Matching grants to prevent excessive withdrawal of EPF funds

KUALA LUMPUR: Despite 2020 being a bad year in terms of the pandemic and economic downturn, the Employees Provident Funds (EPF) – a retirement savings fund responsible for ensuring members' retirement well-being – is able to dish out a dividend of 5.2% for conventional savings and 4.9% for syariah savings for 2020, total payout of RM47.64bil.

And this could be the main reason why it had earlier announced its readiness to allow an unconditional withdrawal of EPF funds for those who are mostly affected by the economic downturn brought about by the pandemic.

The reason why the retirement fund is able to dole out a respectable dividend is because its investments overseas and on fixed income instruments in 2020 had produced good returns.

With some 14 million contributors, the Fund has achieved a net investment income of RM37.83mil for the first nine months of 2020, with its fixed income portfolio recording an income of more than RM22bil for the same period.

EPF’s fixed income instruments comprise largely government debt papers and highly rated corporate papers, which are actively traded with only a small portion held to maturity.

With a low interest rate regime expected throughout the pandemic, its fixed income portfolio is sitting on good profits as bond prices rise when interest rates fall.

In 2019, EPF disbursed 5.45% dividend to its conventional account holders and 5% for the Syariah account holders. Although a 5.2% dividend for 2020 would be lower compared to the preceding year, nevertheless it is remarkable considering the volatile equities market.

This is indeed a piece of good news for the rakyat as it means they would likely receive fairly attractive returns despite the withdrawals from their EPF accounts.

On Feb 18, EPF said members below the age of 55 who have applied for the i-Sinar withdrawal facility will be given approval beginning March 8, which includes new applications received thereafter, subject to their available Account 1 balance.

For those who have RM100,000 and below in Account 1, they can withdraw up to RM10,000, and the payments will be staggered over a period of six months with the first payment of up to RM5,000. Those with RM100,000 in Account 1 can withdraw up to 10% of their Account 1, subject to a maximum amount of RM60,000.

Many have welcomed the move as timely because of the hardships faced by the rakyat during MCO 2.0 along with the rise in unemployment in the last quarter of 2020.

This revision would help increase people’ disposable incomes which can be used to make ends meet. Also, this would do good to the economy in increasing private consumption expenditures, as consumption is an important driver of growth, and hopefully would prop up the GDP of the country.

As reported by The Star, one of EPF members who goes by the name Rashid Ramli, said he welcomes this move because of his struggles to pay for his wife’s dialysis treatments and to support his children.

Some have been reported to need to use their EPF savings to repay their loans and to attend to other commitments.

It is indeed a sign the economics of empathy is still alive and kicking among government agencies at this unprecedented time of the third wave of the pandemic.

But as cautioned by EMIR Research in an article “Be vigilant of an unconditional i-Sinar withdrawal”, the government needs to be careful on this unconditional withdrawal because the primary aim of the EPF is to ensure savings for the rakyat during their retirement.

According to estimates by the Department of Statistics (DOSM), Malaysian is expected to live longer until 75 years old. Although this life expectancy should not be generalised for everyone, one must prepare for the old days with sufficient amount of savings.

So, this unconditional withdrawal of EPF funds should not be allowed indefinitely. Perhaps, for a period of three months, after which an extension of this scheme could be allowed only if the economy remains sluggish and the performance of the Fund for the first quarter of this year remains good.

Most importantly, there is a need to be aware and mindful that a portion of these funds are allocated for investments to ensure good dividends for the contributing members, which will increase their nest egg for retirement. But due to this expanded coverage for withdrawals, the amount of funds will be less, thus, would likely result in lower dividends for this year.

The other concern to this relaxed i-Sinar withdrawal is because of the poor social safety net of the informal sector workers. Statistics in 2019 showed that employment in informal sector made up 8.3% of the total employment in Malaysia (1.26 million).

Anecdotally, since the pandemic, it can be observed that more people are going or have gone into the informal sector.

Although informal sector workers have been encouraged to voluntarily contribute for their retirement savings through EPF’s i-Saraan scheme, it appears that the number of people contributing is not very encouraging.

For instance, The Star reported on September 12 there are less than 10% of 2.7 million self-employed individuals who contribute to the scheme and only 18% of these 10% contribute consistently.

Therefore, the revised i-Sinar scheme for the informal sector workers would likely put their unstable savings at risk given their unstable/uncertain source of income or would not even benefit some if they don’t contribute to the federal statutory body.

Perhaps one measure to consider as an effort to encourage more savings by the informal sector workers in EPF is through a ringgit-to-ringgit matching contribution, as what has been done in Singapore.

Under the Matched Retirement Savings Scheme (MRSS) in Singapore, the government will match every dollar of cash top-up made to the retirement account of Central Provident Fund Board (CPF) members of up to S$600 (RM1,832) annually.

Or perhaps because Malaysian society on the whole observes filial piety, this kind of matching grant could be given to parents whose children top-up their parents’ EPF saving or vice versa.

The extra matching of monies would mean EPF will have more fund to invest further, despite the withdrawal.

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Jamari Mohtar and Sofea Azahar are part of the research team at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.