Where Does Our EPF Money Go?


EPF contributions from employees and employers come close to RM$5bil per month. That is no small sum. Penang Monthly explores where this money goes.

Most of the 1.4 million civil servants in Malaysia can expect a monthly pension, which is called a defined benefit. Those in the private sector, on the other hand, are entitled to a defined contribution in the form of a lump sum of savings from a pension fund.

There are three pension funds representing the wage-earning labour force in Malaysia: the Employees Provident Fund (the EPF), the Retirement Fund Incorporated (better known by its Malay acronym,


) and the Armed Forces Pension Fund Board (or its Malay acronym, LTAT).

The EPF is easily the largest of the three. It is the oldest and has the largest number of members. Globally, the EPF is among the top ten largest national pension funds, ranked seventh, just below Singapore’s Central Provident Fund. till age 100). Each month, the EPF collects employee and employer contributions at a rate of close to RM5bil.

Like many pension schemes, the EPF has struggled to declare a reasonable dividend to its contributors. By law, the minimum payout is 2.5% which was what was paid for the first eight years from its inception in 1951. From that period onwards, dividends gradually rose to a high of 8.5% in the mid- 1980s, and thereafter bottomed out at 4.25% in 2002. Since then – save for 2008 – the dividend declared has climbed steadily to 6.75% in 2014 – the highest in 15 years.

What Happens to the Money?

The rule of thumb for any pension fund is to minimise risk, and the safest instruments in the market are government bonds or Malaysian Government Securities (MGS). Since the beginning, EPF’s portfolio has been heavily skewed towards investing in MGS (and the occasional loan). However, with the eventual realisation that higher yields could be found in equities and with the dawn of Malaysia’s privatisation policy, the EPF became an enthusiastic participant in the IPO party.

Data on EPF’s asset mix was only provided after 1999. Since 2000, the EPF classifies its holdings as fixed income (MGS and private debt securities), equities (listed and unlisted), inflation asset class (e.g. loans and investments for infrastructure and property) and cash. The cash is placed with local banks, which are rated A3/A- or better, which most banks in Malaysia are.

In 2000 fixed income securities’ share of EPF total investment was 57% (this includes MGS and private debt securities, local and foreign), which by 2004 had risen to a high of 69%. Thereafter, this fell and by 2014 had been reduced to 54%. As at 2014, the EPF held RM164.16bil of MGS or 25.80% of its total investment. In addition, it holds close to RM180bil of bonds issued by private corporations.

The EPF maintains an average portfolio rating of AA for its private debt securities. As a matter of policy, it invests only in debt securities with a rating of at least A3/A- or of investment grade (which is six notches below that of Malaysia’s sovereign rating). However, the EPF may also invest in unrated bonds as long it is able to grade the risk with its internal rating model. And yes, it has also invested in 1MDB bonds – RM1.7bil worth.

Battersea Power Station. The EPF is participating in a joint venture with real estate players SP Setia and Sime Darby to develop the £8bil property in London.

Between 2000 and 2014, equity shares increased from 22% to 39%. Part of the reason why is that the issuance of MGS has declined while private bond and equity markets have come alive in the last 20 years, providing investments with higher return but with acceptable risk.

In its annual report, the EPF states its top 30 equity investments of corporates listed on Bursa Malaysia with the largest shareholding being in boutique lender Malaysian Building Society (64%). The Fund owns a stake in eight of the largest local banking groups, from as high as 41% in RHB to below 10% for Affin Holdings. Its investments are diversified across various sectors such as palm oil, oil and gas, manufacturing, and services and utilities. Apart from that, the EPF indirectly has exposure to these sectors through its purchase of bonds issued by various corporates.

A recent trend has seen the EPF investing, together with an experienced industry operator, in strategic assets. In 2011 the EPF and Khazanah Nasional took highway operator, Plus, private. The Fund now owns 49% of Plus, though its role is mostly as a passive investor. It leaves the running to the more experienced Plus. In 2012 it banded together with Johor Corporation and US private equity firm, CVC Capital, to privatise KFC Holdings and QSR, owners of the KFC and Pizza Hut franchises respectively in Malaysia and Singapore.

The other asset class the EPF ploughs its money into is what is vaguely called inflation class assets. These are investments such as real estate and infrastructure, and natural resource which are resistant to inflation and which provide steady and predictable streams of cashflow.

The bulk of the inflation class assets of RM19.2bil are invested in real estate with more than half of it in the UK and the balance in France, Singapore, Germany and Australia. For real estate, prime examples would be the EPF’s 20% participation in a joint venture with real estate players SP Setia and Sime Darby to develop the £8bil Battersea property development in London.

Locally, the EPF’s wholly owned Kwasa Land has been appointed the master developer for the new RM50bil Kwasa Damansara township in Sungai Buloh in the outskirts of KL. Other than residential properties, the types of properties invested in include hospitals, office buildings, industrial warehouses and retail assets.

