Pension program is an plus accretion from one ‘s working old ages and is compensated during their nonworking old ages. This is necessary as it provides fiscal security for the retired persons. In Malaysia itself, 3 types of pension programs are set out in line with the 3-pillar pension theoretical account by World Bank ( Rutkowski, n.d ) , largely under 2nd pillar on compulsory occupational or personal pension programs and late on 3rd pillar, concentrating on voluntary pension program. The three types of programs are as follows:
( I ) Defined-benefits pension programs
This strategy is normally publically managed, which in Malaysia, Retirement Fund Incorporated ( KWAP ) manages the parts and investings. Benefits are paid to retired persons normally based on the mean one-year wage ( if collectible in one ball amount ) or on per centum of the last drawn wage ( if collectible monthly until decease ) . However, in Malaysia, the Government Pension Scheme is paid monthly to public retainers one time retired.
( two ) Defined-contribution pension programs
This strategy mandates employees and employers to lend a fixed per centum of the members ‘ salary to function as nest eggs in the fund. Just like most nest eggs, benefits are unsure as it depends on the strategy ‘s investing returns. Private sector members contribute to the Employee ‘s Provident Fund as a nest egg program ( Manulife, 2009 ) .
( three ) Private pensions programs
Under this class, the pension programs are decided wholly on the person. Contributions are voluntary and this program serves as complementary and auxiliary to the other pension programs. Malaysia ‘s Prime Minister, Dato ‘ Sri Najib Tun Razak said the move to present the Private Retirement Scheme was to reform and beef up the full pension and retirement landscape, giving more options for employees and freelance to salvage for retirement programs ( Carvalho & A ; Rahimy, 2012 ) .
2. Major developments in pension fund industry in last 10 old ages
2.1 Contribution Rate
Contribution rates for employees to the EPF had been drifting throughout the past 10 old ages. Contribution rate bases at 11 % in 2003 so decreased to 9 % , effectual May 2004 onwards. However, the rates increased to 11 % once more in 2008 but down once more to 8 % in 2010. In 2011, the rates were adjusted to 11 % up to now. Contribution rate for employers on the other manus, has had a little alteration of 13 % to employees with wage of RM 5,000 and supra, effectual 1st January 2012 onwards. Those below RM5,000 remained 12 % since 1995 ( KWSP, 2012 ) . This is to run into the volatile economic sciences demands.
Effective 1st February 2008 onwards, with the launch of “ Beyond Savings ” by EPF, duty period for employers and employees to lend to EPF had been extended from 55 old ages old to 75 old ages old. This can further guarantee the sum of nest eggs in their history so as to hold a better life quality in ulterior old ages ( Swiss Life Network, 2012 ) . Members above 75 years-old will hold no dividend paid. Besides, if pension nest eggs are non withdrawn till the age of 80, it will be transferred to Registrar of Unclaimed Money. Ratess of part to the pensions differ before and after the age of 55 old ages old. Before 55 old ages old, part to pensions from employer is 12 % while for employee is 11 % . Following April 2007 onwards, the part rates for 55 old ages old and above will be reduced to 50 % of pre-55-year-old which become 6 % and 5.5 % severally unlike antecedently, they are non required to lend and dividends are non given ( Malaysia Payroll Services, 2009 ) . After the age of 55, they really no longer necessitate to work. However to promote these old-age population to go on work and contribute to the state, they statutorily O.K. them to foster lend even after the age of 55, accomplishing end to promote nest eggs and help the aged prepare for retirement.
2.2 Dividend growing
Dividend in % ( Annually )
Table 1: Dividend rate given by EPF
( Beginning: Annual Report KWSP, 2011 )
Chart 1: Graph on fluctuation of dividend payout rate by EPF yearly ( in % )
( Beginning: Annual Report KWSP, 2011 )
There was a steady addition in the dividend rate from EPF from 2003 to 2006. A important hiking was seen in 2007 chiefly due to gain from past investings. It was the 10.01 % investing growing in 2006 that caused the dividend hiking in 2007. However, there was a important bead from 2007 to 2008 due to the subprime mortgage fiscal crisis but market wellness picked up and dividend payout was record high at 6 % in 2011 within the past 10 old ages.
