2nd EPF!

The move to allow EPF members to buy only funds with a track record of at least three years has drawn mixed reactions.

Effective August, funds with a less than a three-year performance track record as well as newly launched ones will not be sold to EPF contributors. The new rulings also reinstated a previous move to allow EPF members to invest in funds with foreign exposure, but now with a limit of up to 30%.

The Federation of Investment Managers Malaysia (FIMM) recently said the reason to allow EPF members to invest in performing funds — those that have higher consistent returns for at least three years, was to strengthen trust and confidence in unit trust investment.

That was a fear that with the three-year track performance ruling, members might lose out as good investment “windows” did not last that long especially true for “thematic” investments. Thematic investing is an approach that seeks to identify and capitalise on economic, political, and social trends that are likely to have significant implications on important sectors of the economy and financial markets.

However the move is considered a good one as the three-year performance time frame would help investors choose funds that perform consistently and eliminate those that underperform. Just be warned that the selection criteria may lead members to focus too much on the past performance of a fund which may not necessarily be indicative of future performance.

There are other factors to consider in choosing the right investments, such as risks profiling, time horizon, qualitative factor and others

Diversified From EPF to Unit Trust

Significantly larger number of EPF members withdrew part of their retirement savings for investment in unit trusts.

The amount withdrawn under Members’ Investment Withdrawals in first quarter of 2010 (Q1 2010) increased by 43.26 per cent to RM911.15 million (Q4 2009: RM896.66 million) from RM636.01 million withdrawn in the corresponding period in 2009. Total applications approved under this withdrawal increased to 113,809 (Q4 2009: 114,375) from 87,420 in the same period last year.

The increase in withdrawals for investments is in tandem with the recovery in the domestic economy that began in the third quarter of 2009 and has since continued to gain momentum. The increase was also attributed to the rise in the number of members who are eligible for investment withdrawals.

EPF's Top 30 Equities

EPF will publish its Top 30 equity investments in companies listed on Bursa Malaysia on a quarterly basis. Members could see from the website which companies their savings were invested.

The investment highlights can be viewed at www.kwsp.gov.my. As of March 31, the EPF’s top three shareholdings were 67.33% stake in Malaysian Building Society Bhd, 56.14% of RHB Capital Bhd and 41.54% of Malaysian Resources Corp Bhd.

Private Pension Funds

Malaysia is set to have private pension funds by the middle of 2010. This is part of the whole pension fund reform in the country and crucial for building the new high income-based economic model.

Several fund managers have shown keen interest in establishing private pension funds. Therefore, there could be a few, rather than just one.

At present, a relatively large proportion of the economically active population in the formal sector has pension coverage through the Employees Provident Fund (EPF), the public sector pension scheme and Lembaga Tabung Angkatan Tentera (LTAT).

As at the end of 2008, there were over two million self-employed Malaysians remaining outside any formal pension system.

The important issue is sustainability of financial security during retirement.

A survey by the EPF indicated that about 90 per cent of contributors have less than RM100,000 in their accounts. Over 70 per cent would have exhausted their total contributions within three years of withdrawing a lump sum on retirement at the age of 55. This means by 58, an average retiree would have depleted all his retirement savings with EPF.

This underlying trend reflects the sole dependence of retirees on their EPF savings as a safety net, and as such, the inadequacy of sustainable levels of income after retirement.

Difficult To Sustain Above 5%

Employees Provident Fund (EPF) contributors may have to be contented with lower returns in the coming years as the fund struggles to boost income amid steep falls in interest rates and a weak equity market.

Analysts said given the fund’s size and strict mandate, it would be very difficult to sustain payouts of above 5% in the coming years. The fund has already hinted that this year’s payout would be less than that for 2008.

In the near term, weak equity markets will continue to hurt EPF but in the longer term, the performance will also be determined by the returns it gets from investing in low-risk assets such as government bonds. EPF had allocated a quarter of its RM342bil investment funds for higher yielding government papers. But as these higher yielding notes expire, the fund must purchase new issues which will now come with lower returns.

Malaysian Government Securities (MGS) debt papers maturing in three and five years are currently yielding less than 4%. In comparison, MGS five-year notes yielded more than 5% a decade ago and above 7% during the 1997/98 Asian financial crisis.

Another big chunk of EPF holdings is in highly rated corporate bonds and low-risk guaranteed loans. However, the global economic turmoil has cut the supply of new bonds coming into the market. Cheaper lending rates had also reduced interest income from loans given out.

EPF was able to fork out steady dividends of above 5% between 2004 and 2007 was mainly due to gains from investments in equities. However current market scenario had eroded the value of EPF’s shareholdings, forcing it to make a provision of RM4.69bil to account for the lower value of its shares, both domestically and abroad.

