EPF’s Negative Reserves

Back in February 2019 I wrote an article explaining how the EPF, the Malaysian retirement fund is able to pay out a dividend of 6% despite the poor performance of many asset classes in 2018.

The answer is that EPF draws from its reserves that was built over many years, selling assets such as bonds and stocks in order to raise the cash needed for the dividend. I knew that the reserves would be significantly depleted but the 2018 annual report was not released then so it was any one’s guess how bad it would be.

A few weeks ago, I noticed that EPF had published its 2018 annual report so the first thing I did was to check its balance sheet. Unsurprisingly the reserves had dropped. But surprisingly, the reserves had ended in a negative position as of the end of 2018.

This is the first time in 7 years of my tracking that the reserves have turned negative. And below is how it compares with past years:

EPF reserves from 2012 to 2018

For clarity, I calculated the reserves by adding together the Reserves and Retained Earnings items of EPF’s balance sheet. I then calculated the reserves margin by dividing this sum with the members’ fund total, which is the sum of Reserves, Retained Earnings and the Members’ Contribution items of the balance sheet.

A negative reserve margin means that the EPF is sitting on nett unrealised losses on its investments. It is like you buying a stock at RM10/share but it is now valued at RM9/share so you have an unrealised loss of RM1/share. The question is what will you do next?

The problem that EPF faces is that 2019 is still turning out poorly for stocks and bonds. Malaysian government bond yields have dropped from 3.9% to 3.3% yield. The KLCI is down 5.8% year to date. Thankfully the MSCI world index is up 11.2% year to date. It would not be a stretch to assume that EPF’s return for 2019 could be between 3%-4%.

It will be irresponsible for EPF to declare a dividend of 6% again for 2019 since that would further reduce the reserves. It should not be forced to sell assets at deep losses for short term cash. It must stay true to its long term investment objectives.

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