Business

Friday August 28, 2009

Pension models and the pitfalls


The first of a three-part series by KPMG on ‘A Penchant for Pensions?’ looks at various pension models around the world and outlines some of the pitfalls, especially during implementation

IF we mention “retirement planning” to the man in the street, we will probably draw wide-eyed blanks from them but mention the word “pension” and many will immediately think of public servants receiving their monthly income after retirement.

Not too long ago, civil servants who initially switched to an Employees Provident Fund (EPF) system were thankful to be allowed to revert to a pension scheme. Though we hear occasional complaints from the current batch of pensioners, many have now started to realise the benefits of the current public pension scheme.

Therefore, it was not too surprising when the EPF offered a scheme akin to a monthly pension where private sector contributors can opt for a regulated monthly withdrawal of their savings as opposed to a lump sum payout. Some studies have also shown that retirees who opted for lump sum payment often spent all of it in two to three years.

Pensions attracted more attention recently when the Government took a greater interest in this subject by commissioning a study about the implementation of a private pension scheme to cater for those who are self-employed.

We believe that the penchant for pensions is justified and that our government is rightfully concerned with the welfare of the ageing Malaysian public. If nothing is done and with spiraling medical and support costs for the elderly looming, Malaysia will soon be finding herself paying a hefty price of being a welfare state. It will also mean burdening the future generation with this colossal bill of supporting an ageing population.

Similarly in other countries, like in Britain and even our neighbour, Singapore, governments are fine-tuning pension schemes on an ongoing basis to cater for an expected larger group of senior citizens over the next few decades.

In the first of this three-part series on pension models, we will endeavour to look at the various pension models around the world and hopefully have a better overall view of the evolving “pension” trend and also some of the pitfalls, especially during implementation.

The public pension model

By and large, public pensions is the most common model in developed countries and predominantly exists to cater for the social insurance, social assistance and universal pensions for citizens who are no longer in employment.

The initial model envisioned was a generic welfare state that caters not just for the elderly but to any citizen with a need, typically the disabled, the sick, the impoverished and the unemployed. This model is workable provided that the economy (and the employed) is able to sustain the costs of maintaining this system.

Yet, as most countries have discovered, this model is no longer “workable” in the 21st century. With increasing life expectancy, declining birth rates, and rising health costs coupled with the recent economic downturn, the social and economic costs of maintaining this model are hampering its sustainability.

For instance, the Social Security concept in the US is starting to buckle under the strain of escalating expenditure. Funded by taxpayers, it currently takes up the largest chunk of government expenditure and yet it helps to keep about 40% of all Americans aged 65 or older out of poverty.

Increasingly, the solvency of the programme is being called into question, as it worsened with the fallout of the financial crisis that required the government to increase spending to boost its flagging economy in the midst of high unemployment.

Even in some countries with budget surpluses such as New Zealand, where monies are being rechanneled to support the welfare of its citizens, this cannot be expected to carry on endlessly.

Similarly in Malaysia, we cannot be relying on our current resources to subsidise the cost of living in this country. Once these resources are depleted, there will be a significant impact to the nation, especially when faced with a growing ageing population. The strain will be apparent in the public healthcare sector and also a ballooning government budget.

In the long run, this will no longer be tenable with Malaysia’s birth rate having declined to a new low of 2.2 per couple, according to a study by Universiti Putra Malaysia. The working population of today needs to be awakened to the reality that we can no longer rely on the Government (i.e. future taxpayers’ money) alone to provide a safety net for our old age.

Therefore, what are the alternative initiatives that the Government can pursue?

In the second part of the series, we will look into the alternative models such as the private pensions and provident funds and how these are employed successfully in certain countries.

l Part 2 will appear on Monday.

  • E-mail this story
  • Print this story