A new report, citing an unnamed official, revealed that the Employees Provident Fund (EPF) attracted a whopping RM13 billion in voluntary contributions last year from over 1.2 million members.
That’s about 7.5 per cent of the EPF’s more than 16 million members or 14 per cent of its 8.7 million active contributors.
These include 400,000 members under the i-Saraan scheme, introduced in 2018 to help self-employed and gig workers save for retirement, where participants receive a 20 per cent government incentive or up to RM500 per year on their contributions.
On Saturday, a senior Maybank Investment Bank (MIB) analyst WhatsApped me, calling the RM13 billion figure “mind-boggling” while another from Hong Leong Investment Bank (HLIB) pointed out that this sum is just 1.06 per cent of the EPF’s massive RM1.22 trillion investment portfolio.
The surge in voluntary contributions can be attributed to government support through i-Saraan since 2018 and the increase in the annual contribution limit from RM60,000 to RM100,000 in 2023.
While this trend signals a growing awareness of retirement planning, it also raises concerns for banks, which may be losing a key source of low-cost funding.
That’s something we’ll be keeping a close eye on.
BANKS MIGHT NOT BE HAPPY ABOUT THIS
Banks typically rely on customer deposits as their primary funding source, as demand and savings deposits — especially from individuals — incur low or no interest costs and provide stable funds for lending at higher margins.
In contrast, alternative funding sources such as interbank loans, bonds and foreign borrowing carry higher costs due to market-driven interest rates.
With RM13 billion flowing into the EPF — where members benefit from a consistent 5 per cent-6 per cent dividend yield —are banks at risk of losing a segment of their traditional deposit base?
Data I pulled together with JP Morgan Chase colleagues shows that while core deposits for the Malaysian banking system, which include demand, fixed and savings deposits, grew 27 per cent, fixed deposits specifically declined by almost 10 per cent to RM611.3 billion in December 2024 from a peak of RM676.2 billion in April 2014.
Even so, this decline was offset by demand deposits, which almost doubled to RM530 billion over the past decade, while savings deposits grew by about 75 per cent to RM238.5 billion.
Total deposits, fortunately, grew by almost 60 per cent to RM2.44 trillion, mainly driven by the faster growth of non-core deposits, which surged by 133 per cent.
The shift in deposit patterns could push banks to rethink their funding strategies.
It’s not hard to see why — the returns on the EPF savings are much better than at banks, and with (EPF) Account 3 offering the same returns with immediate access, there should be an outflow from banks to the EPF in voluntary contributions.
Historically, the EPF’s dividend rates have consistently outperformed fixed deposits, making it a more attractive savings option.
In 2023, the EPF paid a dividend of 5.5 per cent and 5.4 per cent for conventional and Syariah savings, respectively, significantly higher than the 2.5 per cent to 3.5 per cent interest rates offered by banks for fixed deposits.
If EPF delivers between 5.5 per cent and 6 per cent for 2024, my back-of-the-envelope calculations suggest this shift could accelerate even further.
Banks, meanwhile, have been adapting by focusing more on fee-based income rather than interest-based income.
Fee-based income is now preferred as it has a greater impact on improving return on equity (ROE), which is a key performance indicator for banks.
Rather than seeing the RM13 billion in voluntary top-ups as a “mind-boggling number,” I see it as part of a bigger, long-term shift in how people approach savings.
Those who withdrew during the pandemic now feel things are more stable and want to top up more.
At the same time, the EPF continues to sustain a reasonable dividend rate.
Still, the RM13 billion represents just slightly over 1 per cent of the EPF’s total fund.
There has been a surge, but this is likely to stabilise as people get back on track to achieve their target retirement savings.
THE BIGGER PICTURE: EPF’S INVESTMENT STRATEGY
With more capital at its disposal, the EPF faces pressure to deploy funds effectively both locally and internationally to maintain strong dividend yields.
The pool of investible funds will grow, so that also means pressure to invest the money, either locally or abroad, and give a reasonable dividend.
However, the surge in voluntary contributions could strain the EPF’s ability to maintain strong performance, especially when it is compelled to channel more of its investments locally.
Adding to the challenge, the majority of Malaysians are disillusioned by the stock market.
The fact that January 2025 was the worst- performing first month for the past three decades is telling.
WHAT’S NEXT FOR VOLUNTARY CONTRIBUTIONS?
We can all agree that the trend of increasing voluntary contributions to the EPF is likely to continue.
People are becoming more aware of the need to safeguard their retirement savings.
So when a Channel News Asia (CNA) editor caught me after the Fitch Ratings committee meeting yesterday and asked if voluntary contributions should be further incentivised, my answer was immediate:
“Absolutely. I’d love to see the RM100,000 limit increased in the future.”
I outlined two critical priorities for the EPF — first, how it can help build more retirement savings for contributors and second, how to ensure the fund is invested in the right asset classes to deliver sustainable dividends.
A positive shift is already happening, with more self-employed individuals and people in informal sectors contributing to the EPF.
I believe that, eventually, the trend will taper off as people get back on track with their savings targets.
That said, greater participation is crucial.
There’s plenty of room for more people to contribute.
In fact, the EPF should also allow foreign members to make voluntary contributions.
The loan-to-deposit ratio (LDR) of Malaysia’s banking industry, which stood at 87 per cent in 2Q24, noting that a lower ratio could pose challenges for banks in extending loans.
A low LDR of say 70 per cent would present a headache to banks as it would indicate a challenge to extend loans to credit-worthy borrowers and a lack of demand for loans, as it was during the global financial crisis of 2007-2008.
The current LDR of 87 per cent is an ideal balance.
The RM500 incentive has compelled many to save with the EPF.
There is no doubt that the socioeconomic benefits are substantial and should be continued.
Medecci Lineil has over a decade of experience leading a niche-focused team within Goldman Sachs’ investment banking division (IBD). His expertise extends beyond the bank, having been instrumental in establishing consultancy firms in Kuala Lumpur and Singapore, where he serves as a founding board member.
