Malaysian Finance

• Why are Malaysians struggling with extremely low EPF savings?

• Should the retirement age be increased to allow people to work longer?

• What are the impacts of raising the mandatory EPF contributions from employers?

• Why did Bank Negara Malaysia (BNM) hike the Overnight Policy Rate (OPR) by 25 basis points? Are more rate hikes expected?

• ASB and ASM – are they still good forms of investment?

On Thursday, May 11th, I had the privilege of hosting a discussion featuring RinggitPlus Founder Hann Liew and Economist Sani Hamid.

Our dialogue spanned various significant subjects, encompassing the dire state of EPF savings and the debate on whether the retirement age should be increased.

We also delved into the recent OPR hike by BNM as well as expert opinions on ASB and ASM.

For those who missed the insightful session, the full replay is now available on Spotify. Listen to it here.

Scroll down for a written summary of the session.

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Quick Facts

1. The state of EPF savings for Malaysians is alarming.

   
   As of December last year, PM Anwar revealed that only 19% of EPF members had reached the basic savings target of RM240,000 to retire by 55. Even this amount wouldn’t be enough to retire in our opinion, as it will only give retirees RM1,000 per month to survive.
   
   

2. Bank Negara Malaysia (BNM) surprised the markets by raising the Overnight Policy Rate (OPR) by 25 basis points on May 3, when a pause was largely expected.
   
   The increase brought the interest rate back to the pre-pandemic level of 3.0%.
   
   

3. Amanah Saham Malaysia (ASM) and Amanah Saham Bumiputera (ASB) are unit trust funds managed by Amanah Saham Nasional Berhad (ANSB). These funds have gained recognition for consistently providing good dividends, averaging 6.92% for ASB and 5.68% for ASM over the past 11 years.
   
   However, the dividend rates have recently shown a decline.

Session Summary

1. In light of the alarmingly low savings in EPF, there have been discussions on raising the retirement age to allow employees to work longer. Is this a viable solution?
   
   Many people tend to have the wrong idea about raising the retirement age. Increasing it is actually beneficial to employees rather than the opposite.
   
   You can stop working whenever you want to, because there are currently no policies in place to force anyone to continue working if they do not wish to.
   
   But with the current retirement age, employers are legally allowed to retire (or fire) you when you’re 60.
   
   Raising it will give more time to allow retirees’ nest eggs to grow, as the average life expectancy of Malaysians is projected to rise from 75 to 84 in the near future.
   
   

2. Is it not more likely for employers to hire younger individuals? Younger employees tend to be more eager to learn and can be paid lower wages.
   
   The employability of elderly individuals largely depends on the nature of the job they are seeking.
   
   While physically demanding or analytically complex positions may be less suitable for older individuals, there are several job roles, such as cashier at McDonald's, driving/e-hailing, and teaching, where elderly individuals can find employment.
   
   

3. The proposition of increasing the retirement age will undoubtedly draw backlash from citizens. To avoid situations like the protest witnessed in France, what other options should the government explore?
   
   The government should first consider aligning the full EPF withdrawal age with the retirement age.
   
   Currently, members are allowed to make a full withdrawal once they reach 55, but they can only retire at 60, which is inconsistent.
   
   For those familiar with the power of compounding, you’ll know that it is the later years that contribute significantly to accumulating wealth. By increasing the full withdrawal age, retirees' nest eggs can grow substantially.
   
   *I provided two case examples, both with an initial balance of RM10,000, which are invested into an asset that compounds 5% annually. The first example shows that after 35 years, you’ll have RM55,160.15. But by allowing the asset to compound another 5 more years, you’ll have RM70,399.89, significantly higher than the previous example.

   

   
   

4. Some have proposed to increase the employers' contribution from 13% to 20% as a solution. What are the implications of such a change?
   
   While increasing the employer's contribution is a commendable suggestion, a blanket increase could potentially have detrimental effects on businesses, particularly small and medium-sized enterprises (SMEs).
   
   A more effective approach would be implementing a tiered increase. For instance, individuals earning below RM2,000 per month could have their employer contributions increased to 20%, while those earning above RM20,000 per month could have their contributions reduced (e.g., to 10%).
   
   This targeted approach ensures that the additional funds are channeled to those who require them the most.
   
   

5. Now let's delve into the recent OPR hike by BNM. Last week, the central bank surprised the markets by raising the OPR by 25 bps to 3.0%. This decision came as a shock, considering a recent Reuters poll indicated that economists were not expecting a rate hike.
   
   Were you also taken aback by BNM's decision?
   
   Both of us were taken by surprise when BNM chose to raise the OPR. The main drivers behind this decision were persistent inflation and robust domestic demand. However, it is likely that the central bank possesses additional information not accessible to the public (ie. higher GDP print than expected).
   
   

6. How will the latest OPR hike affect Malaysians, and what changes can we expect in our spending and saving patterns?
   
   The OPR directly affects our savings and borrowing. With this increase, individuals are expected to reduce their spending and prioritize saving, as loans become more costly.
   
   It’s good news for savers and bad news for borrowers. Banks are expected to offer better fixed deposit (FD) rates in the upcoming weeks, potentially reaching 4.50% or 4.75% per annum, so keep a lookout.

   

   
   

7. Will Bank Negara Malaysia maintain the OPR at 3.0%, or should we expect more rate hikes in the coming months?
   
   Considering the projected moderation of inflation towards the central bank's target and in the absence of any major global shocks, it is expected that the OPR will remain at 3.0% for the remainder of the year.
   
   However, there is a slight possibility that BNM may implement a final 25 bps rate hike, so it is prudent for us to be prepared for such a scenario.
   
   

8. ASB and ASM have been recognized for consistently providing good dividends, but their rates have been steadily declining recently. Should Malaysians still consider investing in ASM or ASB?
   
   ASM and ASB are both reputable funds; however, it's important to note that the majority of their holdings are in Malaysian equities, such as Public Bank, Tenaga, Maybank, and others.
   
   Over the past decade, the Malaysian market has experienced limited growth, resulting in steadily decreasing dividends from these funds.
   

   Furthermore, the yields offered by both funds are only marginally higher compared to cash apps and fixed deposits (FDs).
   

   If one has a higher risk preference, exploring alternative investment options may be a more suitable choice.
   
   If you have a lower risk preference, placing your cash into money market funds (ie. cash apps like TnG, Versa, StashAway) and fixed deposits may be a more prudent option.

   *We update the best FD rates in our LinkTree monthly. Check it out here.

The full replay of the discussion is available on Spotify. Be sure to give it a listen!

That’s all for this week’s newsletter!

Disclaimer: I am not a financial advisor. This newsletter is based on my own analysis and research. Do not take any of it as financial advice.

*This newsletter was written at 11.30 AM on 14th May 2023 and completed at 3.30 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!