PETALING JAYA: As the Malaysian population continues to age, a pressing need arises for comprehensive strategies to support and enhance the living ecosystem for senior citizens, all the while playing a crucial role in fortifying the overall economic well-being of the nation.
According to the Economic Outlook 2023 report released by the Finance Ministry, Malaysia’s ageing population is growing at a faster-than-expected rate, whereby more than 15% of its population will be above the age of 65 by 2050.
Against this backdrop, the Employees Provident Fund (EPF) self-funded pension plan has been at the forefront of a delicate balancing act, crucially navigating between achieving sustainable returns and meeting the retirement benefits of its members.
The government, meanwhile, operates a pay-as-you-go pension scheme for the public sector employees.
The current “pay-as-you-go” system however may be unsustainable according to Asia School of Business practice professor of finance Joseph Cherian.
He explained the “pay-as-you-go” systems for pension contribution are financed by the current working population via taxation and by the government issuing debt.
As the overall cost depends on how top-heavy the population pyramid is, and with a significant number of elderly individuals, Cherian believes it can be a costly proposition.
“It has been estimated that to provide a basic wage of RM2,700 per month up to the 70th percentile of retirees in Malaysia, as measured by income level, it would cost slightly more than RM40bil per annum,” he noted.
Hence, the government may need to consider a self funded government-guaranteed public pension or social security savings fund to better manage its finances and obligations.
Self-funded pension plans, such as Malaysia’s EPF and Singapore’s Central Provident Fund (CPF), operate on a co-contribution model where both employees and employers contribute. The accounts are owned by the individuals.
The plan’s investment strategy varies; for instance, the EPF employs a liability-driven investing scheme, while the CPF follows a pure asset-liability management approach.
A government guarantee sets a floor, ensuring that the return on the social security savings fund cannot fall below a specified level. In Singapore, the legislated floor is set at 2.5% per annum.
Similarly, Malaysia has a mandated floor of 2.5% on the dividends or returns it pays. Singapore adjusts interest rates based on savings brackets, stepping down from 6% to 2.5%.
In contrast, Malaysia has historically paid dividends on entire balances, ranging from as high as 8.7% in the 1980s to a more recent range of 5.2% to 6.75% over the last eight years.
Cherian pointed out that the substantial pandemic-related withdrawal of nearly RM150bil from the EPF have depleted many retirement accounts, crucially impacting savings for the future.
To address this challenge, he suggested integrating and pooling the existing reverse mortgage scheme under Cagamas Bhd with the EPF savings scheme, drawing inspiration from the successful CPF lease buyback programme.
According to Cherian, risk-pooling has the potential to enhance payout rates, as evidenced by a comparison with Singapore’s system.
“A quick calculation shows that S$100,000 invested in the CPF lease buyback scheme results in a lifelong income payout of S$7,100 per annum, whereas Malaysia’s reverse mortgage payout for every RM100,000 saved is RM2,940 per annum. The key lies in the effective pooling of risks,” he said.
Moving on to the concern of healthcare costs in retirement, he recommended creating a separate medisave account within the EPF to cover insurance premiums.
This account could also address surpluses for co-payments or better private care, he suggested.
“Individuals who fall between the cracks should still be provided with free government healthcare. This policy should not change,” Cherian said.
Meanwhile, Bank Muamalat (M) Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid said potential reforms to improve the retirement fund scheme in Malaysia could involve reviewing the current withdrawal scheme.
He suggested a comprehensive review could play a role in extending the lifespan of retirement funds by capitalising on the compounding factor derived from strategic investments.
“Just focus on key areas such as housing, healthcare and education as these areas are important for improving their lives before reaching the retirement age,” he said.
Mohd Afzanizam said the key challenges involve the volatile market, which could impact the investment return profile.
Addressing this challenge would necessitate the fund to adopt a more active approach to fund management, aiming to surpass benchmark returns, he said.
“This would require deeper understanding of the economic landscape amidst the uncertainties in the geopolitical dynamics which easily sway market sentiments.
“Therefore, it requires high conviction and discipline in order to be successful in delivering respectable returns to the members of the fund,” he added.
