EPF dividend shows strong investment strategy amid economic conditions - Economists

SHAH ALAM – Economists have acclaimed the Employees Provident Fund (EPF) dividend rate percentage for conventional savings and Shariah savings which is a better rate and higher amount than the previous year despite the current economic situation.

EPF had earlier announced a dividend distribution totalling RM57.81 billion for 2023, with a rate of 5.5 per cent for conventional savings and 5.4 per cent for Shariah savings.

In line with the announcement, Malaysia University of Science and Technology (MUST) economist Prof Dr Geoffrey Williams said the EPF dividend rate was strong and in line with what he predicted, which was between 5.5 and 6 per cent and the performance was exceptionally good, indicating a rebound from the previous few years.

He also praised the previous year's successful investment plan implemented by the EPF team, which was directed by the former chief executive officer Amir Hamzah Azizan, who is now Finance Minister II.

“This is better than last year when it was only 5.32 per cent so it shows improvement in performance following a challenging year.

“The total EPF payout for 2023 is RM57.8 billion which is 13 per cent higher than 2022 which was RM51.14 billion,” he said when contacted today.

Commenting on the overall outcomes, Williams emphasised the strength of the RM57.8 billion dividend and the RM66.99 billion total return.

He said even in difficult situations, a well-executed portfolio management approach that includes both domestic and foreign assets might continue to produce positive outcomes.

“The main factors are a more stable environment for EPF with no withdrawals, improvement in members and contributions which raised the investable funds and a good strategic asset allocation especially in overseas markets which pushed up the returns.

“It is a very good performance and shows recovery from the last few years. The long-term strategy is sound and in addition to the payout allows EPF some retained funds for reinvesting,” he added.

Additionally, Williams suggested that establishing a separate new Malaysian Superfund, comparable in size to the EPF, by consolidating underperforming Government-Linked Investment Companies (GLICs), could offer a solution to civil service pension problems.

Moreover, he said it could potentially provide a Universal Basic Pension for everyone, offering a promising avenue for addressing retirement challenges and ensuring financial security for citizens.

Meanwhile, economist Dr Nungsari Ahmad Radhi expressed admiration for this year's EPF dividend rate, deeming it superior to the previous year's (2022) rate of 5.35 per cent and surpassing ASB's 2023 rate of 5.25 per cent despite the investment landscape in 2023.

He said last year was challenging, domestically and globally, excluding the US, and said that the rate achieved by EPF was commendable.

“EPF engages in investments both domestically and globally, across a wide array of financial instruments, including equities, fixed income securities such as bonds and sukuks, and potentially even private markets.

“As a result, the dividends mirror the ongoing transition of the post-Covid world as it continues to seek a new balance and stability,” Nungsari told Sinar Daily.

Nungsari added recovery from 2020 that saw better performance in 2021 and then a world economy characterised by trade tensions, disruptions in supply chains because of conflicts and the tightening of monetary policy to curtail inflation - all of which presented challenges to the economy and investing environment.

Malaysia’s own growth was below 4 per cent in 2023 as the result of weaker external demand for exports.

He said barring a worsening and expansion of the Israeli genocide in Gaza would better the outlook for 2024 both for global and domestic economy.

Nungsari also pointed out the millions of EPF account holders who withdrew their retirement savings would not enjoy the decent dividend.

“On EPF, it is not how well the funds are managed and how good the dividends have been. By and large, if EPF is left alone to do its work and deliver its mandate in the EPF Act, they will do fine,” he said.

Nungsari highlighted the recovery from 2020, resulting in improved performance in 2021.

He added the world economy faced challenges such as trade tensions, disruptions in supply chains due to conflicts and the tightening of monetary policy to curb inflation in 2023.

Malaysia's own growth remained below 4 per cent in 2023, mainly due to weaker external demand for exports.

Nungsari also emphasised that EPF must be given the freedom to carry out its duties autonomously in order to meet the objectives outlined in the EPF Act.