2.3 Compulsory Retirement Age
In 2001, authorities has increased the age of mandatory retirement of public retainer from 55 to 56 later, increased to 58 old ages old in 2008 and latest one is 60 old ages old in 2012. At the same clip, minimal retirement age for private sector employees from 55 to 60 implemented in 2012 will merely be effectual in January following twelvemonth ( JPA, n.d. and Daily Express, 2012 ) . There are two grounds for the authorities devising such alteration. First, mean lifetime of Malaysians has increased ( See Table 1 ) . Having longer lifetime, they need more financess to back up their ulterior life.
Table 2: Life Expectancy of Malaysian citizen
( Beginning: World Bank )
Second, longer working old ages will cut down the financial load on the Government to pay tip and pensions as authorities ‘s operating outgo on pensions and tip dramatically increased 2.5 times from RM4.9 billion in 2000 to RM12.29 billion in 2011 ( Nor, 2012 ) .
2.4 Calculation of Pension Payment
Traditional pension strategy was for authorities retainers which provide life-time rente of normally a half of last basic salary upon retirement. In 2009, the authorities has decided calculation of pension based on expression that takes into history a period of up to a upper limit of 30 old ages of service which will supply extra 20 % benefit compared to the old calculation. This new policy is non applicable to officers whose reckonable service is less than 300 months ( JPA, n.d. ) .
For illustration: A public retainer who has 380 months of reckonable service with last drawn wage of RM 3,000.
Upon 31.12.2008 ( Older calculation )
Retire on 1.12.2009 ( New calculation )
300 months/600 ten RM3,000.00
= RM1,500.00 per months
360 months /600 x RM3,000.00
= RM1,800.00 per months
Table 3: Calculation of rente for a upper limit of up to 30 old ages of service
Throughout these old ages, the sum of pensions had besides been adjusted to run into basic disbursal required monthly by the pensionaries. At the day of the month of 1st January 2009, minimum monthly pension payment to officer ( 25 or supra reckonable service old ages ) had been adjusted from RM280 to RM720, last changed since 2001. This could be a consequence of lifting rising prices rates, doing it impossible to populate with lone RM280 monthly. Pension fund aimed to supply some fund for Malayan to keep their golden-age life, as mentioned by Ex-Deputy Finance Minister, Datuk Dr Ng Yen Yen ( Rajah & A ; Shari,2003 ) . In order to supply a better life for pensionaries, their pensions farther improved from RM 720 to RM 820 at the twelvemonth of 2012. Harmonizing to Prime Minister Datuk Seri Najib Razak, these additions were to move as item of grasp for pensionaries that spent 25 old ages or more, functioning people ( Sulaiman, 2012 ) .
2.5 Maximum Leave Accumulated for Cash Award
In 2003, maximal leave accumulated for hard currency award ( GCR ) increased from 90 yearss to 120 yearss and later to 150 yearss in 2009. It means that in the employee ‘s retirement twelvemonth, public retainers are allowed to obtain the hard currency wages of up to 150 yearss leave accumulated for hard currency award ( JPA, 2012 ) . This shows that the development of the pension strategy provides more employee benefits. As opposed to KWAP, EPF has no statutory cash-in policy for one-year foliages were set. It varies from companies to companies as stated by director of Robert Walters Malaysia, Sally Raj ( Leong, 2011 ) . Not all company offers cash-in options for one-year leave unlike KWAP with a upper limit of 150 yearss accumulated hard currency award one-year leave policy.
2.6 Account 1 and Account 2
EPF nest eggs are divided into 2 histories that vary by their backdown flexiblenesss and portion of nest eggs that was effectual at 2007. Account 1 store 70 % of members ‘ monthly parts and history 2 store 30 % . Account 1 allows backdowns when a member, reaches 55 old ages old, is an immigrant, is incapacitated, or passes off. Whilst backdown of nest eggs from history 2 is allowed to settle down payment or staying balance of lodging loan for first house, supply finance to farther instruction or medical disbursals for applicant or his/her kids ‘s ( Daily Express, 2012 ) . This betterment of EPF AIDSs EPF holders during funding hurt.
