A call for reform
Malaysia’s pension system has come under close scrutiny since the coronavirus crisis rocked the world two years ago and the government allowed early withdrawals from the Employees Provident Fund (EPF) for members facing financial hardship from lockdowns to curb the spread of the virus.
Temporary withdrawals from the Southeast Asian country’s largest pension fund through three separate schemes have severely depleted retirement savings such that 46% of EPF members have less than 10,000 ringgit (US$2,389) in their accounts, with 79% of those having less than 1,000 ringgit.
Geoffrey Williams, an economics professor at the Malaysia University of Science and Technology, was an early critic of the early withdrawals and slams calls by some politicians to allow even more as “crazy”.
Williams, dean of the university’s Institute of Postgraduate Studies, has been outspoken about Malaysian pension issues generally. He explains to Asia Asset Management why the pension system needs a complete overhaul and not just the “lame old options” of extending the retirement age or saving more. He suggests a four-tier social pension scheme as a solution.
You have been very vocal on various issues related to Malaysia's pension system, including ending Covid-related EPF withdrawals. Why are you passionate about topics relating to pension systems?
I'm passionate about pension systems because we will all retire at some point and be in need of income in retirement. Looking at old age poverty, especially because it affects too many people, is very distressing and can be avoided with proper planning and proper systems.
When the Covid-related withdrawals were announced in Malaysia, I was one of the first economists to point out how devastating it would be and now we are seeing the outcome of that, with almost 75% of EPF members left with inadequate cover.
What is your view of the current state of the Malaysian pension system?
We have all become very aware of the current state of the Malaysian pension system with data from EPF showing millions of their members with virtually nothing in their accounts. This was done via the i-Lestari, i-Sinar and i-Citra schemes which resulted in a total withdrawal of 101 billion ringgit by 7.4 million members.
According to EPF, this has resulted in 6.1 million members having less than 10,000 ringgit currently in their savings, and 79% of them having less than 1,000 ringgit left.
When we take into consideration many millions more who are outside of the formal pension schemes or outside of the labour force, we estimate that as many as 85% of Malaysian adults have inadequate pensions and face old age living in poverty, sometimes very desperate poverty.
The seriousness of the situation is widely acknowledged but the reform process has yet to be started. We even have some politicians who are pushing for further withdrawals, which is crazy in my opinion.
The EPF allocates about 50% of assets to fixed income, one-third to equities, 10% to real estate and infrastructure, and the rest to money markets. Do you think there is a need to increase the allocation for alternatives, or perhaps to allocate a small amount, say 0.5%-1% of assets, to cryptocurrencies?
EPF's asset management and strategy has been excellent and even in very bad times has delivered good dividends. The forecast for this year is for 5%-6% returns, which is much better than unit trusts or fixed deposits. It has diversified its investments and increased overseas investments in the face of pretty terrible returns on the Malaysian stock market and this has been successful.
It would be very dangerous and inappropriate for a national pension fund to invest in cryptocurrencies because these are speculative, largely unregulated private assets with no reliable track record and very high volatility and risk. So, the strategic asset allocation of EPF should not extend into this arena.
Most EPF members use up their retirement savings within two years of full withdrawals. Would increasing the retirement age and increasing mandatory contributions from employers and employees be the solution?
Extending the retirement age will not work in the Malaysian context because incomes are too low.
The two most often suggested solutions to provide an income for older people are to force them to work longer or force them to save more from their salaries while they are working. Both are very weak options from a standard Western perspective and lack imagination in solving the problem of income in old age. They don't really work in the Malaysian case.
The median salary is 2,062 ringgit, so half of the 9.4 million people earning wages have less than this. That is 4.7 million people. If they worked an extra five years beyond 60 years old and saved 24% into their pension, they would have only 165 ringgit per month extra to their pension at 65 years old.
If we look at increasing savings, then we get a similar unfeasible set of calculations.
If you are 40 years old now with no pension and you want to have the EPF target of 240,000 ringgit to retire at 60 years old, you would have to save 33% of the average salary or half of the median salary. You would have barely enough to live on in each case.
If you are 50 years old now with no pension and you want to have the EPF target of 240,000 ringgit to retire at 60 years old, you would have to save two-thirds of the average salary or all of the median salary. You would have nothing to live on in this case.
So the two options of increasing the working lifespan or increasing savings do not work.
Allowing people the option to continue to work beyond 60 years old, as they do in many countries, including Singapore, is a good idea because a flexible retirement age offers choice.
Forcing people to work beyond 60 years of age on the other hand is not a solution in the Malaysian case where as many as 75% of the working age population have no pension savings and only 3% of EPF holders meet the target threshold savings for retirement.
We need a complete reform of the system, not just lame, old options of forcing people to work until they die or save so much they cannot live decent lives.
You have suggested a four-tier solution. Can you elaborate?
Because of the ageing nation challenges and low retirement savings, I have proposed a four-tier social pension scheme with a universal basic pension, an income replacement pension, a desired income pension, and non-pension income alternatives.
Funding would be different in each tier and should be a portfolio of direct government contributions by combining existing aid programmes, contributions from those who can afford it as we have now, and income from public investment funds.
If you combine all the pension funds in Malaysia, they have more than the total GDP in assets under management but not enough in individual accounts to pay member pensions. This is a difficult reality to admit but one that must be addressed.
So a universal basic pension would be available to everyone but if you had income from another source, it would be reduced pro-rata. It would be paid from direct government transfer and investment income from government funds.
A replacement income pension tries to give you a percentage of your final income and would primarily be funded by contributions and income from a fund as we have now, but with no option to withdraw savings until you reach retirement.
Desired income pensions are for higher earners, with extra savings in public or private funds. These can be tax free to encourage saving and reduce the burden on the lower two tiers.
Non-pension income alternatives aim to consolidate any form of asset into a retirement fund or annuity. The biggest asset most people have is a house, and reverse mortgages help you to get income from the house. Other forms of assets can be used, such as financial savings, fixed deposits or unit trusts, all consolidated into a final retirement annuity.
To fund universal basic pensions, the government can consolidate existing spending on the elderly, top it up with extra funds, increase higher-level income taxes and establish a new investment fund. So this scheme combines government funded direct benefits pensions with private retirement scheme options and flexible lifelong working options.
Ideas to source funds for a new investment fund can be the KWAN [Kumpulan Wang Amanah Negara or National Trust Fund] fund of 20 billion ringgit, 90 billion ringgit in existing unclaimed assets from the estates of people who passed away without dependents, income from windfall taxes, responsible privatisation and Petronas [the national oil company] premia in times of high oil prices or many other sources.
To provide a 2,000 ringgit pension to a two-person household above 60 years old would cost around 3.2 billion ringgit for the B10 [bottom 10% income group], 12.9 billion ringgit for the B40 and 16.2 billion ringgit for the B50 on a very rough calculation.
What we really need is a fully funded research programme to work out retirement income options beyond working longer and saving more.