“It is not how well the funds are managed and how good the dividends have been.

“By and large, if EPF is left alone to do its work and deliver its mandate in the EPF Act, it will do fine.

“The two key issues are the highly skewed distribution of EPF savings which has been made worse by the withdrawals allowed during the pandemic,” he said.

Highly skewed distribution of savings, he said, was a reflection of the labour market and the economy generally, that the economy has not been able to generate more high paying jobs.

“Something that calls for major reforms to effect structural changes. Including fiscal reforms,” he said.

For the withdrawals, Nungsari said it needed to be addressed as it would be looking at those who aged without the means to finance their golden age.

“There has to be some changes to the EPF model to address this as well as a redefinition of social safety net for the aged. The latter requires fiscal reforms, some pain today to alleviate much greater pain later,” he said.

Another expert, Universiti Teknologi Mara (UiTM) Economics and Finance senior lecturer Dr Mohamad Idham Md Razak also said that the dividend rate was reasonable and the increased payout was a positive indication, which showed that the investment strategies demonstrated effectiveness.

He said it was important for EPF to strike a balance between generating returns for its members and ensuring long-term sustainability and financial stability.

“This could potentially boost confidence among EPF contributors and positively impact their retirement savings.

“Additionally, a higher dividend payout may indicate improved economic conditions or better investment opportunities compared to the previous year,” he said when contacted recently.

When asked on factors that influenced the dividend rate, he said that the positive performance of EPF's investment portfolio played a crucial role, encompassing various asset classes like equities, fixed income securities and real estate.

Idham also highlighted that economic conditions significantly impact investment returns.

He pointed out that factors such as GDP growth, inflation rates, interest rates, and market volatility come into play and great economic conditions usually lead to higher returns on investments.

“Global market trends and geopolitical events have a bearing on EPF's returns, as its investment portfolio is diversified internationally.

“Prudent risk management helps safeguard the fund's assets and has the potential to enhance returns,” he said.

Furthermore, he added that changes in the regulatory environment, tax policies and accounting standards could influence investment decisions and returns.

He further highlighted the significance of efficient cost management practices which could improve net returns on investments, thereby impacting dividend rates.

On the long term, Idham said EPF's pursuit of sustainable growth to meet the long-term financial needs of its members was evident in the achievement of higher dividend rate which reflected its effective management of resources to generate returns while prudently balancing associated risks.

He highlighted the capacity for sustainable growth in its assets over time aligns with EPF's long-term financial strategy.

Additionally, the upswing in dividend rates furnishes EPF with additional funds for reinvestment, facilitating the fund's continual growth and the generation of returns for future distributions.

“The reinvestment strategy aligns with EPF's commitment to preserving and enhancing the value of its members' savings, emphasising the fund's crucial role in contributing to the financial well-being of its members.

“A higher EPF dividend payout not only satisfies investors but also boosts confidence in EPF's performance and management. This could lead to increased satisfaction among contributors as it represents a greater return on their investments and savings,” he said, adding that higher dividend payout reflected positively, indicating stability or growth.

The EPF dividend is an annual payment deposited into members’ accounts once it has earned profits from its investment assets.

The annual dividend payout is credited based on the account holder’s savings as of the first day of January each year, calculated from the member’s daily aggregate balance.

The dividend percentage varies annually, depending on factors such as market losses, investment costs and similar expenditures.

In 2022, the dividend rate was at 5.35 per cent for conventional savings and shariah-compliant accounts at a rate of 4.75 per cent.

This marked a decrease from the previous year, where dividends on conventional and shariah accounts were 6.1 per cent and 5.65 per cent respectively, in 2021.

In 2020, the dividend rates were 5.2 per cent for conventional accounts and 4.9% for shariah accounts.

EPF's highest dividends were paid out at 8.5 per cent between 1983 and 1987, followed by 8 per cent between 1988 and 1994.