Sunday February 26, 2012

Protecting EPF investments

By LISA GOH
sunday@thestar.com.my

When news first broke out last month that the EPF would be channelling RM1.5bil for a special public housing scheme, alarm bells sounded off for many contributors.

THERE were smiles all around when the Employees Provident Fund (EPF) announced last Sunday that contributors are getting a decade-high dividend of 6%.

The dividend rate for 2011 is an increase of 20 basis points over the 5.8% rate paid out in 2010 and translates to a total of RM24.47bil being distributed to members.

While the higher dividend is good news, EPF contributors still have a nagging doubt many are asking if the retirement fund can do better this year following news reports that EPF is channelling RM1.5bil for a special public housing scheme in the Federal Territory.

One such contributor, finance manager Nicole Tan, 51, admits to having an uneasy feeling about the whole housing scheme.

The reason for this? The scheme is targeted at those who do not qualify for bank financing.

“What if the borrowers default? Who is going to pay back the money?” she asks.

The new “investment” first came to light when Federal Territories and Urban Wellbeing Minister Datuk Raja Nong Chik Raja Zainal Abidin announced on Jan 30 that the money would be channelled to the Federal Territories Foundation as part of a special funding scheme to help eligible buyers purchase public housing units in the city. It would come under the National Economic Action Council's (NEAC) People Housing Programme (PPR-MTEN) as well as the DBKL public housing.

Since then, more details have been released by both the EPF and the Federal Government.

From the EPF:

> The money is loaned to the Government, not to individuals.

> EPF is in discussions with a special purpose vehicle of the Federal Territories Foundation (SPV FT Foundation) to provide a loan of which the terms are being finalised.

> An initial facility of only RM300mil is being provided. Further loans would be granted at the discretion of the EPF Investment Panel subject to the satisfactory performance of the SPV FT Foundation. It would be reviewed 12 months from the date of the last drawdown of the RM300mil.

> SPV FT Foundation will enter into a lease arrangement (Ijarah scheme) with the individual participants, but the ownership of the houses would remain with the SPV FT Foundation until the lease arrangement has been fully settled by the individual participants.

>The loan to the SPV FT Foundation will be well secured as all housing units will be assigned to the EPF, with security cover of at least twice the loan amount.

> Cash retention of 25% of the disbursement of EPF's loan to the SPV FT Foundation to be set aside in a liquidity reserve account assigned to EPF.

From the Government:

> The EPF will make 5.5% profit.

> DBKL will buy back the houses to secure the cash flow required for the repayment of the loan in the event of non-payment.

> Repayment period of up till 25 years, with monthly instalments estimated at between RM200 and RM300.

> Value of the units expected to be fixed between RM21,500 and RM35,000, which is below market value.

Doing the math: EPF contributors checking their statement at the EPF e-Kiosks after the EPF declared a dividend of 6% for the year 2011. — AZMAN GHANI/The Star

But for Tan, who has been in the workforce for over 25 years, many questions remain unanswered.

Her concerns are echoed by freelance trainer Mohd Radzi Jamaludin, 41.

“What will the selection process be like? What is the criteria for the loan application? What will happen in the event that people abscond from repaying the loan?” he queries.

“The project is supposed to kick off on March 1, but without all these details, I think they should not go ahead with it,” he says.

Tan and Mohd Radzi are fiercely protective of their EPF contributions, and understandably so. It is after all their retirement kitty and the savings will see them through their old age.

But is this project really putting the contributors' money at risk?

According to RAM Holdings Bhd group chief economist Dr Yeah Kim Leng, the answer is no.

“There's not much of a risk factor. It's watertight as it is guaranteed by the Government. It's as good as the EPF buying MGS (Malaysian Government Securities), and the Government in turn using the money to fund the project. In this case, they are bypassing that step.

“The nature of the transaction will be important, especially the terms and conditions of the loan provided by the EPF to the Government,” he says.

He explains that this could be treated as another investment opportunity for EPF, and should be viewed as part of its overall portfolio.

“It depends on the conditions for the loan. If the returns are fully secured, it's very much welcome.

“In the overall scheme of things, we have to look at how the SPV is structured and financed, and nature of the risk they undertake,” he says.

He adds that this project would not jeopardise the EPF's financial standing, as the EPF has a total investment asset of RM469.22bil, as at Dec 31, 2011.

The next question would be is the 5.5% profit promised by the Government to the EPF fair?

“That depends on the inflation rate prevailing then. If this 5.5% interest rate is held for the next 20 to 30 years, it may not be beneficial to the EPF, given that these are nominal returns. It's not inflation adjusted.

“What the EPF could ask for is inflation-adjusted returns, something that is pegged to the prevailing inflation rate. Otherwise, it would be subject to market risk.”

He adds that in the long run, the EPF would have to compare the returns of this investment against that of other asset classes.

“Of course at the present time, because of the lower interest rate environment, the 5.5% would seem to be very attractive.”

Hong Leong Asset Management Bhd executive director and chief executive officer Geoffrey Ng agrees.

“Instead of buying the MGS with a yield of between 3% and 3.5%, the EPF is loaning money to the Government for a profit of 5.5%. At this point in time, it's a fair investment.

“The Government borrowing money from the EPF is one thing. What the Government does with that money, in this case giving it as a loan to individuals, is an entirely different thing. As long as the second point doesn't affect the first, I don't see any issues in it,” says Ng.

So at the end of the day, the question that remains is how the project will be carried out, and how transparent the Government will be in handling the matter.

Mohd Radzi says: “I am not against this scheme which will help the lower income groups, but I do have my concerns. After all, it is my money.”

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Sunday February 26, 2012

Protecting EPF investments

By LISA GOH sunday@thestar.com.my

By LISA GOH
sunday@thestar.com.my