Giving 2 million people a lifeline
By A. Jalil Hamid | jalil@nstp.com.my
PRIVATE PENSION SCHEME: Malaysia joins the ranks of developed economies with a fully-fledged system to support the needs of retirees
IT could have been a mere coincidence that the official "birth" of the private pension scheme framework was announced the same week as the declaration of Pensioners Day.
From now on, the nation will officially celebrate Pensioners Day on July 19 to show appreciation for their contributions to the country's development.
Just a day before the declaration, Prime Minister Datuk Seri Najib Razak had launched the private pension scheme, marking a much-awaited reform in the country's pension system.
This initiative, which the Najib administration has pursued for a number of years, has finally come to fruition. Malaysia now joins the ranks of developed economies with a fully-fledged pension system to support the varied growing needs of retirees and a growing capital market.
Voluntary private pension, as many put it, is seen as the third pillar of the pension framework. The first pillar is the government's pension scheme and the second pillar is the mandatory Employees Provident Fund (EPF).
You and I are probably in either the government pension scheme or the EPF scheme.
But there are millions of other Malaysians who are not in either scheme. In fact, there are about two million people who are now without any formal pension scheme. They include the self-employed, such as pasar malam traders, shopkeepers and salesmen.
Growing old is by no means easy, especially for private sector retirees with their meagre savings and without much hope of finding a new job. Studies have shown that a majority of EPF contributors exhaust their savings within three to five years upon retirement.
Since the average life expectancy is 80 years, there should be enough money to last for 20 long years if a person retires at 60.
As such, the golden years do not necessarily translate into happy and stress-free days if workers do not plan for their retirement from the start.
Like many other countries, Malaysia is also grappling with how it can afford to continue to provide pensions as its population ages. Government finances will be stretched as the number of pensioners for each taxpayer grows.
One solution is to encourage more workers to save some of their earnings to pay for their retirement.
Well-known and successful private pension fund models can be found in countries like Australia and Chile.
The Australian superannuation pension system has been cited by many industry observers as one of the most successful pension schemes in the world. After over a decade, Australian workers have more money invested in managed funds per capita than any other economy.
In Australia, all wage earners are required to put at least nine per cent of their pretax earnings into a superannuation account. This is now the primary form of tax-advantaged savings for retirement. There are currently about 300,000 superannuation funds in operation in Australia.
The Australian superannuation scheme has increased the national savings rate. It has also promoted the development of a funds' management industry. With the world's 13th largest economy, Australia has the fourth-largest pool of funds under management.
The Malaysian private pension scheme is not modelled after any particular country, but rather based on a framework best suited to the Malay-sian environment.
Among the key components that have to be taken into consideration is the need to have trust and confidence in the pension system.
The whole eco-system, from the private pension fund administrator to the private pension provider and fund managers, have be regulated and supervised because they are dealing with people's retirement money.
Workers will only park their money in a retirement fund if they are confident that their money is safe and will be properly managed.
Private retirement accounts should be reasonably hedged against losses so that any financial crisis will not put the future of too many pensioners on the line. Prudent risk management is critical in managing pension funds.
As Securities Commission chairman Datuk Ranjit Singh mentioned in his speech at the launch of the scheme last week the administrative framework also has to be efficient and the workers should have a good choice of funds and providers to select from.
Since contributors have differing risk appetites, they should have a wide range of funds to suit their retirement needs. There should not be a "one size fits all" approach.
The entry and exit costs should also be minimised and the fund managers should be allowed greater flexibility in investing in any asset classes or markets.
Perhaps the providers should also include in their schemes extensive health and medical benefits to their contributors along the lines of Australia's Medicare.
The government has done its part to help encourage the development of a private pension scheme.
As an incentive, contributors will be able to enjoy income tax relief on their annual contributions, while employers will also be given tax deductions for their employees' salaries in contributions to the private pension scheme made on behalf of their staff.
As the private pension scheme takes root, the prospects for retirees will be relatively secured, with enough money in their hand to enjoy a reasonable quality of life in their golden years
A. Jalil Hamid is NSTP Group managing Editor
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