Financial options for retirement and aged care to ensure lifelong sustainability in Malaysia identifies the need for an integrated financial and healthcare framework for ageing population. The existence of a fragmented financial framework in the current retirement landscape coupled with the immediate need for continuous care at old age warrants a strong cohesive mechanism to ensure individual Malaysians are able to sustain their retirement and ultimately their aged care needs because of longevity risk and increasing healthcare costs.
MOST Malaysians are not prepared for retirement and ageing. Pension and EPF (Employees Provident Fund) will only take them so far and with the average lifespan for Malaysians estimated at 75 years, many will have to rely on family, friends and charity in the last years of their life.
Seeking to change this scenario, the panel discussion at the Sustainable Retirement & Aged Care Conference (SRACC), organised by Kenanga in partnership with Aged Care Group (ACG), delved into the topic of “Malaysia’s Financial Options for Retirement and Aged Care to Ensure Lifelong Sustainability”.
Moderator Carol Yip, the chief executive officer of ACG, outlined the current Malaysian retirement system based on the World Bank’s pension conceptual framework:
- Pension for civil servants – mandatory
- EPF – mandatory
- Savings, insurance, unit trust, properties, PRS (Private Retirement Scheme), other investments – voluntary
- Family, community, charity – voluntary
“We would like to see how financial institutions can work together because moving forward we need to have the money to sustain our retirement.
“In order to have a sustainable retirement, we have to continue saving our money. The question is how do we help Malaysians put it aside so that they will not use it until the day they need it to pay for their aged care services,” asked Yip.
Multilayered replacement income
Balqais Yusoff, head of EPF’s Strategy Management Department, said that EPF believes that in order to sustain financial security, Malaysians must have a replacement income after retirement.
“We believe people should have multiple sources of income to cover themselves, because when they become aged, they will need to have more income as they are no longer productive. So, they need to have an income to sustain their basic needs, wants, as well as the rising medical costs.
“Right now, in Malaysia, we are seeing an increase in life expectancy whereby the average life expectancy is 75. How do you accumulate your wealth during the 30-35 years of working life and can it cover the years after retirement?” asked Balqais.
Yip pointed out that there is a segment of society that wouldn’t have sufficient or any EPF savings. This includes homemakers and the self-employed who often do not make contributions.
Dato’ Steve Ong, chief executive officer of the Private Pension Administrator Malaysia (PPA), which is the independent central administrator for the PRS, said this is where savings comes in.
“The big consequence is not that at age 60 you stop work; it’s that you stop earning. The minute you stop earning, your income stops. That is the crux of the matter.
“All of us who are employed are gainfully earning our income and that supports our housing, healthcare and lifestyle.
“So, when you stop working, it means you stop earning and you stop that income stream. You need that to have savings to generate a passive replacement income. We have to educate the public to really get the message across that EPF savings at the moment isn’t even enough. For those who withdraw their EPF money end up spending it all within five years, while their retirement might go on for 20-25 years,” said Ong.
He explained that this is where PRS can help as it offers Malaysians a way to save their money for retirement.
“PRS is not a product. It is a voluntary national scheme. It addresses the need to provide a formal voluntary pillar so that people can have the confidence that it is safe, regulated, and provides a system for private employees who have EPF but still need to top up; for civil servants who retire and have pension which is still insufficient; and for the self-employed who may not be contributing to EPF or putting money into the bank.
“We have various savings vehicles in the country. The question is, are they designed specifically for retirement? If not, then the issue is simply this: Most of the money that people save is in the banks. What do they do? It’s like a giant cookie jar. When they need money, they take it out. They take, take, take and what’s left is for retirement. It’s inadequate; it’s insufficient; and it’s not sustainable,” he said.
What about the role of insurance? Anusha Thavarajah, chief executive officer of AIA, said that 20 years ago, Malaysia was still a very young society and one where the family network was very strong. Because of this, we never worried about retirement. We assumed that our children would look after us. However, society has changed a lot in the last 25 years, and the baby boomers increasingly want to take care of themselves as they age instead of relying on their children.
Quoting Martin Luther King, Jr., Anusha said, “It’s the quality and not the longevity that is more important in people’s lives.”
According to her, it is important to create awareness on the importance of having enough.