The KL Composite Index fell 40% in 2008. The economic slowdown has also dragged down corporate profits. This, in turn, has impaired their ability to pay out dividends to shareholders, further reducing the return on investments for EPF.

The EPF has stakes in more than 100 companies listed on Bursa Malaysia, as well as smaller stakes in a number of big listed firms overseas. Income from equities accounted for 35%, or RM6.67bil, of EPF’s total gross investment income last year.

Just how bad EPF’s dividend payouts will be affected by the current market situation remains to be seen. It is worth noting that under the law, EPF has to maintain a dividend rate of at least 2.5% annually. The dividend must come from income generated from its investments.

Not Good Enough

The Employees’ Provident Fund (EPF) Board declared a 4.5% dividend blaming the lower rate of returns on the global economic crisis. It is the lowest returns of dividend since 2003. In comparison, the EPF dividend primed at 8.5% dividend in 1987, and then slipped to the lowest ebb of 4.25% in 2002. Subsequently, it climbed to 4.5% in 2003, 4.75% for 2004, 5% for 2005, 5.15% for 2006 and 5.8% for 2007.

It decided to declare a lower dividend despite the fact that it earned a record RM20bil in gross income last year, up 9.36% from the RM18.29bil recorded previously. Is the money being retained to perform more bailouts? Last year, it loaned RM5 billion to Valuecap Sdn Bhd for its activities to buy Malaysian stocks and left us wonder if we would get this money back! It is time for account holders to demand a full disclosure of the performance and portfolios of investment. It is time a mechanism is proposed to scrutinize the performance.

The worker unions are certainly unhappy. National Union of Bank Employees (Nube) quoted "EPF is a cash rich entity. There is something wrong if there are no reasonable and acceptable dividends being paid out to workers. This has been going on for years where money from EPF has been used to fund government projects and to bail out ailing companies which later rake in huge profits with CEO and managements enjoying fat bonuses of between 20 to 30 months. What about the poor workers in the private sector whose money were used for these bailouts, what are they getting? We have also, time and again, questioned EPF's investment decisions in certain companies. The scrutiny of the EPF board of directors is questionable as the majority of its members are government officers and there are only a few workers' representatives."

Malaysian Trade Union Congress (MTUC) executive said the economic downturn "is not a good enough excuse for paying low dividends because the global downturn only struck in late 2008".

Just compare the return to a similar but much smaller fund manager. The Lembaga Tabung Angkatan Tentera (Malaysian Armed Forces Fund) is rewarding its contributors with a 7% dividend, 3% bonus and 6% special bonus!!! More reasons to be upset!!!

Read my previous articles on EPF.

Don't Touch My Cookie Jar!

The Human Resources Ministry is looking into setting up a pension scheme for private sector employees so that their Employees Provident Fund (EPF) savings can last a lifetime. Through the scheme, the employees would receive a monthly pension instead of withdrawing all their savings upon retirement.

(Findings showed that many EPF contributors used up all their savings within two years and were left without any source of income).

However Malaysian Trades Union Congress felt that it was not viable as individual savings are too small. On average, savings upon retirement of the majority of the seven million contributors was less than RM50,000. Assuming the retiree lives for the next 20 years, he would receive about RM214 monthly as pension. This amount would probably feed him for only a week!

Malaysian Employers Federation said such a scheme should not be forced on EPF contributors. To make it viable, the employees are to be given an option either to withdraw their savings in a lump sum or on a monthly instalment basis. The savings rightly belonged to the employees and they had a right to decide on the options.
As a contributor, I would prefer to be given the option. I would use the option to withdraw lump sum as I believe there are many better managed investment opportunities in the market (high risk high gain la!).

Anyway, the authority has been flip flop and inconsistent in managing EPF for the past year. On one hand, it encourages the contributors to contribute less and withdraw more from its various schemes. On the other hand, it wants to retain the savings of the retirees. C’mon guys, make up your mind!

What say you? Trust these guys with your savings or ‘I’m an Accountant - Get Me Out Of Here’?

The Worse Is Yet To Come?

The Employees Provident Fund’s (EPF) total investment income for the third quarter fell 60.4% to RM2.06bil from RM5.2bil in the previous quarter as its investments, were affected by the global economic uncertainty.

The EPF said due to the current global economic uncertainty, stock markets across the globe had fallen significantly, including the local equity market.

In the same period, the KL Composite Index fell 243.81 points, or 19.3%, to 1,018.68.

They really know how to time the announcement, don't they? End of third quarter should be end September but it took them till December to announce the result. Look like they are urging us to reduce our 11% monthly contribution to 8%. Read this - don't sign the form to maintain the 11% monthly contribution cause we could not manage them, too hot to handle!

You have been warned so don't blame us if we announce the full year result in due course! Serious food for thought!

To Cut Or Not To Cut?

