6th March 2023 - 5 min read
The Employees Provident Fund is a sovereign pension fund which provides retirement incentives for members through managing their savings. With a total of 15.72 million members (as of December 2022), the EPF invests members’ collective contributions in approved financial instruments for more favourable returns. By law, the EPF is required to provide a guaranteed dividend of at least 2.5% a year, but has consistently managed to deliver significantly higher rates since 1960. But how has the EPF dividend rates changed in the last decade?
By investing in a mix of equities (both locally and internationally), loans, and bonds, the EPF’s sizeable portfolio is managed prudently, allowing it to offer dividend rates above 5% each year for its members since 2009. Even during the 2008 global financial crisis, the EPF still managed a respectable 4.5% dividend.
During the last decade, the highest dividend rate offered by the EPF was in 2017 (6.9%), followed by 2014 at 6.75%. In both years, EPF stated that the favourable market conditions meant that the EPF’s investments were better than expected.
However, market uncertainties always play a factor in the EPF’s dividend rate. For example, 2016 saw the EPF face tough investment changes due to unsettling events that included Brexit, the US Presidential elections, slower global growth in major economies, a slump in crude oil prices, and a weaker domestic currency.
On 8 August 2016, Syariah savings was introduced to provide members with options to have their account managed and invested according to syariah principles. This doesn’t come as a surprise, given Malaysia’s growing influence in global Islamic finance. As such, members who opt for syariah savings would receive dividend payouts based on the syariah-compliant portfolio managed by the EPF.
For 2022, the EPF dividend rate was 5.35% for conventional savings and 4.75% for shariah savings – a slight dip from the previous year’s EPF dividend performance of 6.10% (conventional) and 5.65% (shariah). Accordingly, the payout will involve RM45.44 billion (conventional) and RM5.70 billion (shariah), coming up to a total of RM51.14 billion.
The EPF pointed out that 2022 saw the world going through a persistent global market downturn, with major global equity benchmark indices experiencing their worst annual performance since 2008, plunging between 20% to over 30% during the year. However, the provident fund’s investment portfolio showcased resilience and was minimally impacted. This was attributed primarily to its overarching strategy that emphasises long-term sustainability of investments and returns, in line with the EPF’s Strategic Asset Allocation (SAA).
The EPF’s diversification strategy across different sectors and geographies has also been effective in helping it to capitalise on profit opportunities and generate income. As of December 2022, foreign investment made up about 36% of the EPF’s investment assets, and contributed 45% of its total gross investment income.
The EPF further noted that of its 15.72 million member base, a total of 8.39 million were categorised as active members as of December 2022. This surpassed the growth trajectory recorded before Covid-19, allowing the EPF to record an improved active-to-inactive member ratio of 53% to 47%, respectively. The provident fund admits, however, that more needs to be done, and as such, will ramp up efforts to increase the coverage of the national labour force to more than 60%.
For any given year, the final dividend rate proposed by the EPF management would first need the Minister of Finance’s approval, before the proposal is sent to the EPF Board. Should the Board agree to the rate, the declaration of the EPF dividend rate for the year can be finalised.
In general, the final dividend rate follows the following formula as stated on the EPF website:
Dividend Rate = Net income (a) x 1% Total for a 1% dividend (b), where
(a) Net income: Investment income + Non-investment income – Expenses
(b) Total for a 1% dividend is based on:
– Opening balance of contribution (after withdrawal) that obtain dividend for a 12-month period, and
– Monthly contribution that obtain pro-rated dividend i.e. dividend for the n-month will get (12-n) month dividend. For example, the September contribution (n=9) will obtain a 3 months dividend.
Under Section 27 of the EPF Act 1991, the guaranteed minimum dividend rate is 2.5% per year on members’ savings. As such, members are guaranteed to receive the minimum dividend rate in any situation.
There is a growing concern among Malaysians that an individual’s EPF savings may not be enough to last through their retirement. There are a variety of factors behind this, such as the ability to withdraw EPF savings for certain big ticket expenses, low EPF investment returns, and the poor spending habits of those who withdraw their funds when they reach the eligible age.
Nevertheless, the EPF remains a crucial product to help Malaysians save for retirement – but one that Malaysians should not solely rely on. Other financial products like Private Retirement Schemes (PRS), unit trusts, and even investment-linked life insurance policies all help build retirement savings with potentially better returns compared to conventional savings via fixed deposits or even basic savings accounts.
But, all of this depends on cultivating a savings habit early on and let the power of compounding interest help along the way.
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