INTERACTIVE: Reforming Malaysia’s ballooning civil service pensions


  • Nation
  • Thursday, 08 Feb 2024

PETALING JAYA: In 2010, Malaysia spent RM11.5bil in civil service pensions. This year, the figure is set to hit RM32.45bil, a 182% increase that highlights how the country’s pension bill has grown.

With pensions ballooning, the government recently announced that it was considering a proposal to abolish pensions for new hires in favour of increased contributions to retirement schemes such as the Employees Provident Fund (EPF) and the Social Security Organisation (Socso).

Various groups and elected representatives raised concerns about the proposal. Prime Minister Datuk Seri Anwar Ibrahim then clarified that any decision made following a review of the current public service remuneration scheme would not be limited to civil servants but would also apply to politicians.

He also gave his assurance that the matter would be debated in Parliament as it would require constitutional amendments.

Here’s a closer look at the key numbers behind Malaysia’s civil service pension payments and views from experts on the possible reforms the government could consider.

Why is the pension bill rising?

As the number of pensioners goes up every year, the pension bill will naturally rise over time.

The government expects to spend 10.7% of its total operating expenditure on retirement charges this year.

Operating expenditure is the amount of money the government spends on its day-to-day activities, such as paying salaries, buying goods and services, and maintaining public facilities.

It does not include the money that the government spends on building new infrastructure, such as roads, schools, and hospitals, which is called development expenditure.

Operating expenditure is usually funded by the government’s revenues, such as taxes, fees, and grants.

Malaysia’s retirement charges were at their highest in 2021 at 12.6% of operating expenditure due to special assistance for pensioners.

Prof Dr Chung Tin Fah of HELP University said salaries and debt service charges form a large part of the government operating budget, at 30.4% and 15.4% respectively.

“Together with retirement charges, which make up 10.7% of the operating budget, these three items comprise 56.5% of total operating expenditure.

“It is clear that this is not sustainable,” he said.

Prof Chung said civil servants are estimated to make up 1.7 million out of Malaysia’s population of 33.4 million, or close to 5% of the total population.

“For comparison, these statistics need to be benchmarked against other countries at a similar level of development and location.

“These problems have been prolonged and exacerbated by unstable governments that lacked the political will over the last 10 years,” he said.

How high can the pension bill go, and will a new scheme cut costs?

Economist Prof Dr Geoffrey Williams of the Malaysia University of Science and Technology (MUST) said pension costs, which were RM30bil last year, is estimated to rise to RM46bil by 2030.

He said with the new civil servant employment scheme, the government’s expenses would not immediately improve.

“The current pensioners will still be on the old scheme and payments into the current scheme for existing civil servants will continue.

“So, the cost for the government would not fall,” he added.

According to the ministry’s figures, existing pensions make up the bulk of the government’s retirement payments, at RM25bil or 78.3% out of the RM32bil.

Pensions for new retirees make up a small 2.9% of retirement charges.

The way forward

Williams suggested that the government consider creating a superfund, separate from the EPF, to which civil servants would contribute for their retirement.

“This superfund can combine public pension funds from Retirement Fund Inc (KWAP) and Lembaga Tabung Angkatan Tentera (LTAT), with other underperforming funds such as the National Trust Fund, Khazanah Nasional, and even Permodalan Nasional Bhd (PNB).

He said a superfund would be able to address issues faced by the civil service such as low salaries, difficult career progression, and pension changes.

Meanwhile, Professor of Economics at Sunway University Business School Dr Yeah Kim Leng said the shift from pensions to an EPF scheme is necessary to avoid a fiscal crisis in the future.

This is due to a rapid increase in pension liabilities over the last decade and a funding gap for current and long-term accrued payouts.

He said an EPF scheme would reduce the total accrued liabilities of existing pensionable employees to a sustainable level, which can ensure the stability of the country’s fiscal position over the medium to long term.

“Government spending on current retirees will not change as they are entitled to the pension benefits, but new employees will not add to the burgeoning long term pension liabilities,” he added.

Prof Yeah said the contract employment would provide short-term employment opportunities where the government can leverage on special expertise or alleviate social stress arising from unemployed youth and graduates.

He said new hires looking for pensionable employment would be disappointed, but due to the changing work environment, culture and inclination towards job mobility, the EPF scheme would give greater flexibility to suit present day job market requirements.

“Moreover, efforts by the EPF towards restructuring its contribution scheme to provide pension-like benefits will also reduce the advantages of a pension scheme.”

He said as the EPF contribution scheme would require contribution from both the government and the employee, the government would need to boost its revenue base to meet the rising pension payments while boosting the pension fund size to generate sufficient investment income to meet future liabilities.

“With good savings habits and steady career advancement and wage increase in the government service, employees could be better off with a larger retirement savings pool compared with the pension scheme.

“The pension scheme is beneficial if the retiree or spouse has a long-life span and inflation remains low and stable,” said Prof Yeah.

He said a competitive remuneration package, fulfilling work, progressive organisational culture, conducive work environment and good career advancement prospects are some of the factors that can be enhanced to attract and retain staff in the civil service.

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