EPF is hogging the headlines again. After the Valuecap fund injection (my articles dated 28 & 30 Oct), EPF is doing another round of national service. Reduction of the employees’ contribution from 11% to 8% would be made automatically for the ease of members effective January 2009 until December 2010. Those who wish to maintain their 11% rate must fill up Form KWSP 17A (AHL) and hand it to their employers for submission to EPF.

What is the rational for this move? Our left pocket to our right pocket? Or our pockets to their pockets? The Government has estimated that RM4.8bil a year will be freed up for spending in the economy if all EPF contributors opt for the rate cut. The idea is to boost private consumption by putting more money in workers’ pockets.
It is a very optimistic estimate. Personally I believe that the majority will stick to the status quo. Tell me, to cut or not to cut?

To cut and have more disposable income. Assuming you earn RM5,000 a month. 3% cut will put additional RM150 in your pocket. What happen next? Within days, without the financial discipline, the RM150 will end up in someone else pockets! Your retirement nest is the loser here!

Not to cut, status quo and have more retirement money. Trust EPF to declare 5% dividend x RM150 = RM7.5. Satisfied with the return?

Alternatively, let me spin it differently. Cut. Take the money. Instead of spending it away why not put it to good use. Invest. Grow the money. RM150 probably could not buy us a good share but it could be invested into other investment products like unit trust fund. Explore the benefits and check out the market risk. The present condition has made this investment very attractive and affordable. It is up to us what we want to do with the extra cash. Let us make it a left pocket to right pocket transaction and not our pockets to their pockets deal!

Going In Is Easy, Coming Out, How La?

What is the difference between what Valuecap is trying to do, with what the Federal Reserve is doing to save the collapsing banks?

The American bailout is simply injecting much-needed fresh capital directly into the banks and not buying shares in the open market. The Fed is getting new shares and existing shareholders are diluted. The share prices continue to be determined by market forces.

In contrast, Valuecap will be trying to boost stock prices by buying up shares from shareholders eager to get out of the market. Mmm, an exit plan for the shareholders. They will be laughing all the way to the bank and it will be double whammy, if the sellers remit the money overseas. Would this move shores up the market and maintain share prices above critical levels? You decide.

Then would we, the EPF contributors know whose shares were bought? The good and fundamentally strong counters or the buddies’ counters?

And how will Valuecap exit from its positions in the future? Any exit plan? It acts as saviour to the exiting shareholders but who is going to ‘save’ it?

In a further cloud of secrecy, there was news that 20 per cent of its RM330 billion funds has been invested in shares. However we do not know how much has been invested in loans for infrastructure projects with low or questionable returns? Think Bakun, Pelabuhan Tanjung Pelepas, Left Right Centre corridors! Etc.

Perhaps the RM5b would be much better used injected directly into the economy itself, via tax breaks for SME enterprises or short-term loans to help smooth over the rocky road ahead.

Throwing Good Money After Bad?

Last week the Government announced that it has doubled the amount of money available to Valuecap Sdn Bhd (Value *who?) to buy undervalued stocks to RM10bil. At last a positive move to move the market but wait a minute, where is the money coming from?

*Valuecap is a fund management firm established in 2003 to invest in the stock market. It is jointly owned by Khazanah, PNB and Retirement Fund (Incorporated).

The bombshell - The Government would borrow RM5bil from the EPF. Another national service! It claimed that EPF will make a profit based on the past performance of Valuecap which has grown its portfolio from RM5bil initially to RM8bil now.

(Not sure about the claim as past performance does not guarantee profitability, it is only use as an indication!)

Perhaps make public the detailed financial statement before the RM5 billion is channeled. If indeed it is in the black with RM3bil profit, it should feel proud to disclose the book. Show us which counters it has invested in. Fair deals, we only want transparency - if they want to use our money. Without it, how can we hope to inspire confidence?

The other question: why use EPF funds, which is public money held in trust? What kind of return can the EPF expect to get and how does that expected return compare with more stable, less risky investments – opportunity costs?

Another article on EPF was posted on 5 September. Please read EPF 8th Largest Fund in the World.

Dive into Diversification

Most of us keep our hard earned money in fixed deposit or saving accounts (Trust the bankers - still don't know why?). When we have the little extra we might be tempted to indulge in property market. Many still do not consider alternative investment instruments like equity, bond, unit trust, gold and foreign currency. Are we simply just being ignorance or being risk averse?

EPF had stated that the forced saving will not be sufficient for our retirement. If we are solely dependent on it, we will surely be financial dependent! Start asking ourselves - Have we saved enough for the rainy days, children education and retirement? Has inflation escalated too fast that made our investment in the red? Yes, agreed that investment risk is high but the risk of not investing could be higher! The good news is that there are ways to manage the risk!

Many of us are risk averse. So it is not surprising that we prefer to invest in guarantee or capital protected products. However, by doing this, we have passed on the opportunity to earn better returns to the banks! The banks get the difference between what they pays out e.g. FD rate and what we could earn e.g. dividend and capital gain.

