Financial maturity vital with introduction of Account 3

The upside of this new initiative is the increase in contribution quantum to Account 1 from 70% to 75%.

ACCOUNT 3, known as the Flexible Account for members below the age of 55, is one the biggest changes the Employees Provident Fund (EPF) has implemented in recent times

In 2007, the EPF split the savings account to Account 1 and Account 2 with the monthly contribution proportion divided to 70% and 30%, respectively. Back then, Account 2 was introduced to allow limited withdrawals for its members for such needs as the first property downpayment or settlement of a housing loan, financing education and medical expenses.

With Account 3, the monthly contribution proportion is now divided to 75%, 15% and 10%, respectively. This new savings account allows members to withdraw the money at any time but with a minimum of no less than RM50 per withdrawal.

This account is introduced for EPF members who want the flexibility to use their retirement savings without having to wait until reaching the age of 55 or to fulfil the permitted conditions for withdrawals under Account 2.

How did it all begin?

This episode started during the Covid-19 pandemic when the then-government broke the sacred rule of EPF of not allowing withdrawal from Account 1 under the justification of the pandemic.

So, what we are witnessing today is the direct result of the floodgate being opened for populist measures around 2020-2021. Once the gate is opened, it is hard to shut.

In essence, this decision by policymakers to allow flexible withdrawal under Account 3 is not only a pragmatic policy decision to satisfy some of the members’ complaints, but it is also a matter of political expediency.

In life, it is hard to please everyone. In a way, from the current government’s standpoint, Account 3 is a means to an end to put a stop to any further demand from some EPF members who want pandemic-time withdrawals.

The upside of this new initiative is the increase in contribution quantum to Account 1 from 70% to 75%. The biggest loser, however, is Account 2, and with Account 3 being introduced, Account 2’s restricted withdrawal scheme appears to have lost its purpose.

Should EPF members utilise the flexibility?

The EPF recommends that members should have at least RM240,000 in retirement savings by the age of 55 so that they can at least have RM1,000 for monthly usage over the next 20 years.

Currently, only 33% of EPF members have savings of RM240,000 and above. For those living in the city or urban areas, the EPF recommends at least RM600,000 to live comfortably upon retirement. At present, more than 6.3 million EPF members have less than RM10,000 in their EPF savings.

Under Account 3, between

May and August this year, members can opt in to transfer part of their balance in Account 2 to Account 3.

This opt-in measure is to help give a head start to those who want to build up their saving balances in Account 3 for the purpose of flexibility.

Indeed, everyone has a right to decide how they want to use their retirement savings or spend their money but I strongly believe, with the current low level of financial literacy in Malaysia, as well as the proliferation of scams and get rich quick schemes, Malaysians in general are not ready for the withdrawal flexibility that comes with EPF Account 3.

The tenet of EPF is to provide savings for retirement and not for flexible withdrawals. Unless one is in a dire financial situation, have nowhere else to turn to but their own EPF savings, I would advise against the opt-in

nd measure.

It is best to keep your savings in Account 2 untouched, if possible.

Maintaining dividends?

For Account 3, there are no withdrawal limits, hence, many EPF members who are savers are worried this will impact the EPF’S yearly performance.

With 10% of allocation to the flexible account, moving forward, the EPF theoretically will need to set aside close to Rm30bil to Rm50bil of its total funds in liquid assets to meet potential withdrawal of member.

The thing is, the EPF have always adopted a strategic asset allocation method which is similar to what fund managers like us do.

They will never be fully invested because in the event of a meltdown in the economy, there is nowhere to run.

It is likely that EPF has already tabulated, based on their portfolio size, a certain percentage of diversification across asset classes, including liquid assets like money market funds or deposits, to form part of its investment portfolio.

This means the funds set aside for liquidity purposes cannot be used for long-term investments or investments into an asset class that is hard to monetise.

This percentage of funds set aside will likely be put in shortterm money markets or deposits and not long-term bonds or equities, real estate or private-market investments.

For now, the EPF has stated that the dividend rate will be the same for all three accounts. This makes sense, as it is now the introduction phase; otherwise it defeats the purpose of introducing Account 3 in the first place. In actual fact, the entire investment portfolio of the EPF will be managed in totality, but the realised gains that will be utilised and distributed as dividends to members will then simply be allocated based on the quantum of savings balance across all accounts rather than pegging certain returns to each account differently.

Having three different accounts may also provide an opportunity to the EPF to shape their policy objective. For instance, if the EPF wants to encourage certain savings behaviour, they could provide higher dividend payout rate to Account 1 instead of Account 3.

For the sake of getting higher dividend payout, savers have the incentive to keep their funds in Account 1.

Financial maturity necessary

Financial maturity is necessary in order for Account 3 to be effective. I run a fund management company, but whenever clients ask me whether they should withdraw their EPF money to park in my fund, as much as I want their money, I would always reject them outright.

This is not because I lack the confidence to deliver returns. As a business, I want my clients to park their savings with me. However, this goes against the very fundamental of financial prudence.

EPF savings is meant for rainy days. It is a social protection scheme provided by the government for its citizens. It is not a personal piggy bank to meet one’s lifestyle choice.

The EPF is possibly one the best things our Malaysian government has ever done for the rakyat and they should be proud of the institution’s ability to safeguard and compound their savings.

So, for those who are excited about Account 3, do take a pause and exercise discretion when making any withdrawal decision. If possible, just leave your money in the EPF and let it work for you after a lifetime of hard work.