Carol Yip comments on the need for the framework and structure of private pension schemes to meet our requirements.
AT the recent Invest Malaysia 2011 conference, our Prime Minister announced the establishment of a national private pension scheme targeted for the end of this year. This is good news for the financial industry, as it will lead to added liquidity in Malaysian capital markets. And it is rare good news for individuals, as it will help us direct funds towards our retirement savings and a safe and secure retirement is good for us all and the Government too.
But to be successful for all interested parties, the framework and structure of the pension scheme must meet the stated purpose of enabling us to save effectively for our future retirement needs. So, what will be our financial needs as retirees?
First and foremost, we have the basic cost of living and subsistence needs. Then comes healthcare, medical care and aged care needs which, depending on the individual, can be quite varied. For those of us who are unfortunate to have health problems later in life, these financial needs can dwarf the basic living costs.
4th stage of human life cycle
The natural human life development cycle is such that we have a 4th stage in our life cycle (in the 70s and beyond) during which we become frail and weak, and potentially experience deterioration of our mental health as our bodies slow down. Some of us will experience illnesses such as dementia, stroke, high blood pressure, hypertension, diabetes, prostate cancer, other forms of cancer or malignant growth, chronic lung disease, heart ailments, arthritis or rheumatism, kidney problems, and cataracts or glaucoma.
The list is frightening. Some of the treatments for these illnesses can be insured, but not all. Normally, there is an insurable claim limit and time period which may leave many of us uninsured during our 4th stage. Therefore, the private pension scheme is very welcomed.
The percentage of our retirement savings that will be spent on healthcare and medical care during our 4th stage is subject to many variables. Among the variables will be the degree of physical fitness (better fitness is supposed to lead to better health), and healthcare and medical costs the person may have to pay (cheaper healthcare costs is better to enable us to stretch our retirement savings).
If an older person is able to maintain a healthy level of physical fitness, with good diet, and balanced mental and emotional health, chances are the healthcare and medical costs will be diminished. Then again, this person may have to spend money on healthcare products, supplements and healthy diet food to maintain his or her health.
If the authorities are going to benchmark the Malaysian private pension fund framework along the lines of private pension funds that are taking shape in other Asian countries, or other successful models in Australia and Chile, we have to be mindful that we have a certain uniqueness as Malaysians; be it our psycho-social environment, our healthcare pricing, or the existing community and family support systems that exist for our elderly.
All these have implications and will impact our financial needs when we age.
I hope this announcement of a private pension scheme serves as a catalyst to bring together our key stakeholders. Governments, individuals, families and care-givers, NGOs, employers, healthcare and financial services industries all can benefit from a dialogue about the long-term consequences of our aging society.
A serious dialogue will help every one of us individuals, governments, businesses and NGOs alike to prepare for the challenges and opportunities that we encounter in the future, a future with a higher percentage of aged individuals supported by fewer taxpayers.
We must structure the pension fund framework so that it rewards private pension fund managers that hedge the financial and non-financial risks to ensure that the capital funds invested are well protected.
But minimally, the investment return of these funds must still meet the rising cost of healthcare and medical care for old-age illness and the rising cost of inflation. No doubt, this is a difficult task to handle.
Will healthcare and medical industry experts, doctors and service providers compromise to manage an equitable and affordable pricing system that caters for old-age illness? Will individuals’ choice of private pension fund performance be sufficient to cover their costs for long-term medical and nursing care, and not burden them financially later in life? Some important questions.
Let’s not forget that we need efficient management of nursing care with a ready pool of nurses, specialists and care-givers to keep the pricing of these services affordable. The law of supply and demand clearly tells us that high demand for limited supply will inflate prices. Government subsidies have not proven to be a solution; in fact in some countries, health subsidies have aggravated health costs.
Private collaboration and initiatives are crucial to create a successful private pension scheme for Malaysians. Otherwise we will overburden our government coffers, leading to higher government budget deficits and ultimately, higher taxes for Malaysians.
All these issues point to the need for in-depth holistic research studies with collaborative effort from the important stakeholders in academia, the financial industry including insurance companies, pension fund experts and healthcare and medical experts, to find a workable framework that is sensitive to the changing financial needs of Malaysians over time rather than viewing these needs as static.
Such longitudinal research study helps to refine the framework overtime. This is because the changes in elderly individual’s economic status, employment status, living arrangements, and health status will continue to evolve in a dynamic sense as we progress to a developed nation made up of baby boomers, Generation X, Y and Z’ers.
I believe that if the stakeholders and individuals like you and I focus on the mission of making this private pension scheme a success, then it will be a Malaysian success story. It is definitely going to be an exciting journey for us, economically and financially, despite the challenges that may lie ahead. The taste of the pudding is in the eating. We and future generations of Malaysians will taste and experience the benefits of a successfully designed private pension framework provided we are careful in its implementation. Let’s us all put our heads together to make this work!
Carol Yip is the founder and CEO of Abacus For Money