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On Monday, the Employees Provident Fund (EPF) launched the new and improved mechanism to allow members to use their retirement savings in Account 1 of their EPF account under a new program called i-Sinar. This, of course, came after a lot of pressure from all walks of life, including both sides of the political divide, as the RM6,000 withdrawal announced earlier in the 2021 Budget was only intended for the roughly 600,000 employees who they lost their jobs.
With the new mechanism, an estimated two million members will be eligible to receive an advance of their savings in the EPF held in Account 1, as the scope of eligible members has now been expanded to active members who they do not receive – Pay license or have no other source of income.
The issue of withdrawing from our retirement fund has been the subject of heated debate. At one extreme, we have members desperately looking for members who want to tap into their savings in Account 1 as they need the funds now, and at the other extreme, we have members asking that Account 1 balances not change as is. intended for exactly that purpose: retirement.
Balancing the current urgent need and the long-term goal is not an easy task for the HBS or the government. In today’s political environment, the issue has also become a hot topic for politicians to handle as they need to balance the demand of the people, especially the voters.
If we look back over the years, the EPF has been flexible in terms of withdrawal of funds by members, but all of these measures are primarily under Account 2 initiatives. Of course, at present, Members may also withdraw from Account 1 for the purpose of investing in the Members’ Investment Scheme, whereby EPF members may withdraw no more than 30% of their total amount in excess of their basic savings in the Account 1.
Earlier this year, due to Covid-19, the government also allowed i-Lestari program members to withdraw RM500 per month for a 12-month period to overcome this difficult period. As of the end of October, the plan has seen some 4.71 million taxpayers withdraw about 11.18 billion ringgit from their respective accounts. In addition, under the 2021 Budget, the Minister of Finance has also proposed that Account 2 be used by members for the purchase of life insurance and takaful and critical illness protection products.
As can be seen from the above, the EPF has allowed members to use their savings in Account 2 for a variety of reasons. Members will now be able to request an advance from Account 1 before it is replenished through future contributions, directly into Account 1, as clarified by the EPF.
With EPF savings in use, it is no wonder that members are abandoning the long-term retirement goal for short-term needs and it is quite alarming when we look at members’ total savings statistics one year before eligible age. full withdrawal. .
For example, according to the 2018 EPF Annual Report, there were 245,837 54-year-old members with average savings of just RM 107,561. In this group, only 38.3% or 94,260 members are active and have an average savings of RM 209,862, while inactive members had an average savings of only RM 43,938. Based on the current EPF minimum required basic savings amount of RM240,000, on average 54 year old members no longer have the minimum nest to survive for the next 20 years (i.e. between age 55 to expectation average life of the nation of 75) and a benchmark against the minimum pension for public sector employees, which is 1,000 ringgit per month.
In fact, withdrawals at age 55 are the highest reason to withdraw from the EPF, accounting for about a third of total withdrawals in 2018. Based on the EPF’s minimum core savings of RM240,000, only slightly less than 500,000 of The 7.36 million active members have savings of over RM250,000 or more, leaving 93.2% of the active members with less than the minimum amount. Of course, among these active EPF members, they represent all age groups and the younger members still have time to accumulate their retirement savings.
Covid-19 has not only taken a toll on companies and employees, but also on the EPF in the form of growing its investment asset base. For example, according to information provided by the EPF, the fund’s investment assets at the end of June 2020 grew only RM4.9bil to RM929.6bil compared to RM924.8bil at the end of 2019. The EPF, which has seen an increase Sustained in net contribution for longer, you may be in danger of registering a net withdrawal for the first time this year or in 2021 due to these new withdrawal schemes.
The EPF has highlighted that in terms of deposits, it will see a lower contribution of RM8bil and RM9bil in 2020 and 2021, respectively, due to the reduction of the contribution rate for employees. There could also be some reduction, perhaps another RM5bil, due to the absence of contributions for employees who are laid off or, in some cases, due to the reduction of salary or unpaid leave. So, when it comes to total EPF contributions, this could drop to $ 13 billion this year and $ 14 billion in 2021.
In terms of withdrawals, the i-Lestari program will result in a RM16bil withdrawal this year and another RM7bil next year, although the EPF has allocated some RM30bil for the program. i-Sinar may see another recall of RM10bil next year, although the EPF has projected RM14bil in total applications. Altogether, in addition to normal withdrawals of approximately RM45bil, the EPF will see an additional total withdrawal of approximately RM16bil this year and will increase to RM17bil in 2021.
Therefore, on a net basis, the EPF will see a change in total contributions of approximately RM29bil this year and RM31bil in 2021. Thanks in large part to an assumed growth of approximately 3% -4% for the rest of the contributing members. From EPF, based on wage growth and new contributors, the EPF will continue to see a positive net contribution of around RM4.2 billion this year and RM5.3 billion next year.
However, there is still a possible reversal of the net inflow of funds in the EPF if the previous projections, whether deposits or withdrawals, do not meet the expected figures and this may have implications on the ability of the EPF to manage its investments. Should this occur, EPF’s equity and bond market portfolio, which has an asset allocation of approximately 38.2% and 49.2% respectively, should adjust. However, with a money market exposure of around 7%, the EPF would have sufficient balances to meet the demand of its members.
Going back to the topic of retirement savings, there are a variety of reasons why we don’t have enough savings, in addition to the many retirement schemes that the EPF offers. One reason is that not everyone is an employed person from the moment they enter the workforce until retirement. That perhaps explains why EPF’s active members comprise only about half of its total members. Second, our wages are too low to build a nest to help us get through retirement life. Third is the discipline of the members themselves. Studies have shown that most full withdrawals that were made at the age of 55 result in the funds being depleted in a short period of time, even less than five years.
On the government’s solution to the needs of the people, it is clear that even in the i-Sinar program, the target group is quite superficial, since one has to be an active member of the EPF and in an affected group to be able to take advantage the program. To suggest that two million members may need this initiative may be an overestimate, as it represents a quarter of the active members of the EPF. The initiative also does not cover the unemployed and the self-employed or inactive members, especially the day laborers who are seriously affected.
For the government, allowing the EPF to be a cookie jar for selective active members to get their hands in is a narrow-minded short-term solution. The government must do more for all working adult Malays, not just active members of the EPF.
As it stands, most EPF members, at one point or another, have used their retirement savings to fund their specific short-term needs. While the steps taken above are genuinely helping members in times of need, especially in relation to home retirement, we must not continue to add options to members to withdraw their lifetime savings. Let’s focus on the big picture to solve the income problems of all Malaysians and not just a few.
Also, for some of these programs, once withdrawn, it can have a detrimental impact on society, as members may take EPF savings for granted and then we would face another syndrome, members suffering from withdrawal syndrome. EPF, as they are so used to tapping into the piggy bank for their immediate needs.
Pankaj C. Kumar is a long time investment analyst. The opinions expressed here belong to the author.
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