The pandemic has brought a new focus on the livelihood of Employees Provident Fund (EPF) members post retirement given the vast amounts of money that has been withdrawn from member accounts.
EPF chairman Tan Sri Ahmad Badri Mohd Zahir noted that the RM101bil pandemic-related withdrawals since 2020 had resulted in 48% of EPF members having less than RM10,000 in their accounts.
According to him, the primary concern with the withdrawals was the impact on members’ retirement adequacy.
Also, the pandemic-related withdrawals resulted in the pension fund recording in 2021, its first ever negative net contribution (contributions after withdrawals) in 20 years of RM58.2bil.
Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said recently the EPF dividend rate should have been higher at 6.7%, compared with the 6.1% announced for 2021 if there were no outflows of savings by its members.
“The loss of RM5.4bil from this dividend has resulted in about 5.3 million members — who have never withdrawn their savings through any withdrawal scheme before — receiving lower returns on their savings," he said.
Tengku Zafrul warned that to cover another one-off RM10,000 special EPF withdrawal, which may total RM63bil in additional withdrawals, the EPF will have to carry out portfolio balancing, and sell more overseas investment assets in volatile market conditions, as well as halt domestic investment for the short and medium term for three to six months.
Tengku Zafrul added that such a move would have a negative impact on the local stock and bond markets, including Malaysian Government Securities' (MGS) interest rates, and cause borrowing costs for the government in the future to increase significantly.
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The EPF has also noted that maintaining sustainable long-term returns remains a challenge amidst uncertainties, as the amount needed to pay 1% dividend continues to grow, which was RM9.38bil in 2021.
Meanwhile, on March 16, 2022, Prime Minister Datuk Seri Ismail Sabri Yaakob announced that Malaysians will be allowed to make a fourth special withdrawal of RM10,000 from their EPF retirement savings.
As for the pandemic-related withdrawals, Datametrics Research and Information Centre Sdn Bhd managing director Pankaj C. Kumar pointed out that without the pandemic-related withdrawals, EPF's assets under management (AUM) would be around RM1.1 trillion today.
"Obviously, when there are (extraordinary amounts) of withdrawals, the EPF has to do some sort of rebalancing in terms of asset allocation. Whether the pension fund can continue to pay stellar dividends, is a function of two things.
"One is the fund size. Second is the performance of markets. And of course, EPF's ability to read markets, and realise the investments because EPF can only pay dividends from realised investments," said Pankaj.
Bank Islam Malaysia Bhd (BIMB) chief economist Dr Mohd Afzanizam Abdul Rashid said depending on the quantum of the latest special EPF withdrawals by members, the pension fund may see "some disruption to its investment strategy, as it needs to meet the withdrawal demands."
"It may have an impact in terms of EPF's asset allocation strategy. EPF may need to shift from the more risky assets towards low risk assets, like fixed income and money market instruments.
"However, the trade-off towards more liquid assets and cash-like instruments is low returns," he said.
Regarding the special EPF withdrawals, an asset fund manager said "it was a lose-lose situation".
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"If you don't allow those who need the money today to take it from EPF, they will continue to suffer. But by allowing the special EPF withdrawals today, the same EPF contributors will suffer from less income when they retire in the future," he said.
The fund manager added that the fact that the government has allowed yet another special EPF withdrawal is very worrying.
"It just shows that despite the gradual re-opening of the economy and the normalisation process that we have seen for the last six months, there are still a lot of people who are not out of the woods," he said.
Yeah also pointed out that the headwinds facing EPF is further compounded by the government’s decision to allow further withdrawals.
"If the rate of withdrawals exceeds the increase in monthly new contributions by working members, then the impact on EPF’s fund performance will be minimal, with the potential loss confined largely to ‘missed’ investment opportunities.
"However, if the withdrawals necessitate liquidation of assets, then EPF may incur substantial losses given the current turbulent market conditions and depressed prices for some asset classes," said Yeah.
As for UOB Kay Hian Malaysia head of research Vincent Khoo, he hopes the government would be able to impose strict conditions for withdrawal eligibility, in order to ensure that withdrawals are absolutely essential only to sustain the livelihoods of EPF members.
"There is a moral hazard to prematurely utilise retirement funds, particularly when the economy has already opened up and with borders," said Khoo.
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Centre for Market Education research fellow Dr Liew Chee Yoong also argued that allowing further EPF special withdrawals will hurt the contributors more in the long run.
"Except for those whose income and contribution are high, the majority of the EPF contributors are from the middle and lower class.
"These segments of contributors will not have enough retirement savings after they retire if they withdraw further from their EPF accounts," he said.
Liew added that the government will need to provide more financial aid to these segments of society if they do not have enough retirement income, which may further increase government debt levels.
Meanwhile, Dr Geoffrey Williams, an economist and specialist in higher education management and finance at the Malaysia University of Science and Technology, said allowing further EPF special withdrawals may not help very much because the poorest members will have depleted their accounts, and so will not benefit.
"If the aim is to provide welfare support, then this will not be effective because around 75% of all Malaysian adults and 55% of EPF members are not eligible," he said.
Williams added that there is a need for a separate cash transfer scheme for the millions of people in need.
"Also, I fully agree with the Finance Minister in the case that the extra EPF withdrawals would force asset sales, particularly overseas assets where the income has been made.
"It would also have wider effects on MGS sales, so these externality effects are still real," said Williams.