The announcement of the Employees Provident Fund that it will sell off assets to make funds available to depositors shows it has weak liquidity.
However, the current severe global downturn amid the COVID-19 may have doubled the impact on the liquidity of the EPF.
As a result, this means EPF may suffer huge losses by selling non-cash assets with weak liquidity.
Subsequently this may decrease funded ratios, indicating excessive liquidity risks.
There are a few other factors that need to be taken into consideration here. This includes cash in hand, credit ratings, impact of foreign assets and currency exposure as well as net cash flow of publicly traded assets.
The EPF did not provide details for the liquidation plan although the estimated withdrawals under the i-Sinar and i-Lestari schemes will see about RM45 billion exiting the retirement fund by next year.
EPF claims that they executed the strategy to sell off assets in March although the overall rebalancing assets may take a while considering its long-term investment horizon structure.
The liquidity risk already affected pension funds all over the world and the EPF is no exception.
The EPF needs to heighten the focus on the liquidity risk for the next two or three years.
Typically, weak liquidity is not a major problem to long-term horizon pension funds. And, the common view that funds are undisturbed by market turmoil is not applicable, at this stage.
In essence, a liquidity-to-assets ratio indicates the liquidity risk of a pension plan.
NEGATIVE LIQUIDITY TO ASSET RATIO
A negative liquidity-to-assets ratio means the fund needs additional money to make payments.
The rule of thumb is the further below zero the ratio is, more assets may then require a drawdown for short-term support.
On a separate note, Perbadanan Nasional Berhad (PNB) and its unit trust funds are selling their combined 56.32% stake in Chemical Co of Malaysia Bhd (CCM).
The sale will be made to plantation and industrial chemicals group Batu Kawan Bhd for RM292.79 million and is part of PNS’s rebalancing portfolio strategies.
Meanwhile, Petroliam Nasional Bhd is committing to pay government a dividend of RM 34 billion in 2020.