In Defense of EPF

Strictly speaking this post isn’t about economics, but the reaction to EPF’s dividend announcement is a good argument for greater financial literacy:

Good, but it could be better, groups comment on EPF dividend rate

PETALING JAYA: EPF’s 5.8% dividend rate has been lauded, but some say the amount should have been even higher, given its large investments and the higher dividends offered by other funds and unit trusts.

Consumer activist and Federation of Malaysian Consumer Associations (Fomca) adviser Prof Datuk Dr Hamdan Adnan said the increase was good as it showed the economy was picking up.

However, he said it could have been higher, given EPF’s long-term existence and the dividend performance of other funds, which were not as old as EPF.

“We are glad it is higher. But there are funds that are offering dividends of between 8% and 10%. Even Amanah Saham Bumiputra is offering almost 9%. EPF is not even giving bonuses like trust funds do.

“It is important to maintain a strong investment return even as the membership keeps growing.

“It is to help workers save for their old age and provide a decent income for their retirement,” he said.

Malaysian Employers Federation executive director Shamsuddin Bardan welcomed the higher rate but said it could be better, noting that investment institutions such as Permodalan Nasional Berhad were giving good dividends.

“EPF used to give 8% dividend before. It will be a big challenge to get back to that level but it is something that we can strive for,” he added.

Basic portfolio theory says that risk is commensurate with reward. EPF’s mandate requires that it exercise a fair degree of capital protection, due to the nature of its contributions – retirement savings of its members.

That means EPF’s fund managers have to be fairly conservative in their investment decisions. In fact, EPF is required by law to invest primarily in government securities and other fixed income instruments. The fact that they’ve managed to better the yield on MGS suggests that they’re in fact taking on more risk than they used to…or should. Pressuring them for even greater yield is counter-productive, as it will result in even greater risk taking.

Back in the day when EPF was yielding over 8%, interbank rates were just as high and MGS yielding double or more what they are today. Expecting them to make over 8% when overnight rates are below 3% is asking for miracles, or a great deal of trouble down the road.

For the same reason, comparing the return on EPF’s massive portfolio to smaller, more nimble unit trust funds (which are mostly equity-based) is also really unfair given the differences in mandates and risk profiles – remember, risk=rewards. Also when EPF buys or sells, the market moves…really moves. That makes liquidity management a nightmare: sell to raise cash, and the market value of the remaining securities you hold drop.

Given the constraints they work under, I think EPF is doing a great job. So don’t complain…and don’t criticise them when they lose money on higher yielding investments, like the recent splurge on property in the UK. As the saying goes, “Be careful what you wish for, you might actually get it”.