EPF withdrawals trend raises call for retirement reform

It could be time to see beyond the EPF being the dominant retirement fund for the population

by RAHIMI YUNUS / pic by ARIF KARTONO

MALAYSIANS dipping into their retirement savings to get through the Covid-19 pandemic has raised concern that many will have too little when they retire.

The government recently relaxed conditions to withdraw money from the Employees Provident Fund (EPF), the country’s largest pension fund, to help those affected by the pandemic.

This has accelerated withdrawals recently but the problem may have been brewing for some time leading experts to suggest a structural overhaul on how Malaysians prepare for retirement should be done.

Williams Business Consultancy Sdn Bhd founder and director Dr Geoffrey Williams said the structural issue might not necessarily affect EPF’s performance or income flows, but it would definitely affect the fund coverage of the working population.

He suggested that it could be time to see beyond the EPF being the dominant retirement fund for the population.

“The main structural issue for EPF will be the depletion of funds in the contributor accounts due to the Covid-19 withdrawal under i-Lestari and i-Sinar.

“This will leave millions of EPF holders with ‘hundred-dollar pensions’ that are nothing in their accounts,” Williams told The Malaysian Reserve (TMR).

Outgoing EPF CEO Tunku Alizakri Raja Muhammad Alias said during a review of the fund’s performance last week, the potential of some Malaysians not having enough to retire was not just an EPF issue but a national one instead.

He said solutions must not only come from one authority, agency or ministry but needed to be developed holistically.

EPF chief strategy officer Nurhisham Hussein said the retirement savings adequacy issue is happening because Malaysia is becoming an ageing country, the second-fastest in Asia.

He said there are other issues over retirement adequacy including a large informal sector where workers are not covered by EPF.

He said the total system reform would take much longer efforts.

Nurhisham said EPF has given input to the government and constant review with other agencies like the Social Security Organisation and Retirement Fund Inc.

Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff said the EPF needs support from the government to help boost retirement funds for its members such as ringgit-to-ringgit matching contribution which has been done in Singapore.

He said under Singapore’s Matched Retirement Savings Scheme, for instance, the government will match every dollar of cash top-up made to the retirement account of Central Provident Fund Board members of up to S$600 (RM1,832) annually.

He said extra contributions will allow EPF to have more funds to invest further despite the withdrawals by its members and i-Sinar initiative.

About 30% or 1.6 million members of EPF may have exhausted nearly all of their retirement savings in Account 1, leaving a minimum required balance of RM100 in the aftermath of various Covid-19 related programmes, according to the pension fund’s data.

Besides that, close to 60% or three million members have or will use up all savings in Account 2.

Adequacy levels are expected to deteriorate with the number of members meeting basic savings dropping from 22% (3.3 million) to less than 20% (three million) with Covid-19 programmes.

The number of active members meeting basic savings also declined from 36% (2.7 million) to 28% (2.1 million) post-Covid-19.

On the liquidity front, the year 2020 saw contribution collection increase by 3.3% to RM78.4 billion compared to RM75.9 billion in 2019.

However, withdrawals also increased by 30.1% to RM58.3 billion in 2020 against RM44.8 billion in the previous year.

Net contributions for 2020 were down by 35.4% to RM20.1 billion from RM31.1 billion recorded in 2019.

Williams said the investment challenges for EPF this year will be the continued headwinds from the Covid-19 crisis and the risks to recovery in business activity and profitability.

He said many good return companies are also outside the environmental, social and governance space, glove stocks were the main example last year, so the EPF still needs to maintain a traditional portfolio approach to sustain dividends each year.

Ahmed Razman said the challenges this year would be on how fast the country’s and global economies can recover amid the ongoing vaccination programme.

He said uncertainties in global geopolitical, volatile commodity prices and a slowdown in real estate and infrastructure industries can derail EPF’s investment strategies.

iFAST Capital Sdn Bhd research analyst Shawn Low Tian Hao said EPF is likely required to raise more cash by selling investments and could raise more in anticipation of further withdrawals.

“Should there be a spike in daily Covid-19 cases, the government could be forced to implement Movement Control Order (MCO) or Enhanced MCO measures, postponing the greatly-anticipated return to a pre-Covid-19 lifestyle.

“Not only the equity market would face selling pressure, but more EPF withdrawals could thus be expected from the ailing citizens,” Low told TMR.

He said the market rally in 2020 was limited to specific sectors and the pension fund’s top holdings of banking, real estate investment trusts and consumer sector were not one of them.

EPF declared a dividend of 5.2% for conventional savings for 2020, lower than the 5.45% declared for 2019 and the lowest in more than a decade.