Safe and strong: EPF contributors using the various services at the EPF Petaling Jaya branch. It is perplexing that some people feel money with the pension fund is not safe.
IT is that time of the year when the Employees Provident Fund (EPF), the guardian of some RM650bil worth of funds belonging to private sector workers, declares its annual dividend.
Last year it declared a dividend of 6.75% - the highest in recent years.
This year, taking the fragility of our economy into account, the dividend declared is not expected to surpass or fall far behind last year’s figures.
However, one thing we can say for sure – the returns are much higher than what savings in other parts of the world are yielding.
Savings rates are near zero in many countries in Europe as central banks adopt the negative interest rate policy. Japan joined the bandwagon on January 29.
Amidst the low interest rate environment and the fact that the EPF has been consistently declaring dividends of more than 6% since 2010, it is perplexing that some folk feel money with the pension fund is not safe. It’s easy to fathom why – they fear that EPF would run out of money as they are used for government projects.
This is a baseless fear. I can only say one thing: If the EPF is in trouble this means the entire government finances are in a worse shape.
The funds from EPF form the backbone for funding large infrastructure projects in the country. It allocates a substantial portion of its money to debt papers issued by the government or its agencies. And all the investments with the government are secured.
The government has never defaulted on any of its debt obligations and there is no basis that it is going to happen in the future.
Even in the worst of economic strife, such as the stock market meltdown and currency shock in 1998, the government did not default on its obligations.
So there is no reason to believe that it is going to happen now or anytime in the near future. In that respect, EPF’s investments with the government are virtually risk-free.
Supposedly such a situation arises, before that, money the ordinary people have in savings or investments within the country outside the EPF would have lost in value tremendously or even wiped out. In this respect, money in EPF is virtually risk free.
Back to the returns that the EPF is expected to declare this year, it has increasingly played a more meaningful role for those still keeping their savings with the pension fund even after the age of 55.
The returns of more than 6% come handy when banks are offering 4% or less. And the rate that the banks are offering is expected to continue to be low now that more central banks around the world are adopting a negative interest rate policy to stimulate their economies
Under this policy, the central bank will impose a fee on reserves placed by commercial banks with it.
The objective is to discourage commercial banks from placing their excess cash with the central bank and discourage capital from coming into their country.
What the central bank wants to see is for commercial banks to lend out more money without fear and hopefully spur people to spend more on goods and services freely.
A negative interest rate regime discourages money from flowing into the country, weakens the currency and hopefully would induce exports and stimulate the economy as well.
The negative interest rate policy is new in the world of monetary economics. It was experimented in 2009 by Sweden’s central bank, Riksbank, with success.
Then the Riksbank for a brief moment moved its rate to negative 0.25% on deposits placed with it by the commercial banks. This discouraged commercial banks from placing deposits and the money went back into the economy.
It helped Sweden in its economic recovery six years ago and the rates were pushed up back to normal after a short span.
In 2014, the European Central Bank (ECB) adopted the “negative interest rate policy” to stimulate the economy in the region. Hot money started to flow into other countries within the region that are not using the euro as their currency. Among the favoured destinations were Switzerland and Denmark.
Switzerland adopted the negative interest rate policy to stem the tide of funds coming into that country and Denmark followed suit. The Riksbank of Sweden resumed the policy.
In late January, the Bank of Japan surprised world markets by adopting a negative interest rate policy in an effort to stimulate the economy.
The policy is beginning to have an impact on the profitability of the banks because financial institutions generally do not pass on the cost of holding deposits to retail depositors.
If they do impose a fee on deposits placed by retailers, the banks will lose out on cheap cost of funds.
Worst still is when people turn to placing their money under the pillow, safe deposits boxes or placing it with some risky investments in their search for returns.
Recent developments of banks in the euro zone indicates that the regime of `negative interest rate policy’ is beginning to take a toll on banks. Share prices have been battered down, an indication of the market fearing that the profits of banks will drop.
It is easy to see why the large funds are shying away from banking stocks in the Europe.
The negative interest rate policy has reached levels of absurdity that in the euro zone, some banks are paying customers a token sum every month for taking a loan.
However, the negative interest rate policy has been a boon to emerging markets, Malaysia included. It has brought hot money back into the region.
The ringgit has strengthened against the US dollar although the domestic economy is still slowing.
The yields on Malaysian Government Securities (MGS), which moves inversely with the price, has gone down in recent weeks. This means that the price on MGS has gone up due to the demand. Obviously, funds from the western world are back here in search of products that give them high yields.
Against this backdrop, the deposit rates are not likely to go up in Malaysia. In fact, there is speculation that it may come down. So pensioners hoping for an increase in their fixed deposit rates will likely be waiting in vain. Hence, returns from EPF that has surpassed 6% since 2011 are indeed a silver lining.
A word of advice to those intending to withdraw their funds: It’s good to give it a careful thought because there are not many places in the world that give you more than 6% risk-free returns.
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