fund (EPF) should be allowed to invest more abroad after the fund declared the lowest dividend rates in over a decade, blaming local equity investments for the disappointing distribution to its 14.6 million members.

Malaysia’s largest pension fund announced a distribution of 5.45% for its conventional savings and 5% for Shariah savings, with a combined payout of RM45.82 billion.

The returns on the Shariah savings are lower because the universe of investable assets is narrower, the fund stated in a release on Saturday.

The pension fund derived the majority of its income from equities which contributed nearly half or RM21.49 billion to its revenue stream in 2019.

The figure marked a 24% fall from the RM26.66 billion it gained from equity investments in 2018, with about 70% of the EPF’s RM924.75 billion asset under management invested domestically.

Institute for Democracy and Economic Affairs research manager in economics and business, Lau Zheng Zhou, said the concentration of government-linked investment companies (GLICs) investing in the local equity market gave little room for funds to manoeuvre away from Asia’s worst-performing market last year.

“EPF and other savings based on GLICs must be allowed more room to invest abroad for diversification and opportunities in emerging markets and fast-growing companies.

“These GLICs sometimes own the same big blue-chip companies, so the concentration risk is high and may all suffer if there is further weakness in Malaysia. But at the same time, without GLICs like the EPF providing stability to the local market, we may see even greater swings and volatility. So, it really is a policy dilemma,” Lau told The Malaysian Reserve.

The EPF owns substantial shares in RHB Bank Bhd (40.6%), Telekom Malaysia Bhd (16.5%), Axiata Group Bhd (15.8%), Sime Darby Plantation Bhd (14.4%) and CIMB Group Holdings Bhd (14.2%), its latest available annual report showed.

The lower EPF dividend rate comes after the country’s largest fund manager, Permodalan Nasional Bhd (PNB), announced a record low distribution of 5.5 sen in December last year, citing declines of up to 7.2% on the benchmark index in 2019 for the weaker performance.

PNB’s key shareholdings are in Malayan Banking Bhd (48%), Sime Darby Bhd (52%), SP Setia Bhd (60%), UMW Holdings Bhd (59%) and

Chemical Co of Malaysia Bhd (56%). The EPF’s portfolio remains conservative with half of its assets invested in fixed income instruments, a third in equities and the rest in real estate and cash reserve.

Analysts, however, fear after taking into account inflation — especially the rapid rise in the cost of medical and old age care — the EPF’s savings may not be enough for depositors upon retirement.

“In short, the EPF has done an outstanding job in ensuring growth despite tough environment, but should be allowed to invest more abroad for better returns to meet future retirement costs. Policymakers should also work towards attracting foreign investors into the Malaysian bourse, so that GLICs like the EPF will not invest in the same thing and create concentration risks,” Lau added.

The EPF has repeatedly expressed its interest to expand its footprint abroad due to its growing scale and limited investment opportunities in Malaysia.

In 2019, the EPF set a target to increase its overseas investment to 32% of its total assets from 28%, but only managed to raise the level up to 30.3%.

Decisions on overseas investments are subjected to approval from the fund’s investment panel and Bank Negara Malaysia’s regulations.

The EPF’s investments in fixed-income instruments such as Malaysian Government Securities and equivalent, loans and bonds, in total, contributed 43% or RM19.6 billion in investment income last year compared to RM16.64 billion in 2018.

Real estate and infrastructure contributed RM3.03 billion or 6% to investment income in 2019.

Money market instruments contributed RM1.7 billion or 4% to investment income during the year. External fund managers managed 14.4% of the EPF’s total funds and contributed 18.3% to income.