EPF's Nurhisham said Account 3 could potentially be introduced in the next two years.
PETALING JAYA: Having come under intense political pressure in recent years, the Employees Provident Fund (EPF) is changing its game plan by introducing Account 3 for all members to allow “unconditional” withdrawals.
Interestingly, the third account – which will offer a lower dividend rate – is announced as one of EPF’s new reform measures to avert a major retirement crisis in the future.
Other initiatives to be undertaken by the EPF include lower contribution rate for informal workers, mandatory monthly withdrawal option for those born in or after 2010, a campaign to promote voluntary contribution and the extension of EPF’s legal coverage to the entire working age population.
With Malaysia being one of the fastest ageing countries in the world, and at the same time, about 22.1% of EPF members already exhausted their savings by the age of 60, accelerated reforms are needed to ensure retirement income adequacy.
Speaking to reporters, EPF chief strategy officer Nurhisham Hussein said Account 3 could potentially be introduced in the next two years.
While the percentage of contribution is yet to be determined, Nurhisham said about 5% to 10% of one’s monthly contribution could go into Account 3.
While this would not affect the existing 70% contribution into Account 1, he said the contribution into Account 2 will be reduced.
However, members will have the option to transfer their savings in the third account to Account 1 or 2, should they want to avoid the lower dividend rate.
Nurhisham said that Account 3 is intended primarily to help informal sector workers, who currently do not enjoy a good retirement savings coverage.
“Hopefully, with this approach, it will be able to address some of the cash flow concerns that the informal sector workers have.
“Based on the feedback that we have received from informal sector workers, they would like to save more (in EPF) but they need the cash flow.
“This approach will allow them to save and enjoy compound dividends while also meeting any immediate cash needs.
“A total of 50% of Malaysian households can’t even raise RM1,000 to cover emergencies. Account 3 intends to address this,” he said in a virtual special briefing yesterday.
EPF’s data shows that out of 11.1 million total non-formal workers in Malaysia and those outside the labour force, only 5% or 591,000 individuals are active contributors to the EPF.
When asked whether Account 3 will open the floodgate to unnecessary withdrawals, Nurhisham responded by saying that “most Malaysians are sensible”.
Speaking with StarBiz, economist Lee Heng Guie said that while EPF has good intentions, the Account 3 idea would come with a big risk.
“For someone with a low income, 5% to 10% in Account 3 will not result in a big amount. So, in times of crisis, the pressure may intensify on the EPF to allow withdrawal from Account 2 considering the insufficiency in Account 3.
“If we want to proceed with the Account 3 idea, we must have a clear legislation that prohibits withdrawals from Account 1 or 2, unless for certain reasons that are allowed currently such as education or housing,” he said.
Lee added that the EPF must continue to educate its members to withdraw responsibly only in times of emergencies.
Once Account 3 is introduced, EPF plans to rename all accounts to better reflect their purposes, namely Retirement Account, Value-Added Account and Flexible Account.
Meanwhile, Nurhisham told the media that the EPF may introduce a lower contribution rate for workers in the informal sector, in order to cover more working age Malaysians.
Currently, employees’ contribution rate is set at 11%.
“Instead of 11%, we are looking at something lower to account for the fact that most informal sector workers don’t earn very much and the fact that they have more variability in their income,” he said.
By 2035, the EPF aims to cover 80% of the labour force. Currently, it covers about 47% of the labour force, which is well below the global average of 68%.
“A big portion of it (80% coverage) will come from expanding the mandatory coverage,” according to Nurhisham.
He also clarified that the recent proposal to introduce mandatory monthly withdrawal for retirees will only apply to members born in 2010 and onwards.
For existing EPF members, no change is intended for the current lump sum withdrawals at age 55 and 60. The current EPF monthly withdrawal option only applies to members who voluntarily opt-in.
The first payout under the mandatory option is only expected to be made when these new members retire, some decades in the future.
This proposal is still being refined and the EPF assures that any decision regarding the mandatory monthly withdrawal option will only be made with careful consideration and alignment with its commitment to the best future interests of its members.
According to the EPF, the mandatory monthly withdrawal mechanism will bring Malaysia in line with widespread global practice, as the country remains one of the very small minority that continues to allow lump sum withdrawals and not a regular payout.
Nurhisham explained further that for future members born in 2010 and onwards, a portion of their savings will be available for “lump-sum” withdrawal once they hit the minimum retirement age.
The remaining amount will then be used for the mandatory monthly drawdown, until the amount is fully exhausted.
For example, if the remaining amount is RM100,000 and the EPF decides to set the monthly withdrawal at RM2,000, an EPF member will get monthly payouts for 50 months.
“This is not an annuity scheme,” Nurhisham clarified.
As of May 2023, the EPF has 15.9 million members, of which 8.5 million individuals are active members.
The retirement fund’s total investment assets are valued at RM1.01 trillion.
