EPF’s 2009 payout will be better
But don’t hope for an ang pow
THANKS largely to a stellar stock market performance in 2009, the Employees Provident Fund (EPF) should be declaring a decent dividend for last year soon. And thanks too to low interest rates, the pension fund’s dividend payments is going to look good, when measured against the fixed deposit rates.
It is likely that the difference between what the EPF declares and prevailing FD rates will be more than 2 percentage points, which will leave many contributors comfortable with the thought that their EPF savings are giving them higher returns than what their cash in the bank is earning.
Recently, EPF chairman Tan Sri Samsudin Osman hinted that the dividends to be announced next month would be better than the 4.5% announced for the year before. He said this was due to “the local share market’s stable position and good investment returns.”
The EPF must be enjoying some decent (albeit paper) gains because of last year’s stellar performance of the stock market. And that, in turn, means it will likely report higher net earnings for 2009 compared with 2008.
To recap, the EPF had to provide a net allowance of the diminution in the value of its investments of a whopping RM3.9bil for 2008. This was possibly the highest provisioning that the EPF has had to do for its investments and most of this is believed to be related to the 2008 global stock market crash.
To be noted is that this was a mere provision, which means that the EPF did not actually “lose” that amount of money but because of prudent accounting principles, it had to “mark to market” the value of its investments.
Logic will dictate that considering stock markets had rebounded in 2009, that the reverse will happen i.e. the EPF will have the opportunity for some hefty writebacks of the market value of its investments.
This in turn will mean a better net income figure and that in turn will mean higher dividends. The EPF has historically given out just about all of its net income through dividends to its contributors.
But beyond the writebacks, there’s not much more to be expected from the EPF in terms of its earnings growth. Indeed, analysts reckon that it would be very difficult for the pension fund to sustain payouts above 5% in the coming years. That’s because of the following facts:
·While weak equity markets will continue to hurt EPF over the near term, over the longer term, the fund’s performance will also be determined by the returns it gets from investing in low-risk assets such as government bonds.
·The EPF had allocated a quarter of its more than RM360bil investment funds for higher yielding government papers. But as these higher yielding notes expire, the fund must purchase new issues which will now come with lower returns.
·Another big chunk of EPF holdings is in highly-rated corporate bonds and low-risk guaranteed loans.
However, the global economic turmoil has cut the supply of new bonds coming into the market.
Cheaper lending rates had also reduced interest income from loans given out.
It is worth noting that under the law, EPF has to maintain a dividend rate of at least 2.5% annually. The dividend must come from income generated from its investments.
Note: The assumed FD rate is the 12 month average FD rate in Malaysia.
l Deputy news editor Risen Jayaseelan reckons that while many contributors would still feel that their EPF dividends should be higher than what they are, we should be reminded that the EPF’s foremost principle is capital preservation and with that comes lower returns due to its lower risk investments.
THANKS largely to a stellar stock market performance in 2009, the Employees Provident Fund (EPF) should be declaring a decent dividend for last year soon. And thanks too to low interest rates, the pension fund’s dividend payments is going to look good, when measured against the fixed deposit rates.
It is likely that the difference between what the EPF declares and prevailing FD rates will be more than 2 percentage points, which will leave many contributors comfortable with the thought that their EPF savings are giving them higher returns than what their cash in the bank is earning.
Recently, EPF chairman Tan Sri Samsudin Osman hinted that the dividends to be announced next month would be better than the 4.5% announced for the year before. He said this was due to “the local share market’s stable position and good investment returns.”
The EPF must be enjoying some decent (albeit paper) gains because of last year’s stellar performance of the stock market. And that, in turn, means it will likely report higher net earnings for 2009 compared with 2008.
To recap, the EPF had to provide a net allowance of the diminution in the value of its investments of a whopping RM3.9bil for 2008. This was possibly the highest provisioning that the EPF has had to do for its investments and most of this is believed to be related to the 2008 global stock market crash.
To be noted is that this was a mere provision, which means that the EPF did not actually “lose” that amount of money but because of prudent accounting principles, it had to “mark to market” the value of its investments.
Logic will dictate that considering stock markets had rebounded in 2009, that the reverse will happen i.e. the EPF will have the opportunity for some hefty writebacks of the market value of its investments.
This in turn will mean a better net income figure and that in turn will mean higher dividends. The EPF has historically given out just about all of its net income through dividends to its contributors.
But beyond the writebacks, there’s not much more to be expected from the EPF in terms of its earnings growth. Indeed, analysts reckon that it would be very difficult for the pension fund to sustain payouts above 5% in the coming years. That’s because of the following facts:
·While weak equity markets will continue to hurt EPF over the near term, over the longer term, the fund’s performance will also be determined by the returns it gets from investing in low-risk assets such as government bonds.
·The EPF had allocated a quarter of its more than RM360bil investment funds for higher yielding government papers. But as these higher yielding notes expire, the fund must purchase new issues which will now come with lower returns.
·Another big chunk of EPF holdings is in highly-rated corporate bonds and low-risk guaranteed loans.
However, the global economic turmoil has cut the supply of new bonds coming into the market.
Cheaper lending rates had also reduced interest income from loans given out.
It is worth noting that under the law, EPF has to maintain a dividend rate of at least 2.5% annually. The dividend must come from income generated from its investments.
Note: The assumed FD rate is the 12 month average FD rate in Malaysia.
l Deputy news editor Risen Jayaseelan reckons that while many contributors would still feel that their EPF dividends should be higher than what they are, we should be reminded that the EPF’s foremost principle is capital preservation and with that comes lower returns due to its lower risk investments.
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