LETTER | EPF dividend payment system needs re-structuring to benefit B40 contributors

LETTER | Recently a group from the B40 were seen requesting former prime minister Najib Tun Razak to help out in asking the government to allow withdrawals for "one last time".

This clearly shows the plight and hardship faced by many in the lower-income group who have been much affected by the pandemic of the last two years and the recent floods, especially in Selangor.

The government needs to consider the dire circumstances faced by the poor and at least allow for the EPF withdrawals based on a case by case basis.

The former prime minister had also recently remarked on some of the changes needed in the EPF, especially concerning the dividends. 

He had spoken on the need for the lower-income group and the B40 and possibly the M40 to be given a higher rate of annual dividends than those whose total contributions are more than 500,000 or in the millions of ringgit. 

 I fully support this idea and his egalitarian approach as he was the one who initiated the BR1M hand-outs that have benefitted millions in the B40 and M40 groups.

Needless to say, EPF has to undergo some changes and reforms to reflect the spirit and changes of the times. The socio-economic foundations of the EPF as laid out by the colonial British government basically to help the daily waged workers in an under-developed Malaya needs to be reviewed after the last 70 years.

Presently the main problems facing workers is their inadequate salaries and EPF contributions of the B40 and to a certain extent the M40 as well as the wide gulf between those receiving high remunerations and those drawing low salaries.

The government has not been able to reduce the gap between the various groups of workers and employees and this is the main reason why the country even though it is touted to be on the threshold of becoming a developed nation has one of the worst income gaps among citizens of any country in the world as revealed by Gini coefficient analyses.

The government has by introducing oppressive labour and industrial laws tied the hands of workers and unions to demand higher salaries according to the cost of living and the progress of the country.

The influx of foreign workers since the 1990s has dampened further the salary levels of local workers.

The government, the EPF and the workers should take note of the former prime minister's and support his well-intended suggestion with regards to the dividends. The EPF is unable to declare higher dividends that will help the lower-income groups due to the EPF millionaire retirees and there are literally tens of thousands of them.

This has swelled the EPF into an almost trillion ringgit retirement savings fund. Unlike the B40 and the M40 who withdraw all or almost all their savings no sooner have they reached the retirement age, these millionaires keep the savings in the fund as a fixed deposit and only draw the dividends if at all as they will have other incomes to support them.

The EPF gives around 5to 7 percent annual dividends as compared to 2 to3 percent interest by commercial banks. As such this affluent group prefer their savings to be in the EPF.

This brings about the case of the rich contributors becoming richer and the poorer ones getting less than they deserve.

The EPF has to pay dividends for every single ringgit in its hugely ballooned fund of almost a trillion ringgit.

What happens is that the lucrative and hefty dividends that the EPF gets from its investments in equities and properties both locally and overseas have to be spread out over the almost trillion ringgit fund. The EPF has to declare an annual dividend for every single dollar in the fund.

Even the unclaimed monies in the EPF, amounting to a few billion ringgit , have to get their share of dividends. The unclaimed contributions of the EPF members are kept in the fund and snowballs yearly with the declared dividends.

Not all the money in the EPF can be invested as there are strict parameters guiding investment decisions and portfolios. As such one can say that only a major portion of the fund is invested and quite a big chunk remains unused in the fund.

Very much like banks the EPF cannot invest all its accumulated funds and the larger the fund the more difficult it becomes to search for good investment opportunities.

I am sure that if the EPF were to manage a smaller fund it can declare dividends of at least 10 percent annually as its investments in blue chips, equities and shares yield higher than the roughly 5 percent it declares every year. 

Due to the billions not invested and the huge size of the fund the EPF profits are spread thin and hence the smaller dividends which affect the lower-income groups as their accumulated amount snowballs slowly and it affects the total amount when they retire.

For example the EPF has RM1000 and RM800 is invested in shares drawing the interest of 8 percent yearly.

The investment fetches about RM64. However, if the dividends have to be paid for all RM1000 the dividend payment will be about RM51. This explains why the amount not invested brings down the dividend level. The EPF has grown too large for all its funds to be invested profitably and safely.

Added to this will be the administrative cost of operating the EPF. The EPF should reduce the number of offices nationwide now that work is mainly done online and this should result in cost-cutting and other efficiency measures. The government, which regards the EPF as a cash cow for its various needs, must pay higher rates for its borrowings.

It will be better to re-structure the dividend payment scheme whereby contributors who have less than RM500,000 will be paid 5 to 10 percent dividend, those with RM500,000 to RMI million will get 3 percent, and those with more than a million ringgit will get less than three – about the same rate that banks pay for fixed deposits. If the EPF millionaires feel that this is not fair they can withdraw and place their money with the banks. 

The EPF should not be transformed into a millionaires' fixed deposit club.

The real victims of the system are the lower-income workers who should be getting higher dividends from the EPF but because the system is weighted against them they get lower dividends. 

The EPF was primarily set up to help the poor save a reasonable amount for their retirement, and not as a fixed deposit fund ' bank' for those receiving high salaries and bonuses whose contribution to the EPF amounts to more than a million ringgit before retirement.

It is also time that the EPF off-loaded a part of its huge fund for housing and education loans and for other purposes. A too-huge-to- handle- fund only means lower dividends, which is the case right now.

Pension funds from some countries take more risks and are able to influence bourses and bond markets and hike up the profits.

For these pension funds the larger the fund the better as they can influence the markets to increase profits.

This is not the case with the EPF, which has to act under different constraints. Therefore a smaller fund will be more manageable as what is most important to the members is the percentage of dividends declared yearly.

It is really shocking to note that on the one hand we have EPF retirees living in poverty due to their small savings and on the other, there are millionaire EPF retirees whose annual dividends alone are enough for them to live in luxury.

The EPF should not be allowed to continue this unjust socio-economic system. Many people have now come to realise that the EPF serves the rich contributors and lets the poor in limbo. The EPF and the government should stop whining about the withdrawals. If both care for the people of the country then it is time to re-structure the dividend payment system that will benefit the poor contributors who number in the millions.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.