“Today, what we want to do is make people aware that it’s important that they have enough. We’re teaching our distributors that when they meet customers and friends, they have a social obligation to make sure that their friends and family are adequately protected,” said Anusha.
Yip asked the panellists if financial institutions can work together to make it easier for the elderly, so that when the money is needed, it will almost automatically pay for the care and services. This way, the elderly don’t have to think about which stream to get their money from – EPF, PRS, insurance or unit trust – as all of these would work together seamlessly to pay for the elderly’s needs.
According to EPF’s Balqais, the government is trying to establish a national social security task force to look at an integrated ecosystem. “That will cover not just healthcare, but also basic income security for working aged people as well as care for the aged. It will be a concerted effort that will require working with employers, employees, NGOs, academia as well as financial institutions to develop more products for pre and post-retirement.
“The national social security task force will look at this whole ecosystem and work with all the stakeholders to minimise duplication of efforts currently being undertaken by various agencies and also duplication of benefits. It will address basic poverty eradication and guarantee a comfortable lifestyle, especially for the aged,” said Balqais.
Toh Puan Dr Safurah Jaafar, director of Family Health Development Division with the Ministry of Health, said currently more than 70% of the elderly are sourcing medical care from the government.
“That limits their choices in terms of care and facilities. I think, if only they have the savings then their choice is bigger. How do you facilitate that?” she asked.
According to AIA’s Anusha, more and more Malaysians are buying private health insurance, which has extended its coverage in recent years.
“Originally, the insurance cover expired at the age of 60, then it became 70. Today, people are covered till the age of 100. So, basically people are covered for life. I think it comes back to awareness and making people understand that they can buy healthcare insurance,” she said.
Explaining one of AIA’s products, Anusha said that the public can buy a policy where they pay very minimally for the premium while still employed because their employer has group insurance coverage for all employees, so they wouldn’t need much cover then. But, when they retire, the cover then drops down to the first level.
“So, in post-retirement you continue to have this insurance coverage that you bought yourself which didn’t cost much initially and you continue to be covered until the day you die,” she added.
Anusha believes it all boils down to raising awareness so that the public knows what products are available to help them save for retirement and which ones offer them the best coverage in old age.
The public also needs to be educated on how to accumulate money while working and the decumulation after retirement. PPA’s Ong believes that it boils down to money management.
“As to who is going to manage this money … it’s very personal. I think most of us would like to do it ourselves until we can’t. In the case of when you can’t, because you are disabled or have dementia or some other serious illness that prevents you from making a conscious decision, the good thing about our society is we still have our family members.
“I think, that is our first line of defence because we have family members whom we can trust. Failing which, we would have to go to an outside party called a trustee. If you go to a trustee, then there are pros and cons. The advantage is that you can define what the trustee is going to do with your money, the disadvantage is the cost of doing that and losing flexibility because basically you are giving ownership of your finances and properties to an outside party,” he said.
Suitable model, products
In developed countries, the decision of who should manage your money is taken out of the equation. According to Yip, in those countries, the government takes on the responsibility of managing the money for the people.
“When you need it, they see how much you can afford to pay. Then, the government either subsidises or pays 100%,” said Yip.
She questioned if it is possible to have a similar system in Malaysia, with a central administrator working with the financial institutions.
Balqais explained that that type of system is quite different from the one we have adopted in Malaysia, and while it has obvious advantages, there is also a high price to be paid.
“In Scandinavian countries, for instance, the rights of the people are protected at various levels in terms of healthcare, education and maternity. So, when a person retires, they have a sustainable income because the income will come for life.
“But, in Malaysia, we are operating under a defined contribution system whereby there are no defined benefits. In most developed countries, there are defined benefits where you know you will be getting some sort of pension but that system has some concerns in terms of financial sustainability because of the demographic shift.
“But at the same time we also see a trend of high tax rate. In UK for instance, it is 40% and in some Scandinavian countries it is 60%. Are Malaysians ready to pay that kind of high tax regime to finance a defined benefits contribution system?” she asked.
Another option that the financial industry in Malaysia might look into is reverse mortgage since Malaysians still believe in buying property.
Yip questioned if it is possible for those who have properties to use reverse mortgage to pay for their care in their advancing years. According to her, this is one of the products that Singapore is trying out.