In search of yields and risk diversification, the EPF has ploughed its investments outside of Malaysia since 1996 when it first invested in foreign private equity. From small baby steps of RM2bil – a mere one per cent of total assets – this has ballooned to 23% by 2014, with 18% invested in foreign equities, three per cent in bonds and the remaining two per cent in real assets and private equity; it has approval from the Ministry of Finance to invest up to 26% of its total assets in this manner.

Currently, the EPF has exposure in over 30 countries, comprising both developed and emerging markets. It has funded some of its foreign acquisitions with foreign currency denominated loans. For example, in 2012, it closed a five-year £790mil loan to partly fund the acquisition of three Londonbased properties; the EPF is not borrowing because its coffers are empty; it borrowed solely to hedge naturally its foreign currency purchase with a loan in the same currency.

The diversification of its portfolio has brought bountiful rewards. For 2014, although foreign investments accounted for 23% of its total investments, this sector contributed 33% of its total income of RM39bil3.

Managing the Money

The EPF has banked on the expertise of external fund managers; to date, it has outsourced RM98bil of its funds to local and foreign fund managers. The outsourcing of funds has yielded higher returns from these managers’ expertise and fostered competition among themselves while helping to nurture the local fund management market.

As is in vogue these days, the EPF too has adopted “ethical and responsible” investing practices. It claims it has embraced these practices since 2000 and from 2015 onwards would adopt Environmental, Social and Governance (ESG) principles.

While it is admirable that the EPF shies away from unethical sectors such as adult entertainment and arms, one wonders about the wisdom of divesting from soft vices such as alcohol, gaming and tobacco, which distribute high dividends. Of course, these sectors might be considered not Syariahcompliant for some of its contributors but some contributors might argue that they deserve to have this choice. Perhaps with this in mind, the EPF is targeting to roll out a fully Syariah-compliant fund in 2017 for members. This shouldn’t be too difficult as 40% of its total assets are already Syariahcompliant.

It is commendable for the EPF to adopt the highest of ethical standards, but some cynics might want the EPF to apply these standards at all times and to all its investments. The EPF (and KWAP and Petronas) has been used by previous administrations to bail out politically connected projects and companies. Hopefully this practice has ended. It too is exposed to 1MDB, with a total of RM1.7bil in loans and bonds, as mentioned earlier4.

In total, EPF has dished out RM80bil in loans to government-linked companies (GLCs). On top of that it has lent RM25bil in loans to an obscure government-owned company called Pembinaan PFI, which used the EPF loans to directly fund the government’s d e v e l o p m e n t expenditure. This was an ingenious way for the government to fund its development expenditure without busting its debt ceiling and a route which other countries such as Australia have taken.

Despite that, we can take comfort in the fact that the EPF has improved its transparency and returns. Its website provides an archive of annual reports from 2001 onwards. Although the 2001 report gives skimpy details about its income and investments, this has gradually changed over the years. The 2014 annual report is more than 200 pages long compared to 2001’s miserly 30 pages. It has declared dividends only from its profits and not from its members’ contributions; for 2014, it earned RM39.1bil and declared dividends of RM36.7bil, a dividend payout ratio of 94%.

Managing any fund, let alone one as large as the EPF, is never easy. The trick is to make sound investment decisions without compromising investment returns – that’s easier said than done in today’s volatile markets. Apart from investment decisions, improvements in corporate governance would be welcome. That means all investment decisions must be made purely on return on investment and not through political bias. Evidence suggests that the more politically affiliated trustees there are on the Board, the less likely it is to make investment decisions based on fiduciary responsibilities5. The other area it could improve on is to make its financials tailored to dummies; after all, not all of its contributors are financial wizards.

1 The KWAP was established on March 1, 2007 under the Retirement Fund Act 2007 (Act 662), replacing the repealed Pensions Trust Fund Act 1991 (Act 454). The Pensions Trust Fund Act 1991 (Act 454) was enacted to assist the Federal Government in funding its pension liability; with the enactment of this Act, the Pensions Trust Fund was established on June 1, 1991 with a launching grant of RM500mil from the Federal Government. The Pensions Trust Fund was administered by the Pensions Trust Fund Council with the Accountant General of Malaysia being responsible for the day-to-day administration and management of the affairs of the Pensions Trust Fund. The Armed Services Fund Board is the version for the armed forces personnel.

2 The exact profile of EPF’s investing portfolio is not publicly available.

3 TRM200mil in 1MDB bonds and balance in the independent power producers (IPPs) formerly owned by

4 In 2015 this figure was higher – 48% of its total income from a share of 25% of total assets.
5 D. Hess, “Protecting and Politicizing Public Pension Fund Assets: Empirical Evidence on the Effects of
Governance Structures and Practices,” University of California-Davis Law Review 39(1) (2005).

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