OF LATE, there has been a fair bit of discussion about the pros and cons of setting up private pension/retirement funds.
In its memorandum at the recent Budget dialogue, the Life Insurance Association of Malaysia (Liam) called on the Government to promote the setting up of such funds by providing tax incentives. Liam also said the insurance industry was ready and able to manage such funds, which would complement the role of the Employees Provident Fund (EPF).
The initial response from the Government has been positive. Prime Minister Datuk Seri Abdullah Ahmad Badawi said a government committee headed by Second Finance Minister Tan Sri Nor Mohamed Yakcop would study the Liam proposal and come up with guidelines to protect the interests of participants and ensure that private pension/retirement funds were properly managed.
The response from employers is somewhat lukewarm. Malaysian Employers Federation (MEF) president Jafar Abdul Carrim said the Government should study the proposal carefully and be clear about the objectives and issues involved.
Employers would also want to know whether they have to come out with additional money over and above their contributions to the EPF, or whether part of their contributions to EPF could be diverted to the private pension schemes for their workers.
“Our view is that the EPF has done an excellent and effective job in managing the retirement fund for employees over the past 50 years. Let us not diminish the EPF’s role,” said Jafar.
I share the MEF’s view that the EPF has done an excellent job in harnessing and enhancing the savings of Malaysian workers for their retirement. It’s one of the fine institutions we inherited from the British.
Not many people are aware of this: There are very few countries, even in the West, with an institution like the EPF, which operates on a national basis where it’s mandatory for every employer and employee to contribute.
Like Malaysia, government employees in Western countries are covered by government pension, but their counterparts in the private sector have to plan for their retirement/pension by putting their savings in retirement/pension funds (popularly known as annuities) run by insurance companies, investment managers or the companies themselves.
There are two main reasons the Government wants to encourage the private retirement/pension funds industry.
Firstly, the EPF is getting to be too big. The very success of the EPF is creating a problem: it has too much money and too few avenues to invest since it can only invest locally. The EPF has more than RM200bil at its disposal for investment and this is growing by more than RM10bil a year.
Secondly, most Malaysians do not save enough for their retirement. The average EPF contributor has just over RM77,000 on reaching 55. To receive a RM500 income a month, a person has to have RM150,000 in a fixed deposit. Also, an EPF survey found that 70% of contributors who took out their money on reaching 55 spent all their savings within three years.
The EPF is not a retirement/pension scheme in the real sense of the word as it collects contributions during an employee’s working life to be paid out in a lump sum on reaching 55.
That was why, some years ago, the EPF wanted to get its members to set aside part of their contributions in an annuity scheme (to be operated by a group of insurance companies), but for various reasons (including sabotage), the proposal had to be aborted.
Now, Liam members say they are willing, able and ready to start private annuity schemes if the Government becomes a party by providing sufficient tax breaks.
I think it’s a matter of time before private annuity schemes take off in Malaysia.
Malaysians are under-providing for their retirement and we have a retirement time bomb ticking away. Private pension funds can play an important role in educating the public about the importance of saving enough to provide for one’s retirement.
On another note, many EPF contributors complain about the low dividend (4.5% for last year) they are getting and feel it can do better.
I am not too sure. A few individuals may be able to get higher returns investing on their own, but when you deal with millions of contributors and billions of ringgit, it’s not easy to get returns much higher than what the EPF is giving.
Food for thought: The Shell Group in Malaysia used to operate four retirement/pension funds for more than 5,000 of its employees. These funds ceased operating at the end of last year, and Shell is in the process of transferring the funds to the EPF for management. The group feels that returns provided by EPF and the Shell funds are about the same.
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