Tag Archives: ETP

Private pension funds for the financial future of senior citizens

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

Senior living – novel concept or business opportunity?

LIKE Alice in Wonderland, I am getting curious. Will our Economic Transformation Programme (ETP) healthcare NKEA initiative address Malaysians’ sustainable long-term care and living issues?

Without question, we have some ageing society issues and challenges in our immediate future. I have friends, family members, business associates and many others who are seeking comfortable senior living solutions in almost every part of Malaysia be it in more populated urban areas or smaller towns. Some are already suffering due to the lack of it while others have ended up in old folks’ homes.

According to the recent OECD report on “Help wanted? Providing for long-term care,” spending on long-term care in OECD countries is set to double, even triple by 2050, driven by the ageing populations. The report shows that governments need to find a way to provide better support, cost-effectively, for family caretakers and professionals.

Policy makers often treat long-term care reform as being too tough a nut to crack or too far off into the future to worry about. Luckily, we now have many examples of countries that have adopted good practices worthy of emulation.

The concept of “seniors living” is mentioned in ETP handbook on healthcare, chapter 16 “Creating wealth through excellence in healthcare.” Seniors living is identified as one of the two longer term business opportunities in Malaysia, which could deliver significant economic benefits. Unlike nursing homes which focus on final stages of care, seniors living promote active ageing, productive living and integration into the community. Key services offered under the umbrella of seniors living would be integrated personal assistance domiciliary, personal and medical care.

What needs to happen to turn this so-called senior living novel concept into reality for Malaysians? What kind of economic or financial indicators does the Government need before it takes this lack of affordable services seriously?

Rising demand

According to the ETP handbook on healthcare, the number of Malaysians aged 60 years and older is projected to increase to 3.4 million in 2020 (9.9% of total population). Few elderly people can escape the accumulation of chronic pathologies due to physiological changes such as ageing kidneys, memory deficit, altered dietary habits and dependence on multiple prescription drugs.

This growing segment of consumers is likely to create a need for outpatient care in seniors living facilities. The long-term goal is to create a number of centres offering assistance to people who need help with daily living but wish to live as independently as possible for as long as possible.

To address these needs, existing infrastructure can be refurbished to develop barrier-free housing fitted with disabled-friendly features. Other facilities would include wellness, primary and secondary healthcare options.

Can our government provide some milestones for such projects to be implemented? We know that good planning takes a lot of time and effort, resources, expertise, talent, skills and experiences.

Business opportunities

The development of a seniors living infrastructure is expected to deliver 11,400 new jobs and RM1bil in incremental GNI by 2020. The target market is primarily local Malaysians and potentially a small portion of the Malaysia My 2nd Home applicants who come for healthcare purposes. Opportunities such as these don’t come around very often and could entice forward-looking businesses to take immediate action.

The ETP handbook on healthcare recommended that for seniors living to be successful, Malaysians should be able to tap into their Employee Provident Fund or other retirement savings to fund a seniors living lease; or that insurance reform occurs to permit coverage of seniors living support. In this case, government agencies need to be discussing now with financial institutions to ensure an evolution of the private pension system and insurance schemes so that Malaysians can sustain a senior living lifestyle.

The second initiative is to get support from property developers to view a build-operate-transfer model as an attractive value proposition instead of the current build-and-sell model. It is proposed that property developers not only build, but work through third parties to manage the properties.

Recently introduced incentives for green living and businesses have led to an explosion in housing development of green properties. Perhaps the Housing and Local Government Ministry will initiate discussions and provide financial incentives for property developers to cater their current and future housing projects to the elderly and disabled?

And, for seniors living businesses to be successful, the Human Resources Ministry needs to address the lack of human capital skills, experts and specialists in delivering senior living services by importing “talent” and developing education programmes to train locals in order to meet the employment needs.

An estimated RM4.8bil will be required from 2010 to 2020 to develop elderly-friendly property developments that offer a range of medical and personal services for assisted living. Current efforts in the Iskandar region and moves by private property developers on a small scale show the beginning of an organic growth of such a sub-sector.

However, I believe government funding may not be enough. Tax incentives, policies, rules and regulations, other than grants and subsidies, coupled with a price control system may be required to encourage businesses to invest in senior living on a long-term sustainable basis.

Without fair and effective government interventions and business arrangements, aged consumers with limited financial resources will find that they cannot afford the service and the senior living opportunity will be lost.

Governance and delivery

I agree that successful implementation hinges on ownership and accountability. To ensure effective implementation, there is a need for seamless transition between planning and execution, and a good governance model will need to be established.

Only then will we be able to deliver a cost-effective solution to meet Malaysia’s future retirement and ageing needs.

Which ministry should take the ownership and accountability for aged Malaysians in terms of senior living and retirement needs? The needs and wants of elderly Malaysians is spread across several industries and business segments from property to healthcare services; from retirement funds to insurances; from human talent to education; from active ageing to community living and transportation.

Our seniors living champions have to be able to communicate with several ministries for effective implementation – housing, transport, healthcare, finances, education and human resources, family and community, sports and tourism.

Maybe we may need to appoint a special minister of Retirement and Ageing to be the champion and key driver to work hand-in-hand with the private sector to deliver the implementation results.

Seniors living is no longer a novel concept. It requires some focus from our government and business communities. We need some passion to kick-start some senior living projects in Greater KL and major cities in the country as soon as possible. Meanwhile, the clock is ticking … – Comment by CAROL YIP

Source: The Star

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