The Malaysian government's decision on February 16 to halt withdrawals from the Employees Provident Fund has put the spotlight on liquidity management as the state retirement scheme grapples with reduced funds.
Withdrawals at the height of the pandemic have depleted EPF assets, with median savings of account holders halving in 2022 compared with 2019, local media reports said.
About 8.1 million account holders withdrew RM145 billion (US$32b) at the height of the Covid-19 pandemic.
The drop in assets under management will have implications for EPF's money management.
“The key implication for investments when there is a steep decline is around liquidity management,” said Leong Kar Wye, director of investments, Asia at WTW.
“Firstly, there needs to be sufficient liquidity (ideally low risk) assets that can be sold to pay out the cash withdrawals.
"Next, the portfolio needs to be rebalanced to ensure it has the intended risk and liquidity profile.”
EPF is not the only one in the region facing heavy withdrawals during the pandemic.
The Australian government is mulling a ban on early withdrawals after some Australians withdrew from their superannuation to buy homes or used the money for other purposes during the pandemic.
The relatively rare and unfavourable condition of both stocks and bonds tumbling in 2022 has also not helped portfolio values for asset owners in the region.
EPF posted gross investment income of RM39.21 billion for the nine months ended September 2022, an 18% drop from the same period 12 months ago.
Equities, both public and private, brought in 45% of gross investment income, with the equities portfolio posting a 13% gain over the same period. Private equity gains helped this portfolio’s performance, EPF said.
Fixed income accounted for 39% of gross income, while real estate, infrastructure and money market instruments accounted for the rest of the overall portfolio.
By the end of the third quarter, EPF’s overseas investments accounted for 36% of total investment assets.
NO EASY FIX
EPF’s struggles to hold on to AUM is also echoed in the global pensions landscape, where assets recorded their largest fall since the global financial crisis of 2008, according to WTW’s Thinking Ahead Institute.
Global pension assets totalled $47.9 trillion in 2022, down 16.7% from the previous year, according to its latest Global Pension Assets study.
Against this backdrop, liquidity and volatility challenges will remain in the forefront for pension funds in the Asia-Pacific this year, according to experts.
There are no quick-fix solutions. “Restricting further withdrawals is a start. Increasing contributions would be a more drastic action to build up savings, though that comes with challenges around whether employers and employees can afford to do it in the current economy," said Leong.
"Investment returns is the other factor, though that’s tricky given that the need for annual distributions limits the risk that can be taken, and consequently the returns that can be expected."
A fund needs to constantly monitor the liquidity consequences of large external liquidity demands, a January 2023 note by investment manager PGIM noted.
If a fund faces sudden demands on cash, portfolio assets must be sold, and willing buyers must be found.
"Should such sales occur during periods of poor valuations or particularly wide bid-ask spreads, the portfolio could experience a material deadweight loss which may take a long time (if ever) to recoup,” the note said.
AsianInvestor was unable to contact an EPF spokesperson for this story.
This story has been updated in the 7th, 8th and 19th paras.