i-Lestari and i-Sinar will be affecting dividend rate as they will reduce EPF’s financial capability
by RAHIMI YUNUS / pic by TMR FILE
THE Employees Provident Fund (EPF) is expected to declare a slightly lower dividend for Simpanan Konvensional this year, if not flat, against 5.45% declared for 2019, mainly due to the introduction of emergency relief measures namely i-Lestari and i-Sinar.
Putra Business School associate Prof Dr Ahmed Razman Abdul Latiff said the i-Lestari and i-Sinar facilities would strain EPF dividend commitment for 2020 to match last year’s payouts.
“The i-Lestari and i-Sinar initiatives will be going to affect the dividend rate as they will reduce the financial capability of the EPF to generate at least RM46 billion in 2020 that could be translated to dividends.
“I foresee the dividend rate for 2020 will remain or be slightly lower,” Ahmed Razman told The Malaysian Reserve (TMR).
The EPF, one of the world’s oldest and largest retirement funds, declared a dividend of 5.45% with a payout amounting to RM41.68 billion for Simpanan Konvensional for 2019 — the lowest in more than a decade.
The fund declared a dividend rate of 5% for Simpanan Shariah 2019, with a payout amounting to RM4.14 billion, making the total dividend payouts at RM45.82 billion for the year.
The EPF declared the lowest return for Simpanan Konvensional in 2008 at 4.5% during the global financial crisis.
Despite the i-Sinar facility being expanded to all EPF contributors with affected income, Ahmed Razman said not all the eight million contributors would be applying for it.
i-Sinar is projected to benefit eight million members, an increase from the initial target of two million, with a maximum withdrawal of up to RM10,000 and RM60,000 from Account 1.
Ahmed Razman said the EPF would have ample time to rebalance its investment strategy throughout the six-month disbursement period.
The EPF has also allocated RM40 billion under the i-Lestari facility, which would benefit 3.5 million contributors for the withdrawals from Account 2.
i-Lestari is estimated to inject liquidity of RM3.3 billion per month on average into the local economy.
Ahmed Razman said the EPF would need to divest some of its assets to prepare for the expected withdrawal from its members and to ensure that it has enough returns to achieve its target dividend rate for the year.
He said the divestment would also increase the volume of trading activities in the stock market since the EPF is the largest equity player in the local stock exchange.
An analyst also projected that the EPF would be selling off its assets progressively to avoid any shock in the financial market given the volume and value that might be involved.
The analyst said it would not be easy to find other investors that could substitute the EPF in such equity holding.
“The EPF is set to divest some assets, but it will look at the market condition and foreign equity inflow carefully.
“Foreign investors have been net sellers on Bursa Malaysia year-to-date though the pace is slower now. There is no point for the EPF to be a net seller as well,” the analyst told TMR.
The analyst said asset disposals by the EPF would not hurt local equity and capital markets nor the institution itself as the pension fund would have a new investment strategy for 2021 to support the projected outflow from the Covid-19 relief initiatives.
Tengku Datuk Seri Zafrul Tengku Abdul Aziz said the EPF currently has RM960 billion of assets under management.
Based on analyses, he said withdrawals of funds from the EPF, which would help many contributors who are impacted by the pandemic, will not affect the fund’s dividends or returns.
Aberdeen Standard Investments (M) Sdn Bhd country head Gerald Ambrose said the EPF may have to liquidate RM70 billion or keep it in a very liquid form to prepare for the i-Sinar withdrawals.
He said such a move would reduce the potential return in the current low, zero or negative interest rate.
“RM70 billion is about 5% of EPF’s assets. Much of those assets are highly liquid domestic and overseas investments which can be easily encashed.
“However, cash sitting in a bank account might not earn as much as it might if it were invested elsewhere, so it would hamper the EPF somewhat in achieving its target annual returns,” Ambrose told TMR.
Nevertheless, he said the EPF should be able to raise the required liquidity over time without jeopardising the local markets. As returns on cash holdings are close to zero, Ambrose said the EPF’s other investments will have to “work harder” for the same overall fund returns.
“The EPF’s investments are now parked in more diverse asset classes, currencies and geographies, and that will provide some downside protection for members.
“But we are in a ‘longer for lower’ investment world, which makes the good old days of 8%+ returns difficult to achieve,” he added.
The EPF recorded a gross investment income of RM15.12 billion for the second quarter ended June 30, 2020.
Equities, which contributed 54% to total gross income, registered RM8.11 billion.
Fixed income instruments contributed RM6.17 billion, while real estate and infrastructure, as well as money market instruments, contributed RM470 million and RM370 million respectively.
The EPF received an average monthly contribution collection of RM6.3 billion, making a total collection of RM75.9 billion by the end of Dec 31, 2019, which translated to an approximate RM144,000 per minute.
There were a total of RM44.8 billion in withdrawals which are translated into an estimated RM85,000 disbursed to members every minute.
Net contributions to the EPF came up to RM31.1 billion, or an average of RM2.6 billion monthly and RM59,000 per minute.
For 2019, the EPF reported a gross investment income of RM50.29 billion, with two-thirds coming from stable interest and dividend streams. Of the RM50.29 billion, RM45.82 billion was attributed to Simpanan Konvensional.
Equities continued to be the main contributor to income at 47%, amounting to RM21.49 billion, compared to RM26.66 billion in 2018.
Investments in fixed income instruments comprising Malaysian Government Securities and equivalent, and loans and bonds in total contributed 43%, or RM19.6 billion, compared to RM16.64 billion in 2018.
Real estate and infrastructure contributed RM3.03 billion or 6% to investment income in 2019, while money market instruments contributed RM1.7 billion or 4% to investment income during the year.
The fund’s overseas holdings across all asset classes stood at 30.3% and contributed 41% to its gross investment income.
Outsourced external fund managers managed 14.4% of the total funds and contributed 18.3% to income.
Read our earlier report