AS we come to the end of another very difficult year for Malaysians still impacted by the Covid-19 pandemic and now many hit by devastating floods, there have been many calls to allow further withdrawals from savings in the Employees Provident Fund (EPF).

While we all understand the need for extra help for people in difficulty, today Minister of Finance Tengku Zafrul Aziz has taken the right decision to resist these calls for further EPF withdrawals in a very well written, evidence-based statement of the government’s position on the issue.

Difficult as it is, it is the right decision and Tengku Zafrul should be commended for taking this very brave step.

When the policy was suggested in March 2020, he was cautious and, along with the former EPF CEO Tunku Alizakri Alias, had made clear that that many members had very limited funds to support such a scheme.

The underfunding of EPF accounts is structural and preceded the current crises, and they made this clear at the outset.

At the same time, I and others opposed the idea of EPF withdrawals and predicted the consequences we are seeing today.

Nonetheless the need for assistance was urgent and the government proceeded with three tranches of withdrawals worth RM20.8 billion for i-Lestari, RM58.7 billion under i-Sinar and RM21.4 billion under i-Citra.

The total of RM101 billion is around 10% of the EPFs assets and is likely to cause a decline in the total EPF fund this year for the first time, although overall EPF managers have performed very well in defending the resilience of the fund.

It is also to the credit of EPF CEO Amir Hamzah and his team, headed by Nurhisham Hussein, EPF’s chief strategy officer, that they are making the case based on facts and logic that the withdrawals cannot continue.

The data from EPF shows clearly that further withdrawals will wipe out any remaining savings for millions of people and make the long-term structural problems in pensions even worse.

It would also damage investor sentiment by reinforcing the impression that the EPF can be raided at any time to deal with crises from whatever source.

Second, so far, EPF has funded the withdrawals from cash holdings or overseas equities not from the sale of local equities on Bursa Malaysia or other local assets.

If the withdrawals were allowed to continue EPF may need to adjust local equity holdings and this could affect the stock market very badly.

This would hit EPF accounts and have a contagion effect through the entire local share market.

Third, as EPF have pointed out their funds are increasingly held by a smaller group of members who have accounts with higher savings.

This group might be spooked by further withdrawals from the EPF or the selling of local shares in Bursa, which might threaten their annual dividend outlook.

This could cause a mass withdrawal of funds and since around RM270 billion is eligible for withdrawal for certain groups including those above 55 years old or with large savings over RM1 million this must be avoided at all costs.

So, having conceded that further withdrawals from EPF must end we are now faced with a challenge of how to solve the pensions gap, which affects many millions of people in Malaysia, not just EPF members.

In November, I estimated that around 16 million people or 69% of the working age population have no formal pension cover.

This includes those outside the labour force, those who are underemployed or in informal work and those in formal employment but with no formal pension scheme.

If we add into this the EPF estimate that 73% of their active members have inadequate cover then we come to around 87% of the working age population with insufficient pensions.

In addition, around 3.6 million people are already over 60 years old and so in the retirement age group with an estimated 2.6 million already living with inadequate pensions.

This gives us an estimate at 85% of the adult population in Malaysia without proper pension cover.

It is clear that conventional solutions of extra saving from wages or longer working lives will not work in the Malaysian context because incomes are too low.

Somebody on the median income of RM2,062 who works an extra five years beyond the current retirement age of 60 would retire at 65 with only RM165 extra per month to add to their pension.

Someone on the average income of RM2,933 would have an extra RM235 per month from their extra five years of work. So working longer adds virtually nothing to retirement income.

Somebody on an average salary who is 40 years old, with 20 years left to work but who has withdrawn all of their EPF savings would have to save 34% of their monthly wages to reach the EPF minimum threshold of RM240,000.

Someone who is 50 years old on median income with 10 years left to work would have to save 97% of their monthly salary to reach this threshold. Clearly this is not feasible.

While the government is right to end further withdrawals from EPF accounts, it must be viewed as a necessary first step in full reform of pensions and social protection in Malaysia and we must now consider how to reform and rebuild the pensions system.

EPF has a role to play and must be supported but as I have argued before EPF alone cannot solve the problem and some form of basic non-contributory pension must now be considered. – December 31, 2021.

* Prof Geoffrey Williams is an economist based at Malaysia University of Science and Technology.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.