Anusha pointed out that reverse mortgage, which is currently not available in Malaysia, has its pros and cons.
Sharing her experience in the UK about 20 years ago, Anusha said a lot of elderly were real estate rich but cash poor there. They would buy a product called equity release where the insurance company would pay them about 70% of the value of the property. Some of the aged who took equity release used the money to enjoy the remaining years of their life. However, there were also cases which did not have a happy ending as the elderly failed to inform or explain their decision to their family members. When they died, their family members became very upset that the insurance company suddenly owned their parents’ houses.
Nonetheless, Anusha believes it is something that can be looked into here. “Perhaps back it with an annuity for life so you don’t give out a lump sum but have an income for life.
“Then when they pass away, the remaining value of the property goes back to the family. But it’s important that family members understand what’s happening,” she said.
While she believes reverse mortgage is a good product, Balqais reminded the floor that we have to look at it from a cultural context. “Are we ready to not have home ownership? Culturally, people want to own a house. At the same time, are financial institutions ready to offer this kind of long-term payment? In terms of take-up rate, we have to question and study that because the public may not be as prepared as the financial institutions,” she said.
PPA’s Ong agreed with Balqais, saying that for most Malaysians, our home is our biggest asset. He also believes that reverse mortgage works only if you have a debt-free property.
“The other thing about relying on your property to fund your retirement is that it’s not a surety because property values may fluctuate, depending on the location you are in and the property cycle. That’s something we have to keep in mind,” said Ong.
Having listened to all the possible financial solutions, Dr Safurah said she feels hopeful about the future of the elderly in our country. However, obviously a lot more needs to be done and inclusivity should be a priority.
“We say the product is not the main focus but I think at the end of the day, it still is because insurance companies do focus on very defined items that you can reimburse. We may lose a big portion of some groups of the aged who are not supported. Unless they are very ill, then only the insurance companies come in.
“How about those who are no longer earning but need insurance support to keep them well and prevent them from falling sick? I hope that that kind of product is something that financial companies can look at,” she said.
While Malaysia needs to find the right products and model to help its citizens save up for their retirement years, there’s no denying that awareness and education are equally important.
According to Balqais, the root cause of people not having sufficient savings is financial literacy. “The financial literacy rate in Malaysia is still very low. People do not understand about insurance – why do I need to pay when I’m not sure I’m going to get the money back?
“So, when we speak at public briefings, members of the public say they don’t want insurance because they would have more money without it, but in the event of financial shock or distress because of medical illness, they do not have sufficient savings,” she said.
She talked about EPF’s Retirement Advisory Services which offers free financial planning to the public. She hopes that this will help raise the financial literacy rate in the country.
It is hoped that with financial planning, the public will be more aware of the need to save.
As Ong pointed out, “There is no shortcut to saving for retirement. While you put money into EPF, you will still have to top up. Save more. The idea of saving more for retirement is that the money is earmarked for retirement. It’s not buying property for investment for retirement. Whether it really is earmarked for retirement is debatable. While the concept is good, you really need to have a earmarked retirement fund so that it is sufficient and it will sustain your retirement life.”
Main photo: ACG CEO Carol Yip (left) moderated the panel discussion. She was joined by panellists Toh Puan Dr Safurah Jaafar and Dato’ Steve Ong.
MALAYSIANS may soon have two initiatives that will heighten their opportunities to make and save more money for retirement and old age the new minimum retirement age for private sector employees at 60 years old and a Private Retirement Scheme (PRS) is expected in the fourth quarter of 2012.
It is clear that the new retirement age will provide opportunities to increase retirement savings for those who are saving regularly. But for others who are not saving to build a retirement nest egg, it will likely still be a challenge to achieve financial adequacy for old age even if he or she waits until 60 to retire.
The introduction of PRS is timely. We must all seriously consider the need to save more money for retirement. One cannot deny that a system that “forces” us to save monthly will help us to build our savings since our propensity to spend these days is much higher due to our culture of consumerism and materialism, not to mention the increasing cost of living.
PRS will be the right channel for us to increase regular retirement savings regardless of whether we are contributing to the Employees Provident Fund (EPF) or not. For those who don’t have EPF savings, PRS is the system to help save money for retirement regularly and consistently.
