MALAYSIA has an ageing population. Compared to other developed countries, Malaysia currently has a relatively small social security net for retirees and aged senior citizens. Elements such as long-term care insurance, private pension schemes, annuity income, reverse mortgages and others constitute what is normally considered to be a necessary safety net. For the good of Malaysians’ future retirement and acceptable senior or old age living conditions, the missing elements are now required.
Many from the Baby Boomers and Generation X are facing challenges building adequate savings for retirement. Unlike western countries which collect higher rate of tax from the people and then provide them retirement benefits, we have to save to fund our own retirement. We have to save more because we have limited social security benefits for the aged. On top of that, we need more retirement-related products to help us save because of the longevity risk, living expenses and healthcare costs.
According to Malaysia’s Economic Transformation Programme (ETP), a roadmap to a higher-income level society, one of the entry point projects for the Financial Services National Key Economic Area (NKEA) is “Accelerating the Growth of the Private Pension Industry”. The Private Retirement Scheme (PRS) industry is intended to complement and supplement the existing mandatory Employees Provident Fund. It also offers non-EPF and self-employed people a way to save for retirement. Participation will be voluntary. The value propositions of PRS will be customised for different target segments self-employed, business owners and employees. The focus will be to build a desirable level of savings while for retirees, Private Pension Funds (PPFs) will offer protection against longevity and inflation risks and provide adequate returns during retirement. Fund participants can match their investments to their own risk preferences.
In early April, the Securities Commission (SC) had announced the initial list of eight intermediaries approved as providers of PRS. The PRS would be one of the schemes many Malaysians would benefit from. The PRS providers are selected on the basis of their expertise in investment and pension fund management, experience in global pension management, financial strength, governance structure and proposed business model. Implementing private pension benefits such as PRS is therefore essential to boost and protect the retirement savings of individual Malaysians.
New kid in town
New investment opportunities take time to gain traction unless the potential investors see the benefits of getting an attractive return in a foreseeable future, or there are success stories shared by others. In this case, PRS is the “new kid in town” compared to other investment opportunities, without a record of success yet. Many Malaysians are not familiar with the term “Private Retirement Scheme” and its contribution framework and incentives.
For the next few months, how are we going to prepare the rollout of the different PRS products offered by the eight approved providers? How much education of PRS is needed for us to make an informed decision to invest in these retirement schemes? What are the motivations to sign up for these schemes?
Key barriers to successful implementation
The World Economic Forum (WEF) Report 2009, “Transforming Pensions and Healthcare in a Rapidly Ageing World: Opportunities and Collaborative Strategies” shed light on some key barriers to successful implementation that were encountered by other countries attempting to deliver a similar PRS framework. Among them are:
Market competition creates choice but then the choice decisions become too complex. Too many choices may lead to no choice. US research shows that participation rates in 401(k) pension plans decline rapidly as the number of fund options increases. A recent bestselling book entitled Nudge by Richard Thaler and Cass Sunstein focuses almost exclusively on the importance of well-designed “choice architecture”.
Ability to understand pensions and investment issues is limited even if the options are simplified and made transparent. In Chile, for example, less than half of all participants make an active choice even though there are only five funds to choose from.
Financial incentives to save for retirement may benefit mainly higher-income households, while fuelling a perception that pension safety nets are too costly.
New Zealand eliminated the tax incentives for occupational pension arrangements in the mid-1980s as they were deemed to benefit mainly higher-income workers.
It is very difficult to bring people who work in the informal sector, including most rural workers and many of the self-employed, into formal retirement income arrangements. In China, only urban workers are covered by the social security system.
What other countries are doing?
The WEF report also mentioned examples of innovation and actions in other countries by different stakeholders government, financial institutions and employers to encourage participation and contribution towards the scheme.
For example, New Zealand’s KiwiSaver, which involves automatic enrolment in individual retirement accounts with an opt-out feature, has raised private pension coverage from about 20% in 2007 to over 60% at the beginning of 2009. The government provides both kick-start and matching contributions.
Financial product and retirement scheme providers facilitate choice for individuals by providing products that are simple to understand and have suitable risk features.
In a competitive environment, fees, withdrawal options and other plan features have evolved to be attractive and transparent.
Some US companies took advantage of the 2006 Pension Protection Act to introduce automatic enrolment and raise default contribution rates. Automatic enrolment is also common in the United Kingdom as voluntary pension arrangements are offered as part of a labour contract.
The “Save More Tomorrow” initiative in the United States allows employees to pre-commit to saving a higher percentage of any future salary increases unless they opt out, and has been shown to increase overall savings rates over time.
In other words, by facilitating automatic enrolment retirement savings plans with sufficient default contribution rates or offering automated savings rate increases with age, individual’s savings will increase.
Educating the public
There is a need for greater transparency and simplification of options to enable us to make informed choices and incentives to motivate people to take ownership of their own retirement savings. To encourage potential contributors to the newly approved PRS, more attractive financial incentives are needed for lower-income and middle-income workers.
The PRS success will require concerted efforts by the regulators, PRS providers and all Malaysians to elevate the financial future of our senior citizens.
The coming months will be an exciting time for the PRS regulatory body and providers to educate the public about the PRS framework, including fund governance, monitoring and reporting as well as performance disclosure and benchmarking. Well-informed potential contributors will make better decisions and choices.
With wider education out-reach in various channels to both rural and urban areas of Malaysia, more Malaysians will be well-informed of its importance.
The PRS education series should also cater to our special communities like the deaf, the blind and the disabled. It is time for us to gain the insights of this new initiative while we wait for the first PRS fund launch! – By CAROL YIP
Source: The Star