IT came as a shock during a recent briefing for editors when we were told that Malaysia was heading towards being classified as an “ageing society” by the year 2035.
That is some 19 years away.
However, looking at the trend of pension funds run by companies around the world facing difficulties in meeting their obligations towards their members, there is a serious concern whether Malaysians are setting aside enough for their old age.
An ageing society is generally defined when older individuals, generally above 60 years make up a larger proportion of the total population of a nation.
In Malaysia’s case, life expectancy is rising and fertility rate is decreasing. The average family today has two children compared with half a dozen 25 years ago.
Life expectancy has gone up significantly to more than 75 years of age. The forecast is that we would have a bigger chunk of senior citizens amongst the population. The real concern is does the system allow for enough to be set aside to handle Malaysia’s growing ageing population?
The government has taken soft measures such as increasing the retirement age from 55 to 60. The Employees Provident Fund (EPF) has tightened withdrawal rules in a bid to encourage higher savings at the point of employees reaching retirement age.
But all the measures are not enough.
The root of the matter is whether the savings in pension funds generate enough returns to sustain the ageing population at the current life expectancy cycle.
In developed markets, pension funds of private companies are changing the goal-posts due to the inability to meet their obligations towards the members. They are encouraging the members to move away from a defined benefit scheme where the employee is assured of a guaranteed payment at retirement.
Instead pension funds are suggesting a switch to other alternatives such as a defined contribution scheme where the payment at retirement is less predictable.
The problem that pension funds face stems from the low interest rate regime that has hit the global financial markets since 2009.
Investment income from interest rate-driven instruments has been the bedrock of guaranteed profits for pension funds.
These instruments are mainly government or high grade corporate bonds that used to offer decent yields. The income from investments in the equities market supplemented the earnings of pension funds. When the equities markets perform above expectations, pension funds enjoy returns that are above the norm.
However yields on fixed income instruments have dropped causing a mismatch in the pension funds’ liabilities against their assets. The problems are prevalent in developed countries where yields have been low and unlikely to go up – maybe up to the next 10 years.
According to a survey, In the UK, 350 of the largest listed companies face a shortfall of up to £149 bil in their pension plans due to the expected cost of fulfilling the guaranteed payments to pensioners. The guaranteed amount is estimated at sterling 870 bil while assets are only at £721 bil.
The EPF is not in the same boat.
However income from fixed investment instruments used to be the backbone of its ability to pay out high dividends of 8% in the early 1990s. In the past 15 years, the yields on MGS and Treasuries have declined. A 5-year MGS paper yield is less than 3.3% now.
Nonetheless, under such difficult investing environment, the EPF has done a commendable job by giving returns of more than 6% in the past five years – thanks to its shrewd investment strategies in the equities market. Its investments in the foreign equities market paid off handsomely in the last two years.
Going forward, the EPF has already warned that returns are not likely to be as good as it was in the previous years. That is a given, considering that equities markets around the world are struggling and most funds are underperforming.
The low interest rate regime is likely to persist for another 10 years or so, hence impacting the performance of pension funds.
That is why the EPF is putting more money on alternative investments such as infrastructure projects to give it the desired returns. An area of interest for the EPF of late is in toll highways.
The EPF has stated that the returns on toll highways are between 10% and 12%, which may not look attractive for private companies but is good enough for the provident fund. And the fund only puts money on completed infrastructure projects to reduce risk.
The trend of pension funds putting money in infrastructure projects is growing.
In the UK, pension funds are funding £4.5bil on the London Thames Tideway Tunnel, which is known as the “super sewer” project. In fact, the call by pension funds there is for the government to embark on more infrastructure projects for them to invest in.
However the returns from such projects have a gestation period. The returns will take some time before the full benefits can be reaped by members.
The same goes for the infrastructure projects that the EPF is putting their money in. Until then, Malaysians will have to learn to save more, spend less, work longer and lower their expectations of pension funds returning high dividends.
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