Pros or Cons of Simpanan Syariah in KWSP/ EPF

This year, Employees Provident Fund (EPF) announced that the new retirement savings option ‘Simpanan Syariah’, which will be launched in 2017, and is opened for registration to members on 8^th August 2016. Simpanan Syariah means an initiative by the EPF members giving them the option to have their account managed and invested according to Syariah. The investment strategy will still be under control and guided by its Strategy Asset Allocation (SAA) model, along with objectives of preserving and increasing the value of member retirement savings. The features of Simpanan Syariah are as stated below: 

• Open for all members – All members’ regardless race, religion and nationality are given the choice to choose Simpanan Syariah accounts.
• Based on Syariah principle of Wakalah – Simpanan Syariah accounts are managed according to Syariah based on the principle of Wakalah, whereby the EPF board is appointed and entrusted to act on behalf of the members, which is to manage and invest their savings.
• Dividend based on actual performance – The dividend rate to be declared for Simpanan Syariah accounts is based on the performance of Syariah compliant investments managed by the EPF.
• Investment endorsed by EPF Syariah Advisory Committee – Investment for Simpanan Syariah accounts are limited to Syariah compliant assets as endorsed by EPF’s SAC.
• Not allowed to revoke and return to conventional account – Members who have chosen Simpanan Syariah accounts are not allowed to revoke their decision after the effective date and revert to their existing EPF account.

There will be no option to switch back and forth, and the reason for that is two-fold. First, it is in accordance with Syariah principles that once the money becomes Syariah-compliant, it cannot become conventional again and the second pertains to administrative and system issues.

Tabung Haji has also offered Syariah saving scheme. The objectives for both establishment either EPF or Tabung Haji are different. Most importantly, the EPF’s dividend rates cannot be directly compared with Tabung Haji or other funds because each fund has its own different set of objectives, strategies and risks. The dividend rates for the Simpanan Syariah would be based on the actual performance of Syariah-compliant investments made by the EPF. 

To keep it simple, the table below shows the differences between conventional and Syariah-compliant scheme:

Both of this saving schemes perform quite similarly in long term annualised return. However, Syariah scheme may perform slightly better when there are financial crisis. During a downturn, Syariah-compliant stocks tend to perform better as they have fewer exposure to riskier investment especially in conventional banking stocks and high beta company. On the other hand, Conventional Scheme may perform slightly better in the good economic environment as they have more choice of stock selections compared to Syariah. 

Some said that investors are increasingly getting positive about Syariah-compliant funds as it is shown to be strong against recession. The Syariah-compliant funds are in less volatile state over the medium to long term rather than conventional fund. This could be an offer to investor if they are seeking for a low-risk steady-yield investment option. Nonetheless, the guaranteed minimum return from Syariah-compliant funds is zero compared to the conventional scheme of 2.50%.

Syariah-compliant scheme or conventional have its own pros and cons. EPF could face a challenge in managing the public’s expectations when it comes to expected returns, performance and the general managing of both portfolios. The EPF of members should be understood that once they choose to change their savings to full Syariah compliant status, they cannot go back to a conventional account. So, every contributor should make a wise decision and the choice is yours.