But at January of 2008, EPF holders with nest eggs greater than RM 55,000 in their History I were permitted to put portion of their economy through external fund directors. Consequently, this changed as of February 1, 2008 ( Daily Express, 2012 ) . Merely 20 % of the balance in the basic nest eggs sum could be invested in merchandises of sanctioned investing establishments. This gives the chance to EPF members to acquire higher net income investing.
2.7 Derivative Pensions
Table 4: Timeline for betterments in derivative pension
( Beginning: JPA, 2012 )
Harmonizing to Bahagian Pasca Perkhidmatan ( 2012 ) , authorities announced that get downing from 1 January 2002, derivative pension is given to widow or widower who remarries in order to back up the younger kids from old matrimony. In twelvemonth 2004, it was further improved where derivative pension was given to the parents of asleep forces without a widow / widowman or kids who are eligible for the derivative pension. It provides fiscal support to their parents particularly for employees who are the lone kid. Besides, Bahagian Pasca Perkhidmatan besides announced derivative pension to be paid to dependents have increased to 100 % get downing from 1st of Jan 2009. In twelvemonth 2008, Ex-Prime Minister Datuk Seri Abdullah Ahmad Badawi announced that due to fiscal load for households with immature kids, Government decided to get rid of the 70 % depreciation on the derivative pension ( The Star Online, 2008 ) . Previously, the depreciation of derivative pension to be received by following of family is 70 % of pension after a oversight of 12A? old ages.
2.8 1Malaysia Retirement Salvaging Scheme
In the yesteryear, EPF does non make to the freelance but in 2009, the Prime Minister had announced in Budget 2010 that a alone program was set up to care for the public assistance of all freelance, that is the 1Malaysia Retirement Salvaging Scheme. It is to suit non-involvement of freelance in formal retirement programs for fiscal security, particularly those without fixed monthly income for case ; peddlers, existent estate agents, histrions etc. The strategy is flexible in footings of part sum and interval because it depends chiefly on how much the persons can afford, runing from RM50 to RM5000 ( Star Online, 2009 ) . Therefore, this program was seen as to aim a wider scope of persons in the work force, taking to get the better of income insufficiency during retirement age. It seem about similar to private pension programs due to the voluntary characteristic but we could state that it serve as a readying phase before an effectual and formal private pension strategy is formed.
2.9 Private Retirement Scheme ( PRS )
In July 2012, Malaysia Prime Minister besides the Finance curate Dato Sri Najib Abdul Razak launched a new private pension fund, called Private Retirement Scheme ( PRS ) ( Carvalho and Rahim, 2012 ) . This strategy allows people to voluntarily lend into an investing for building future retirement income ( Hann, 2012 ) . Launch of PRS besides established the Private Pension Administrator ( PPA ) ( Malaysia Chronicle, 2012 ) . The PPA simplicities and improves the efficiency to members and provides inclusive disposal on an effectual PRS ( Private Pension Administrator Malaysia, 2012 ) . The launch offers employees and the freelance with an extra manner to salvage for their retirement.
PRS merely officially started in September, and is unfastened for all Malaysia and aliens who age 18 and supra. Under the PRS, 24 financess will be managed by 8 suppliers. Those suppliers, strategies and financess are as follows:
CIMB-Principal Asset Management BHD.