Start exploring the investment world. Adopt a diversification strategy. Start moderately with established providers. Happy Investing. Sikit-sikit lama-lama jadi bukit!

EPF - 8th Largest Fund in the World

The Star, 4 Sept 08

According to the latest Watson Wyatt Global 300 survey, Malaysia’s national pension fund, the Employees Provident Fund (EPF), was ranked the eight largest fund of its kind in the world with US$94.66bil. The list included the country’s Pension Trust Fund (KWAP), at 22nd spot with US$14.55bil.

Watson Wyatt Asia-Pacific said that Asia-Pacific sovereign pension funds grew by about 20% to US$1.8 trillion in 2007. The strong equity returns last year contributed to the boost in asset growth. Among sovereign pension funds ex-Japan, funds that enjoyed growth of more than 30% included China’s National Social Security Fund (up to 38th from 69th), India’s Employees Provident Fund (from 88th to 68th), Singapore’s Central Provident Fund (from 32nd to 22nd) and Thailand’s Government Pension Fund (from 285th to 241st). Eh, where’s EPF?

Need not compare with countries far way, just glance over down the causeway. As at June 2007, a total of 1.9 million Singapore residents are in the labour force (source: Ministry of Manpower). On the other hand, as at end 2007, there are 5.4 million active EPF contributors. There are another 4 million members that had stopped contributing but have yet to withdraw the money.

Why oh why Singapore’s CPF with much smaller contributors could grow >30% and ranked ahead? Size does not matter? As a stakeholder and contributor, I am concerned. EPF is the custodian of our hard-earned compulsory savings; the policies it makes affects every working Malaysian.

Last year, there was concern when EPF paid RM9 billion to acquire 75% stake in RHB Banking Group. For the record, the debts of RHB have run in excess of RM 3.4 billion as of August 2006, and it is presumed that these debts will be taken over by EPF. (For the record II, the government has spent more than RM3.5 billion to bail out Bank Bumiputera on 3 separate occasions in 1984, 1990 and 1998).

So is EPF being selected to do national service?

EPF simply does not have the capacity and experience to manage a banking group with such heavy debts. Additionally, such large investment in a single stock clearly represents poor portfolio allocation and diversification. EPF has put at risk by 'betting' heavily on a single large investment. EPF had been ‘burned’ before but do they learn? EPF equity investments had suffered severe financial failure in the last few years, amongst them the staggering financial losses incurred in the investment into Malaya Borneo Building Society (MBBS).

Let us revisit the founding principles of EPF as a fund manager that commit to ensure good financial returns to its members within a 25 to 30 year period. During the formation year in the 50s, EPF was required to invest 70% of its assets in securities or government bonds. EPF needed to be conservative in its investments. From the 80s onwards, government bonds were reduced when privatisation was introduced. EPF started to transfer its investments to equity. However it remained as a passive investor. By 90s, EPF investments in government bonds had been reduced to about 30% whereas investments in equity had risen from 2% in 1990 to 19% in 2005.
The acquisition of a bank will not only change its charter and increase the risk, it may also cause poorer performance in its fund management objectives. By redirecting the attention to managing a bank, fund management may inadvertently become a secondary concern for the EPF management. It is important for EPF to retain its function as an investor and not become involved in the management of any company. EPF needs to retain its conservative nature because it is the only long term fund that is responsible for the welfare of its 9 million members.

EPF should emulate the investment principles of Warren Buffet. His primary approach is to invest in low-value securities that guarantee returns on investment and not to interfere in the management of any company. This practice would allow EPF to sell or exchange equity without any conflicts of interest.

Can we do something as a contributor? No action, just talk only?

Well, EPF saw the rebel inside Since November 1996, EPF allowed all eligible contributors to withdraw part of their savings to invest in unit trust. Contributors can invest 20% of their credit in excess of Basic Savings in Account 1.
Put money where the mouth is, so for the past 3 years, me, myself and I has been consistently withdrawing from EPF Account 1 (every 3 months) to invest into unit trust. This diversification creates a second pension fund! The long term objectives are to beat the EPF annual dividend and to wallop the ever increasing inflation rate! Join me or forever keep your peace!

Poverty After Retirement

According to an EPF survey - the average EPF contributor would have exhausted 70% of his retirement savings benefits from the fund in just 10 years. The recent survey on retirees found that at 65 years, many had exhausted all their funds and depend on their children for support for the rest of their remaining years.

If this is true, many Malaysians may face poverty in their old age. With the decline in the extended family support system and increasing life expectancy, concerns are being raised about the implications of old age security. Values are slowly eroding as some children choose not to take care of their parents although they can afford to do so!

Sad but true! Don't fret, there are still hope. Never too late. Let us start building our pipelines.