Combined with longer careers extended to 60 years old, the PRS will help to boost the private pension component for Malaysians, whether they work in the private sector, public sector or are self-employed.
But are Malaysians ready for such improvements to our national retirement system? And how far along are we in achieving an effective retirement system compared with other countries?
Best retirement system
The 2011 Melbourne Mercer Global Pension Index compares retirement income systems around the world and rates them based on their adequacy, sustainability and integrity.
It examined retirement plans in 16 different nations across Europe, the Americas and Asia using three criteria adequacy (appropriate provision of benefits); sustainability (the long-term durability of the system) and integrity (the regulation of private pension schemes, including the protection given to members).
The Netherlands comfortably topped the chart, followed by Australia and Switzerland in second and third place, respectively. The United States rounded out the top ten, but Asian nations fared significantly less well, with Japan, India and China coming in at the bottom of the survey.
The report showed that no country’s system has an index value above 80, which is considered an A-grade retirement income system. However, six countries have an index value between 65 and 80, which represents a B-grade system and with some adjustments or improvements these countries could be re-classified as A-grade systems.
“The best pension systems adopt a multi-pillar approach to spread these long-term risks between governments, employers and individuals. Such an approach is also particularly relevant in periods of economic uncertainty, as we are now facing,” according to Dr David Knox, Mercer senior partner and author of the report. For instance, Australia’s index value increased from 72.9 in 2010 to 75.0 in 2011 due primarily to a real increase in the size of the age pension and higher net household saving rate, but fell short of being the best in the world due to lower levels of adequacy.
“Australia is very much in reach of becoming the first in the world to receive an A-grade score if we can address the issue of adequacy by raising the level of compulsory savings via superannuation and continue reforms to reduce costs,” said Dr Knox. “Our superannuation system is in the middle of significant reform, some of which is likely to boost our score in the index in the future but our current B-Grade is an important reminder that our world-class retirement savings system is in danger of failing us unless we take action now,” he added.
No perfect pension system
According to the report, there is no perfect system that can be applied universally around the world. Indeed, even comparing the diversity of retirement income systems is certain to be controversial as every system is different and has arisen from each country’s particular economic, social, cultural, political and historical circumstances.
However, there are certain features and characteristics of retirement systems that are likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community.
With recent global economic slowdown, inflationary pressure and euro crisis uncertainty, the risk of governments not being able to financially support their ageing population is becoming more of a reality unless some significant pension reform is made now.
The report has made several suggestions to improve each country’s retirement income system. Although each system reflects a unique history, there are some common themes as many countries face similar problems in the decades ahead like:
- Increasing the state pension age and private sector retirement age to reflect increasing life expectancy;
- Promoting higher labour force participation at older ages including the provision of phased retirement;
- Encouraging, motivating and requiring higher levels of private saving to reduce the future dependence on the public pension;
- Increasing the coverage of employees and self-employed in the private pension system, recognising that many individuals will not save for the future without an element of compulsion or automatic enrolment; and
- Reducing the leakage of funds from the retirement savings system prior to retirement, thereby ensuring the funds saved are used for the provision of retirement income as long as possible till end of life.
We face similar challenges in Malaysia. Though we have features like EPF, Socso and civil pension for government employees, we may not be saving enough to ensure financial adequacy and sustainability for our old age. Even with voluntary saving methods like bank savings, unit trust and other methods according to individuals’ preferences, our propensity to spend can be higher than savings, from young to old.
Now that we may have two “new retirement features” retirement age at 60 and PRS to put in place, we could well be on the right track towards improving our country’s retirement system. The Global Pension Index can be used as a benchmark to compare with other countries’ retirement systems; helping us avoid certain risks and shortcomings that might adversely affect our retirement system efficacy and long-term sustainability.
However, we are a “new kid on the block” in terms of experience and enforcement of these features. Our success would require our regulators, PRS providers, employers and individuals to trust and make the system work, fulfilling the three important criteria of adequacy, sustainability and integrity.
Should the implementation and enforcement of the new retirement features become a challenge and take a longer time than expected, some of us will not live long enough to enjoy its fruits.
Still, we must continue to work towards an effective retirement system for our children and younger generations. They’ll need it. We are paving the way for them. It may be difficult but it will be worthwhile walking the path! – By CAROL YIP
Source: The Star