EPF Dividend 2020: These Challenges Could Make It Hard To Maintain Decent Returns

EPF Dividend 2020: These Challenges Could Make It Hard To Maintain Decent Returns

It’s that time of the year again – when the Employees Provident Fund (EPF) is expected to announce its dividend returns for the year of 2020.

The EPF has delivered stellar returns over the past decade, with dividends ranging between 5.45% and 6.90%. It also managed to deliver decent returns during times of economic volatility. The previous 2019 payout saw a 5.45% dividend for Conventional Savings and 5% for Syariah Savings, even though our local stock market fell 6%.

With such a track record of performance, you’d be forgiven for expecting high returns on your EPF savings every year. But perhaps our expectations should be adjusted this time around, as 2020 has been an unprecedented year. It’s no easy feat to maintain returns in light of the COVID-19 pandemic and the global economic recession.

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Here are the challenges the EPF faced last year:

Effects of the pandemic

It’s hard to overstate COVID-19’s impact on the global economy. Due to the pandemic and the recession it caused, markets were extremely volatile.

Around 70% of the EPF’s portfolio is invested in Malaysia, but our local stock market went through some hurdles last year. Thanks to the COVID-19 recession, it dropped by 15% by the end of March; its lowest level in 11 years. Although it recovered in the latter half of 2020, its performance for the entire year only reached 2.4%.

Global markets also dropped by as much as 32% in the first quarter of 2020. While they have since rebounded, the EPF notes that the global indices it tracks have yet to recover to pre-pandemic levels.

These returns in the local and global markets may make it hard for the EPF to generate high dividends. Former Chief EPF Officer Alizakri Alias acknowledged this in December, saying that “This year has seen great volatility in the financial markets which saw very rapid movements from one extreme to the other. Our financial positions over the first three quarters have been affected by the volatility in market sentiments exacerbated by the uncertainties of the COVID-19 pandemic and continued fragile consumer sentiments.”

More payout needed to maintain dividends

Apart from economic forces, the EPF faces another challenge: the growing size of its assets under management. With the growing workforce and wages, the EPF’s investment assets increased by more than 100% in just a decade. In 2010, EPF’s investment assets totalled RM440.52 billion. As at end-September 2020, that figure has more than doubled to RM941.77 billion.

This growth means that the EPF has to pay out more just to maintain its dividend rates. In 2010, the EPF needed RM3.72 billion to pay 1% of the dividend. But for 2020, The Edge estimates that the EPF would need RM9.2 billion for every 1% of dividend payout. As EPF’s fund size continues to grow, it would be more challenging to continue paying high dividend rates in the future.

Uncertain outlook in the short- to medium-term

Though 2020 has come and gone, we’re not out of the woods yet. Here’s why things still look uncertain in the short- to medium-term:

  1. A second Movement Control Order (MCO). Thanks to the recent surge in COVID-19 cases, Malaysia entered into another MCO on January 13. While the SOPs are less stringent, Malaysia is still expected to lose RM600 million for each day of MCO. The economy may even undergo a double-dip recession, where it enters a second recession before fully recovering from the first one.
  2. Rise in global cases. The number of global cases also rose at the start of the year, reaching the 100 million mark in late January. While vaccinations are now taking place around the world, Bloomberg estimates that it may take years to cover 75% of the global population with a two-dose vaccine at the current pace. This could mean that we might be living the economic effects of the pandemic for a while longer.
  3. Low interest rates. To help consumers deal with the recession, central banks around the world cut interest rates throughout 2020. These rates are expected to stay low this year. While this can cause the price of fixed income investments to rise, it could also mean lower interest returns for these investments in the future.

Due to these continued economic challenges, and the uncertainty of how the pandemic will play out, it’s hard to predict how markets will perform in the near future – and how this could affect EPF’s investment performance.

Pulling through despite challenges

Despite these challenges, it’s not all gloom and doom for the EPF’s 2020 dividend expectations. Almost half of the EPF’s portfolio is invested in fixed income investments, which performed well last year. Overall, the second and third quarters of 2020 also recorded higher gross investment returns than the first quarter.

It’s also worth noting that the EPF does not focus on short-term returns. Instead, its role is to safeguard its members’ retirement savings through sustainable long-term returns. This focus on preserving capital could help it ride out economic uncertainties.

Besides, this isn’t the first time the EPF has faced a major challenge. It has managed our retirement savings through a few crises: the Asian financial crisis of 1997 to 1998, the dotcom bubble burst of 2000 to 2002 and the global financial crisis of 2008 to 2009. Despite these events, and the challenge of ensuring a comfortable retirement for an increasing number of Malaysians, it has historically delivered decent returns. This experience could help the EPF weather through future crises – as  the EPF mentioned last year, it is well-positioned to ride out the current volatility.

So, what’s in store for the dividend announcement? Keep checking our Learning Centre for our next update, where we’ll explore expert insights and expectations on the upcoming dividend, as well as EPF’s long-term strategy for protecting its members’ retirement savings.

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