An uphill battle
Category: Asia, Malaysia, Global
It was almost exactly two years ago that Prime Minister Najib Razak launched Malaysia’s Private Retirement Scheme (PRS) with great fanfare, but enthusiasm for private pension products in the country so far remains lukewarm.
According to data from Securities Commission Malaysia, at the end of 2013 there were fewer than 73,000 accounts under the scheme, with a total NAV of less than 300 million ringgit (US$94.37 million). By comparison, the nation’s mandatory retirement scheme, the Employees Provident Fund (EPF), has more than 6.5 million active members and 586.66 billion ringgit in total investment assets.
The tepid response comes despite the Private Pension Administrator (PPA) – the administrator set up to oversee the PRS, as well as the fund providers accredited under the plan – making a commendable effort to promote the scheme, including extensive advertising and marketing.
The PRS is by no means surplus to requirements, either. Malaysians are living longer and saving less, with consumer debt levels among the highest in the region. For many, EPF savings will probably only last a maximum of five years post retirement. Rising long-term healthcare costs will also be a challenge for many workers after they retire.
The biggest obstacle for the PRS gaining widespread acceptance is, however, the EPF. Of the fund managers and consultants Asia Asset Management spoke to for this month’s feature on the subject (pages 12, 13 and 14), most agreed that there is an inevitability that the PRS must compete with the EPF. This no easy task, given that the EPF has historically generated high returns, including 6.97% last year. Experts also argued that there is something of a mind-set among Malaysians to believe that as the EPF is a government scheme, it is by default more secure.
Others instead choose to invest in tangible assets, like property, or simply think that family will look after them during their twilight years.
So what needs to change? Firstly, the PRS should be marketed as a complementary product, not one that competes with the EPF. Portability between the PRS and EPF, and other employer retirement plans, should also be streamlined. The Malaysian government could also offer an equal level of tax relief across the EPF and PRS, and remove any tax penalties for early withdrawal from the latter. Moreover, greater tax incentives could be offered to both employees and employers in order to attract greater buy-in to the scheme.
Finally, the PRS needs more time to establish itself. If the scheme’s fund providers are able to build a track record for developing returns comparable to the EPF, it will become increasingly harder for Malaysians to ignore it.