Tag Archives: PRS

Sustainable retirement income – myth or reality?

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:

  • State
  • 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.

Cohesive system

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.

Conclusion

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.

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

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