Green-washing will not help civil service pensions

 

Kumpulan Wang Persaraan (Diperbadankan) (KWAP) or the Retirement Fund (Incorporated) ended its recent 

KWAP Inspire

 conference with a commitment to environmental, social and governance (ESG) investment.

To achieve this, it pledges to increase its focus on climate-based transition assets to RM20 billion or around 10% of its gross fund value.

KWAP was established in 2007 to handle the retirement fund contributions from civil servants.

Since then its total fund has risen from RM42 billion to around RM169.8 billion with the gross fund value reaching RM190.3 billion at the end of 2023.

Despite this rise KWAP is still unable to cover the pensions of retired civil servants and their dependants.

Since 2008 their gross investment income has averaged only 31.5% of government retirement costs.

In reality only RM3 billion to RM5 billion per year or 12.2% of the total civil service retirement bill has been paid by KWAP since 2018.

The remaining 88% was paid by Malaysian taxpayers, many millions of whom have no pension of their own.

Civil service retirement costs now commit RM32.4 billion or 10.7% of government operational spending before any other priorities for the rakyat can be funded.

This compares to 6.5% in 2008 and is predicted to reach around RM46 billion by 2030.

So it looks like a new strategy is timely for KWAP to enhance the long-term value of its investments for the benefit of retired civil servants and the wider public who are currently overburdened and covering the shortfall.

The shift in civil service retirement savings to the EPF for new hires offers long-term savings for the government and flexibility for civil servants but it also shows an apparent lack of capacity at KWAP to manage the growing pension burden.

Against this backdrop their new agenda of climate change, Islamic investments, including an Islamic stock exchange and the pledge to achieve a net zero portfolio by 2050 to mitigate climate change, may not be the answer.

As an illustration, for almost a decade Malaysian conventional equities on Bursa Malaysia have barely broken even and ESG portfolios and Islamic portfolios have also been sluggish.

While Islamic equities out-performed conventional and ESG stocks during the Covid-19 crisis they under-performed both before and after that period.

ESG stocks have moved much in line with conventional stocks because the BM FTSE4GOOD index is little more than the FBM100 conventional index with 

sin stocks

 removed.

By comparison conventional international equities have grown more than 150% in the last decade despite the turmoil on global and domestic markets.

Of course it is true that pension funds do not invest in equities alone and have a more conservative portfolio including fixed-income and property investments.

It is also true that national pension funds have a mandate to support domestic investment.

That said, the illustration is clear, if the investment strategy of KWAP was not driven by political considerations or now by late-comer ESG ambitions it could achieve a much better long-term return.

If KWAP had invested in plain vanilla, conventional international equities since inception in 2007 it would now have a fund almost twice the size of today with annual returns to cover at least half of the civil service pension bill.

This is why civil servants and members of the general public need to be aware of the new KWAP strategy focusing on ESG.

To many observers this narrative looks more like green-washing, reputation management and virtue signalling rather than a clear focus on a sustainable investment strategy and long-term returns.

The danger is that it will cause continuing long-term under-performance, leaving millions of taxpayers to bail out the civil service pension when they have no pension for themselves. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.