The economic impact of the new EPF Account 3

 

The Employees Provident Fund (EPF) will launch a new Akaun Fleksibel, or Flexible Account, in May to give members access to 10% of their savings in times of emergencies.

In restructuring its strategy EPF is providing greater flexibility and choice, focusing on retirement income security rather than a lump-sum final payment with a wider portfolio of options for members to invest as well as save for retirement.

Of the three new accounts Account 1 (Akaun Persaraan) will be for retirement, Account 2 (Akaun Sejahtera) for education, health and housing withdrawals and the newly created Account 3 (Akaun Flexibel) will be for emergencies.

For Akaun Fleksibel, the 10% threshold is enough to be meaningful when the cost of living bites.

The better news is that the proportion for Akaun Persaraan will rise to 75% of contributions, and it will only be for retirement. This is a good move and hopefully it will increase long-term savings and reduce short-term withdrawals.

For many the best option may be to opt out of the initial transfer to protect their long-term savings.

From May, 75% of monthly contributions will automatically be sent to Akaun Persaraan, 15% to Akaun Sejahtera and 10% to Akaun Fleksibel.

The dividend will be the same across all accounts. At 5.5%, this is better than most other instant access savings accounts on the market.

The main concern is that the initial amount that can be moved into Akaun Fleksibel which is 10% of total savings for those with more than RM3,000 or all of the Account 2 savings up to RM1,000 for those with less than RM3,000 in savings.

This means that at the start a lot of savings can be taken out but more will be allocated to the long-term, protected Akaun Persaraan and less in Akaun Sejahtera.

This makes it easier to achieve the Basic Savings level pension of RM1,000 per month and the Adequate Savings level pension of RM2,500 per month.

Based on the age bands and current contribution trajectories, EPF estimates that 65% of members will meet Basic Savings by 2035 because younger generations have higher incomes and therefore higher contributions.

Income growth and compound interest will also increase savings in Akaun Persaraan.

The option to switch current savings into Akaun Fleksibel for emergency use also makes a big portion of the EPF fund of over RM1 trillion available as a windfall.

Since around 8.1 million, or half of EPF members, made withdrawals in the previous four occasions at the height of the Covid-19 pandemic, it is likely that a maximum of RM50 billion will be available.

Based on previous data EPF expects RM20 billion to RM30 billion to be withdrawn, similar to what was allowed under the Covid-19 withdrawals.

This RM20 billion to RM30 billion will have the same effect on the economy as the Covid-19 withdrawals but this time it is a windfall rather than a necessity.

In macroeconomic terms there could be RM20 billion to RM30 billion of extra consumer spending in 2024 which will push up growth.

On the positive side it will offset the economic impact of slow global growth and compensate for higher costs of living, especially if subsidy rationalisation causes prices to rise.

On the negative side it can cause inflation, reduce EPF investment in local businesses and reduce long-term savings in pension accounts.

This is a trade-off of long-term pain for short-term gain which might be justified given the challenges in achieving 4% to 5% growth under current global economic conditions.

Pension reform is fully on the agenda with EPF playing an innovative anchor role for its members, targeted to cover 80% of the workforce by 2035.

For millions without EPF accounts there is still a gap that needs to be filled with a non-contributory guaranteed Universal Basic Pension funded through a Malaysian SuperFund. - FMT

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