CIMB-Principal Private Retirement Saving Scheme
-CIMB-Principal Conservative Retirement Fund
-CIMB-Principal Moderate Retirement Fund
-CIMB-Principal Growth Retirement Fund
CIMB-Principal Private Retirement Saving Scheme
-CIMB Islamic Conservative Retirement Fund
-CIMB Islamic Moderate Retirement Fund
-CIMB Islamic Growth Retirement Fund
Hwang Investment Management Berhad
Hwang Private Retirement Scheme
-Hwang PRS Conservative Fund
-Hwang PRS Moderate Fund
-Hwang PRS Growth Fund
ING Fundss Bhd
Manulife Unit Trust Bhd
Manulife PRS NESTEGG Series
-Manulife PRS-Conservative Fund
-Manulife PRS- Moderate Fund
-Manulife PRS Growth
Public Mutual Bhd
Public Mutual PRS-Conventional Series
-Public Mutual PRS Conservative Fund
-Public Mutual PRS Moderate Fund
-Public Mutual PRS Growth Fund
Public Mutual PRS-Shariah-based Series
-Public Mutual PRS Islamic Conservative Fund
-Public Mutual PRS Islamic Moderate Fund
-Public Mutual PRS Islamic Growth Fund
RHB Investment Management SDN BHD
RHB Retirement Series
-RHB Retirement Series-Conservative Fund
-RHB Retirement Series-Moderate Fund
-RHB Retirement Series-Growth Fund
Table 5: Praseodymium suppliers and the strategies and financess offered
( Beginning: Private Pension Administrator Malaysia, 2012 )
This private sector fund suppliers are licensed and approved by the Securities Commission. ( Securities Commission, 2012 ) Harmonizing to Carvalho M. and Rahim ( 2012 ) , employees and employers can lend to this fund without any fixed sum or interval. The part of employer to employees is based on which type of the financess the employees choose, offered by the relevant PRS supplier. If the employees choose non to take any of the financess, the employers need to follow the default option of the chosen PRS supplier. Besides, if the member withdraws the pre-retirement backdowns or the sum in sub-account B from each supplier one time a twelvemonth after doing the first part, they need to pay an 8 % revenue enhancement punishment on the backdown sum.
3. PRS Complementing bing pension system
3.1 Management of ain retirement income programs
Unlike EPF, PRS allows its subscribers to take between financess based on their fiscal demands, ends and hazard tolerance ( Shearn Delamore & A ; Co. , 2011 ) . EPF invests the parts based on their ain determination but it may non be of favour of some subscribers as some may non prefer the hazard consideration by EPF. In 2011, EPF had invested about 64 % in fixed income securities ( such as Malayan Government Securities, loans and bonds, money market instruments and belongingss ) ( iFAST Content Team, 2012 ) . ( See Chart 2 )
Chart 2: EPF Asset Allocation as of 31 December 2011.
( Beginning: iFAST Content Team, 2012 )
Based on Chart 2, EPF is considered as a riskless investing as bulk of the investing guarantees return. Therefore, this may non be in favour for hazard takers who takes “ High hazard, high return ” as rule. PRS on the other manus takes into consideration of such issue ; subscribers are free to take whichever investing suitable for their hazard tolerance and even diversify their parts to multiple financess or suppliers ( Securities Commission, 2012 ) . Making so, it is a move for the persons to take control of their ain retirement nest eggs planning.
Private Pension Administrator ( PPA ) illustrates the pick of variegation persons could take as follows:
Diagram 1: Channeling of parts to several financess under PRS offered by different suppliers.
( Beginning: Private Pension Administrator Malaysia, 2012 )
3.2 Withdrawal flexibleness
Member of EPF and KWAP is prohibited to retreat their nest eggs before their retirement age ( except for Account 2 in EPF for specific grounds ) . However, PRS consists of 2 histories dubbed as sub-account A ( 70 % of entire nest eggs ) and sub-account B ( 30 % of entire nest eggs ) is allowed to retreat whole sum of money in sub-account B after 1 twelvemonth without any grounds needed but capable to 8 % revenue enhancement punishment for retreating whole sum of their nest eggs in both histories ( Security Commission, 2012 ) . Despite the punishment, PRS clearly provides the flexibleness in commanding their finance for the PRS members who needed money instantly unlike limitations from EPF and KWAP.
3.3 Contribution flexibleness
As the part of private sector ‘s employees to the EPF is compulsory, this action might supervise fiscal affordability of the employees ( Security Commission, 2012 ) . For illustration, lower limit rewards implemented this twelvemonth is RM 900 in Peninsular Malaysia ( Gooch, 2012 ) and take if an employee earns this much of money after contributed to EPF ; they will hold non much left for day-to-day usage. Therefore, they will non hold excess fund for investing, holding stuck in poorness or middle-income trap for a long clip. However, with PRS, they can salvage more if they can afford and is an investing by itself as subscribers can take their pick of fund, holding no minimal part or interval for parts.
