KUALA LUMPUR: The Employees Provident Fund (EPF) is hopeful of lower impairments in 2017 on the expectation that the local stock market will perform better. The fund’s impairments swelled to a historical high of RM8.17 billion in 2016, taking a toll on the dividend declared for the year, which at 5.7% was the lowest since 2009.

EPF chief executive officer (CEO) Datuk Shahril Ridza Ridzuan (pic) said increased impairments were one of the main contributing factors for the lower dividend for 2016. For the previous year, EPF paid a dividend of 6.4% after recording impairments of RM3.07 billion.

“The RM8.17 billion is probably in absolute amount the highest impairments ever made, but you have to remember that is in context to the size of EPF which is about RM730 billion in size.

“So in percentage to total assets, the impairments are roughly a negative 1.2%,” he said at a media briefing yesterday.

Shahril explained that the impairments were made in accordance with the Malaysian Financial Reporting Standards (MFRS), in particular MFRS 139 which deals with the recognition and measurement of financial instruments.

The brunt of the impairments stemmed mainly from listed equities, which were impaired by RM8.05 billion. Of this, 73% of the impairments were from local equities, while 27% were from foreign equities.

Banking and oil and gas were the sectors that contributed most to local equity impairments, at 49% and 25% respectively.

“However, this year, we are seeing signs of increased activity and interest in Bursa Malaysia, looking at the fact that the [FBM] KLCI is now at [the] 1,700[-point level],” said Shahril. “If the [index] improves or holds steady, we may see impairments go down as we have already booked in most of the impairments.”

“So if impairments go down and gross investment income remains stable or grows, we will be OK for this year,” he added, but declined to confirm if a higher dividend is in store for 2017.

“Whether it is a 6% dividend … it will depend on the performance [of Bursa].

“EPF pays out essentially all the realised income it creates. There’s no issue of keeping anything in the reserves and things like that because the payout is almost 100%,” said Shahril.

Notwithstanding the lower dividend declared, EPF recorded its highest-ever gross investment income in 2016 since its establishment in 1951. The RM46.56 billion income represented an increase of 5.25%, compared with the RM44.23 billion recorded in 2015.

On whether EPF’s Simpanan Shariah that comes into force in 2017 would deliver a higher dividend compared to conventional savings, Shahril said it depends mostly on the performance of the banking sector.

“The big difference between the two schemes really is the banking sector, where the syariah savings scheme basically will have minimal exposure to core banking other than syariah-compliant financial services.

“So the big swings will depend on what happens in the banking sector. If you look at 2016, there were a lot of impairments in the banking sector, so if you extrapolate on that, the conventional savings probably won’t perform as well the syariah savings.

“However, given the fact that we have taken three straight years of [impairment] provisioning on the conventional [side], this year could very well be the case where the conventional banking sector will outperform other sectors. So if the banking sector picks up again, the conventional savings sector will do better than syariah … it’s hard to say [which savings scheme would perform better],” he said.

Through Simpanan Shariah, which was open for registration from August last year, EPF members regardless of race and religion can opt to have their accounts managed and invested according to syariah principles.

As at Dec 23 last year, a total of 635,037 members had switched to Simpanan Shariah, with RM59.03 billion of the initial RM100 billion fund allocation taken up.

On EPF’s foreign investments, Shahril said there will be more news flow in relation to the pension fund’s overseas assets.

“The weak ringgit has an impact in the sense that we are more careful about the timing of our investments [abroad], but we have been more aggressive in optimising our asset portfolio overseas,” he said. “So you will see a lot more news flow on our overseas assets as we trade out of assets and invest in new assets.”

Foreign investments made up 29% of EPF’s investment assets in 2016, close to its 2017 target of 30%. The figure for 2015 was 27%.

Meanwhile, RHB Investment Bank Bhd chief economist Lim Chee Sing rejected the suggestion that EPF’s lower dividend declared for 2016 marked the beginning of a downward trajectory for dividends.

“The FBM KLCI could trend higher this year, on the back of a recovery in exports and consumer spending, as well as an improvement in commodity prices which would translate into better earnings performance for listed entities,” Lim told The Edge Financial Daily.

“Global growth is also recovering, as developed countries shift from monetary policy to fiscal policy to boost economic performance,” he said. “So unless there is a black swan event that is negative for markets, EPF’s dividend will not be on a downward trend.”