Malaysian Pension Fund to Start $26 Billion Islamic Saving Plan

  • Employees Provident Fund Shariah-compliant plan due January
  • `Another brick on the wall for Islamic finance industry': Lau

Malaysia’s biggest pension fund expects almost a quarter of its members will migrate to an Islamic retirement plan in its first year alone.

The Employees Provident Fund, a state-owned vehicle that manages $178 billion of assets including London’s Battersea Power Station project, aims to open the Shariah-compliant plan in January 2017 and is targeting an initial size of as much as 100 billion ringgit ($26 billion), Chief Executive Officer Shahril Ridza Ridzuan said in an interview in Kuala Lumpur. There’s strong demand and 1.5 million of its 6.7 million members should switch in the first year, he said.

Shariah retirement funds have been available since at least 2012 in Malaysia, the biggest market for Islamic bonds, and Indonesia is currently preparing rules to allow them. The number of Malaysians over 60 is forecast to more than triple by 2050 and the nation aims to have 40 percent of banking assets complying with tenets of the Koran by the end of the decade, from 27 percent now.

“EPF is laying another brick on the wall for the Islamic finance industry,” said James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management Asia Bhd. “They are positive for the industry and will further strengthen Malaysia’s position as a global Shariah hub.”

Aging Population

Some 60 percent of the 30.5 million Malaysians are Muslims. The population will expand to 40.7 million by 2050, by which time the proportion of over-60s will rise to 24 percent from 9.2 percent, according to United Nations projections.

Malaysians are required by law to contribute to EPF. The vehicle accounts for more than 85 percent of assets in the country’s provident fund system, according to the Asian Development Bank.

EPF set up a Shariah advisory council in 2010 and about 40 percent of its investments already comply with religious principles, according to a Jan. 21 statement. Islam forbids interest payments and funds are restricted to investing in bonds and shares of companies that avoid activities deemed unethical including gambling.

The Kuala Lumpur-based asset manager paid out 38.24 billion ringgit to its members in 2015, equivalent to a 6.4 percent dividend rate. EPF has a minimum guaranteed annual payout of 2.5 percent. The Islamic fund won’t have a minimum dividend as they can’t be guaranteed under Koranic rules, said Shahril 

Similar Returns

While the returns of the Shariah-compliant and regular funds will vary on an annual basis, “statistically, they should converge in terms of performance in the long-term because the overall asset allocation matrix on both pools basically have the same risk parameters” he said.

Some 51 percent of EPF’s assets were in fixed income at the end of 2014 and 42 percent were in stocks, figures from the company show. It has started investing in property and it plans to increase private-market assets including real estate to 10 percent from 4 percent in the next five to seven years.

There are several private Islamic retirement plans in Malaysia offered by companies including Manulife Asset Management Services Bhd. and CIMB-Principal Asset Management Bhd. EPF’s plan is intended to complement, not crowd out, the other vehicles, said Shahril.

“They are not meant to be directly competing with each other,” he said. “The private retirement scheme is voluntary while EPF is statutory.”

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