3.4 Administrative efficiency
Harmonizing to Mahalingam ( 2012 ) , Ernst & A ; Young Australia advisor and planetary pension pattern member Nick Sherry said the late launched Private Retirement Scheme ( PRS ) have 8 suppliers ( an optimal figure ) to pull off a pension program, will ensue in better administrative efficiency. Ernst & A ; Young besides mentioned that if several suppliers need to associate multiple financess and histories, challenges will happen, nevertheless, Malaysia does non hold that job because so far, the chief suppliers are merely EPF or KWAP. However, holding merely one to supervise all investings will take to excessively much a work load. Therefore, PRS holding 8 suppliers can non merely diversify work load but besides provide administrative efficiency.
3.5 Additional Saving Scheme
The freshly launched private retirement strategy ( PRS ) , effectual in September 2012 acts as a tool to better the bing pension financess industry in Malaysia. Harmonizing to Hamid ( 2012 ) , 1000000s of Malaysians are presently non under the authorities pension strategy or employees provider fund ( EPF ) strategy. They usually consist of the freelance such as dark market bargainers, sales representative etc. Though there is already 1Malaysia Retirement Scheme which accommodates retirement programs for the freelance, PRS act as a complement or extra tool for them to salvage. Not merely for freelance, PRS besides acts as an extra fund strategy for employees who is already under either the authorities pension strategy or EPF strategy, to voluntarily lend towards the retirement salvaging. PRS participants are entitled to bask up to RM3,000 of revenue enhancement alleviation, promoting persons to salvage their money under PRS and indirectly lend more financess to the pension fund industry. ( Private Pension Administrator Malaysia, 2012 )
3.6 Restrictions to PRS
Unlike the EPF where statutory demand requires dividend payment of at least 2.5 % per annum, PRS dividend payments depend wholly on the investing returns ( Moneysaver, 2012 ) . Therefore, these subscribers must at least have anticipated investing with no return ( Risk tolerable ) .
4. Potential growing of pension fund industry for the following 10 old ages
4.1 Alternate Income
Although statutory demand for EPF dividends was set to be at least 2.5 % , there are opportunities that rising prices rates to be higher than the dividend rate. In norm, between old ages 2007-2011, dividends yearly and rising prices rate was 5.55 % and 2.59 % severally. However, the dividend rate may non ever be higher than rising prices rate, intending nest eggs can non cover the rising prices cost. For case in 2008, dividend was 4.5 % and rising prices at 5.39 % ( iFAST Content Team, 2012 ) . ( See Chart 3 )
Chart 3: EPF Dividend Rate and Malaysia Annual Inflation Rate
( Beginning: iFAST Content Team, 2012 )
As a precautional step, EPF functionaries have invariably highlighted the demand for subscribers to supplement their retirement with other beginnings of income. The income can hence be from other investings, nest eggs or even under the new private retirement strategy. The debut of the new private retirement strategy will therefore help in accretion of dividends earned from both EPF and PRS to battle rising prices. Take the instance in 2008, EPF rate was 4.5 % but if added with likely PRS rate of 2 % , it will be higher than the rising prices rate. Knowing that, public will be given to lend to PRS to salvage as retirement program and in return aid turn the pension fund industry.
4.2 Competition enhance efficiency
Harmonizing to Siau ( 2012 ) , holding more picks of pension fund for members will take to the competition amongst the financess in both service and public presentation. Besides, based on the Money Compass ( n.d. ) , in an interview with PRS suppliers, Datin Maznah Mahbob, CEO of AmInvestment Bank Bhd said that the competition between the suppliers will turn the PRS industry. Therefore, the competition between PRS suppliers will non merely hike efficiency in service and public presentation but besides help in turning the pension fund industry in a whole.
4.3 Trend Analysis
Chart 4: Graph of possible growing of net assets of EPF
Throughout these old ages of development and part from the labour force of Malaysia, pension industry in Malaysia had a steady addition in footings of net assets under EPF. ( See Chart 4 ) . EPF is the chief subscriber for the whole pension industry as it covered pension fund for all private employer and employee, hence EPF is said to be the anchor of the pension system. Through the anticipation of growing on EPF, the overall image of growing of the industry could be moderately foreseen. From the chart above, the tendency line have R-square value of 0.9709, R-value of 0.9853 which means, as old ages increase, net assets addition in value proportionally. The straight-line equation shows that y= 30,000,000x + 100,000,000, which means with every twelvemonth yesteryear, the net assets will increase by around RM 30,000,000, traveling uptrend. With that, the pension fund industry is foreseeable to turn aboard.
