FINANCIAL security in old age has never been more important, what with declining birth rates and increasing longevity.
For many Malaysians and Asians who in the past used to depend on their children and grandchildren as a primary source of income post retirement, the pressure is increasing as people are living longer but having fewer children to support them.
Not surprisingly, retirement income systems worldwide are under pressure.
Mercer, a leading global professional services firm, recently launched its annual Melbourne Mercer Global Pension Index (MMGPI), revealing important information on how some 34 countries are preparing for tomorrow’s ageing world.
Among the 34 pension systems measured, there is wide gap among the systems around the world with scores ranging from 39.2 for Argentina to 80.3 for The Netherlands
The Netherlands and Denmark come up tops (with scores of 80.3 and 80.2 respectively), both offer A-grade world class retirement income systems with good benefits.
The index indicated that Malaysia maintained a stable C rating, compared to some Asian countries, coming up ahead of Japan and South Korea, but behind Singapore.
On Malaysia’s Global Pension Index score, Mercer Malaysia CEO Hash Piperdy says: “Malaysia maintains a stable C rating but action needs to be taken to address our ageing nation – over five million Malaysians are expected to be over 60 years old by 2030, and nearly 10 million will be over 60 by 2050.
“Malaysia’s sustainability score has decreased from 61.2 to 60.5, based on the index. There still exists a gap which poses risks in terms of the long-term sustainability in the system due to the ageing population, and the need to address it is crucial as there are still many Malaysians without sufficient pension savings on top of the Employees Provident Fund (EPF). It is high time for industry and community groups to look into Private Retirement Schemes (PRS) and other ways to boost long-term savings,” he adds.
Malaysia’s retirement income system is predominantly based on the EPF which covers all private sector employees and non-pensionable public sector employees. Under the EPF, some benefits are available to be withdrawn at any time (under pre-defined circumstances including fund education, home loans, or severe ill health) with other benefits preserved for retirement.
Introduced in 1951, the scheme makes it compulsory for employees to contribute 11% of their salary towards their personal EPF account. Employers are also required to contribute 13% of the salary for employees earning RM5,000 and below, and 12% if the employee’s salary is more than RM5,000.
Although the guaranteed base dividend rate for EPF is 2.5% per annum, Malaysians have been enjoying an average 6.02% for the last 10 years (2008-2017).
This high EPF dividend rate has given many Malaysians a false sense of long-lasting financial security.
The institution suggests that the minimum savings EPF members should have at age 55 is RM228,000. This equates to a monthly withdrawal of RM950 to cover basic needs for 20 years. However, according to a 2016 survey by the Department of Statistics Malaysia, the average household expenditure of Malaysians was RM4,033.
EPF reported that only 18% of members have the minimum savings target of RM228,000 in their account by 55.
Mercer points out that the overall index value for the Malaysian system can be increased by:
> Increasing the minimum level of support for the poorest aged individuals;
> Raising the level of household saving and lowering the level of household debt;
> Introducing a requirement that part of the retirement benefit must be taken as an income stream; and
> Increasing the pension age as life expectancy continues to increase.
Making good progress
Piperdy says a well-functioning social security system is needed, one where an income stream is provided rather than just a lump sum payment upon retirement.
“This could be something like the CPF Lifelong Income For The Elderly (CPF LIFE) scheme that they have introduced in Singapore. By having this, people don’t outlive their savings and there is less reliance on family support. However you have to build up that nest egg before you can drawdown on it,” he says.
Piperdy commended the EPF’s efforts and said that there are already a lot of good steps being taken, and there is still time to improve on the system. However, there are fundamental changes that need to made because the population is aging fast.
“Aging is accelerating. Some 20 to 30 years ago, Malaysians used to have families with 6 to 7 childen, but now its under 2 children. This is definitely going to create pressure,” he says.
He said that people are now expected to live on average for another 20 years after they retire.
In recent years, there has been an increasing trend where people do not withdraw their EPF in one go.
“The beauty of drawing down this way is that the remaining money in the EPF benefits from the dividends,” he says.
The other issue is an older retirement age.
Piperdy says that as people are living longer today, it is important to have more flexible retirement ages. Afterall, the economy is changing and people don’t stay with the same company for most of their lives anymore.
“Instead of having a hard cut-off at 55 or 60, perhaps we could have flexible retirement so that an individual can carry on working while concurrently drawing down on their EPF, before gradually moving on to full retirement.”
“If you are 55 today, try not to withdraw your entire EPF savings in one lump sum. You can also defer the age where you stop working. Just by contributing a little bit more, that money goes very far – you will be drawing down on that extra contribution for the next 20 years. These small steps can make a big difference,” says Piperdy.
Piperdy says that to have that income stream, one must build up on one’s nest egg so that there is a decent amount first.
“To build it up, this simply means more contributions. One way is via the PRS. In an A-rated or a high B-rated pension system, an individual has multiple sources of contributions.
“The Netherlands and Denmark have multi-tiered retirement plans. For example they have social security scheme which provides a basic income for everybody. That is supplemented by company pension plans.
“So perhaps the social security part covers 10% to 15% of retirees’ needs, while a further 30% to 40% comes from company pension plans. The remainder comes from private savings or investments,” he says.
In Malaysia, it is still the EPF that most people rely on. Piperdy feels there are opportunities to develop more company pension plans as the infrastructure is alredy in place.
“The Securities Commission and the government introduced the PRS a few years ago. Its got some RM2bil in assets, and has been successful so fast, although it is on a voluntary basis. I would like to see more incentives for employers to set up these plans for their staff,” he says.
For some background, the PRS is a voluntary long-term savings and investment scheme designed to help individuals save more for their retirement.
Each PRS offers a choice of retirement funds from which individuals may choose to invest in based on their own retirement needs, goals and risk appetite. The fund options under PRS are intended to enhance long-term returns for members within a regulated framework.
The year 2017 was a record year for the PRS, attracting the highest number of new members to the savings fund since its launch five years ago. Total members grew by 36% to 301,279 in 2017, from 221,235 in 2016.
Meanwhile total asset under management (AUM) of the 56 existing PRS funds rose by 47% to close the year at RM2.23bil, from RM1.51bil in the year before.
Piperdy would suggest eventually having auto-enrollment of these savings plans as one way to broaden the contribution base.
“Everyone complains that money is tight, but who is going to miss 1% of their salary.If that 1% increases to 2% in a few years, that makes a huge difference later on in life,” he says.
Author of the study and senior partner at Mercer Australia, David Knox says that the natural starting place to having a world class pension system is ensuring the right balance between adequacy and sustainability.
“It’s a challenge that policymakers are grappling with. For example, a system providing very generous benefits in the short-term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?” he says.
Knox adds that it’s not enough for a system to be sustainable or adequate. In some countries, broad coverage has been successfully accomplished through compulsory workplace pension systems or in some cases, auto-enrolment arrangements.
Knox says that governments need to ensure these schemes include everyone so that the whole workforce is saving for the future. This includes contractors, self-employed, and anyone on any income support, be that parental leave, disability income or unemployed benefits.
The Mercer Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 40 indicators.
The overall index value for each system represents the weighted average of the three sub-indices. The weightings used are 40 percent for the adequacy sub-index, 35% for the sustainability sub-index and 25% for the integrity sub-index.
The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important system design features.
The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to continue to provide these benefits into the future.
The integrity sub-index includes several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens of each country have in their system.