Bracing Malaysians for Retirement

Trusts Berhad, shares here with Money Compass’ readers how much exactly an individual needs in order to sustain their post-retirement lifestyles and how to start planning ahead in pursuit of a comfortable post- retirement life.

Retirement ranks last when Malaysians are asked about investment, their savings of choice or purpose for saving. According to a survey conducted by TNS for Manulife Malaysia, bank savings rank the highest as the invest- ment of choice among Malaysians (98%) followed closely by fixed deposits (10%) while the penetration for retire- ment investment or savings rank the lowest at 4%. This shows the inadequacy of the financial literacy among Malaysians.

The current situation at a glance

The Employees’ Provident Fund (EPF) became the only choice for retirement savings. This is cause for concern looking at the current investment patterns of the average Malaysians.

Malaysians generally are not saving enough as shown by the facts presented about the EPF:

Firstly, the EPF has a one-size-fit all solution. Let us say if you are young, without dependents and perfectly capable of taking higher risks in exchange of higher interest rates, the EPF’s fixed interest rate return would prove to be a stumbling block for those who could have achieved optimum returns with their investments.

Secondly, more than two million working adults, including the self-employed, are not covered under the EPF.

Thirdly, retirees reportedly use up the average RM150,000 of their EPF savings in the first three to five years of retirement.

Lastly, 6.3 million or 86.5% of the active EPF contributors have less than RM100,000 as at the end 2011. Increase in life expectancy.

When EPF was formed in 1950s, life expectancy was in the low 60s. Today’s life expectancy for the average Malaysian is at the 70s.

Aging demographics

A study conducted by Manulife Asset Management reveals that the once “youthful” Malaysian nation is now facing an accelerated graying population that plagued nations like Japan.

The Economist Intelligence Unit (EIU) report suggests that most Asian countries will be seeing a tripling in the percentage of their pensioner population in less than 40 years.

By 2050, well over one in 10 (15%) of the population will be over 65. This was triple percentage in 2010 (5%).

Over the same time frame, the old age dependency ratio will more than triple to a situation where every 100 workers will be supporting 23 pensioners in 2050 compared to just seven pensioners in 2010.

Less than 40% of working age Malaysians are members of the formerly constituted pension programmes.

Malaysians favour solid bank deposit rates, which the report forecasts will continue to rise in the short term. Malaysian bank deposit rates are expected to notch up a compound annual growth rate of 4% in the five years to 2016.

The EIU report examines the opportunity to mobilise these into longer term investment vehicles in a bid to help individuals fund their old age.

In addition to the growth in savings and bank deposit rates, the report finds that comparatively sound econo- mies and greater market liberalisation are likely to support the continued growth of savings and investment such as life insurance and mutual funds. It provides the region’s army of aging citizens with a variety of comple- mentary options to plan financially for retirement.

Financial education is still acutely low in our society.

Low wage level of most income earners

Low monthly EPF accumulation due to averagely low income earned despite the amount contributed to EPF is high at 23% or 24%.

Recent pension reforms: Private Retirement Scheme (PRS) PRS is a newly formed voluntary system that helps to supplement existing public pension schemes such as the EPF and offer non-EPF members and the self-employed a way to save for retirement.

Malaysia’s current pension system is based on a mandatory pillar, anchored on formal public pensions.

The system, however, faces a number of challenges. It is not holistic because an estimated two million people are not covered under the EPF; the accelerating graying population in Malaysia poses to be an issue while the EPF savings are also typically exhausted within three to five years.

PRS was brought to order upon recognising the need for a better pension system to address the EPF’s shortcom- ings, a government joint-agency task force comprising the Ministry of Finance, Bank Negara Malaysia, Securi- ties Commission Malaysia and the Economic Planning Unit has been established to review the country’s pension system.

The PRS will be customised for different target segments. For working adults, the focus will be to build a desirable level of savings while for retirees the private pension funds will offer protection against longevity and inflation risks besides providing adequate returns during retirement.

It provides ownership to its contributor with options to select their own investment according to their current age or lifestyle profile to achieve their retirement financial goal.

According to the Economic Transformation Programme (ETP), Malaysia envisions having a model pension system and vibrant private pension industry. By 2020, we expect the private pension industry to grow to RM73 billion, with more than 2.7 million participants.

Benefits of the PRS

It is an investment structure that allows investors to enjoy investment-linked returns instead of interest-rate based returns.

Choice:. Allowing different individuals at different stages of their life build their investment portfolio based on their own situation and needs. One size does not fit all.

Addressing the under-served: This is where we can play a part in the government’s ETP. With the PRS, we would able to offer those not served by the EPF the ability to plan and prepare for their retirement needs.

On a final note, Manulife is the worldwide leader in management of pension funds with a proven track record. It has global expertise from across a full range asset class with more than 300 investment professionals in offices from across 17 countries and territories.