4.4 Higher life anticipation taking higher part
Harmonizing to Yip ( 2012 ) , Malaysia is presently holding an ageing population, with increasing figure of citizens come ining age group of Generation X and Baby Boomers. Therefore, this coevals are actively looking for fiscal security cyberspace such as long-run attention insurance or private pension strategies to back up their retired life. However, due to limited societal security benefit for the older people while life anticipation has increased up to 80 old ages for Malaysians ( Park and Estrada, 2012 ) , citizens particularly the babe boomers and coevals Tens are confronting challenges constructing equal nest eggs for retirement. With that issue, they have to organize better retirement programs for case economy or widen their on the job life. By widening their on the job life, they are able to lend more in the EPF strategy, which allows part up to 75 old ages old. At the same clip, if they were to voluntarily lend in PRS, it would procure more financess to back up their retired life. With that, it would non merely assist them in holding equal nest eggs for retirement but besides add to the plus in the pension industry, intensifying the growing of the industry.
4.5 Wider Distribution Channel
Malaysia presently, as compared to developed state like United States, Germany and Japan, has comparatively low coverage of pension system among labour force and working-age population. Developed state, typically, have coverage of 90 % on labour force while 60-75 % on working-age population.
Chart 5: Percentage of pension system coverage in Asiatic states
( Beginning: ADBI Institute, 2012 )
Chart 5 shows the coverage of pension system in Asiatic states. As pronounced, Malaysia pension system covers 50 % on labour force while merely around 33 % on working-age population. As suggested by Schwarz M. , defined-contribution pension program that are calculated based on rewards had a job of low coverage which unable to cover workers who are non portion of the formal sector such as husbandman from rural population. They need to acquire themselves registered under EPF in order to derive from the system. Therefore, there is a possible for pension system to spread out to rural country for higher growing and engagement into the industry in Malaysia. Through the launching of PRS, PRS supplier ‘s agent will cover the rural and urban countries, distributing consciousness on the importance of pension fund through assorted channels therefore increasing the coverage of pension system ( Yip, 2012 ) .
4.6 Restriction to the growing of pension fund industry
A new pension program, PRS was introduced in Malaysia late but do non vouch the applicants in footings of return compared to EPF, holding a lower limit of 2.5 % dividend return. Although PRS provides 3 different financess with different hazard degrees ( high, moderate and low ) , providing for subscribers with different hazard appetency, the strategy is still new. It is non convincing plenty to pull subscribers in as it may look as if it is merely another nest eggs program which they could make with the Bankss what more with no return guaranteed. Peoples will prefer other investing chances such as stock, derived functions, bonds etc. All in all, this might impede the growing of pension financess.
Throughout the old ages of development, Malaysia ‘s pension system had been developing good, with EPF ranking 5th worldwide ( Towers Watson, 2011 ) . From the yesteryear, with partial derivative pensions to today ‘s full sum of derivative pensions to die ‘s dependants, these developments aimed to supply a better pension system covering participants ‘ and their inheritors ‘ public assistance. Although current pension strategy had been bettering, there is still room for betterment, which was further complemented by the freshly introduced Pension Retirement Scheme ( PRS ) to finish the whole industry. With the debut of PRS, employees under authorities pension strategy or EPF now have voluntary extra nest eggs to be after for their future support. As coverage of pension system in Malaysia is well low, there are still big potency for the system to turn through assorted ways.
Hence, a few suggestions that could be done for farther betterment was listed:
Establish groups of bureau or establishment to vouch the transparence and answerability of pension organisations.
These groups should print studies invariably to the public sing the investing and fund direction on what they invest in.
Statutory demand for engagement of all on the job persons in pension fund industry.
Since pension fund has no injury and could positively determine people ‘s salvaging behaviour, authorities can choose to do engagement of all working person in official pension strategy, a must.
Rural country coverage.
Appoint agents from pension organisations to see rural countries along with old-age support seminar to educate and promote rural population to affect themselves in pension financess as retirement program.
Statutory minimal return
Since PRS is a voluntary private pension strategy, it should be more convincing to pull subscribers therefore ; the subscribers should at least be guaranteed a minimal rate of return.