Business

Saturday August 29, 2009

Is private pension scheme a solution?

By DALJIT DHESI


THE government’s move to set up private pension funds by the middle of next year is laudable judging by the fact that there are about two million people now without any formal pension scheme.

This group include the self employed and those outside the current pension system.

Private pension funds, which are beginning to take shape in many Asian countries, are seen as a vehicle to boost retirement savings and add liquidity in local capital markets.

Studies have revealed that a majority of Employees Provident Fund (EPF) contributors exhaust their savings within three to five years upon retirement.

If there is any basis to these findings, then a serious and an efficient pension fund framework has to be established to ensure sufficient savings for retirees in their old age.

The Securities Commission, which will be the regulator for these funds, is undertaking a six-month study to review and adopt the best practices from successful private pension fund models worldwide.

Studies have revealed that a majority of Employees Provident Fund contributors exhaust their savings within three to five years on retirement.

Some of the well-known and successful pension fund models are those that can be found in Australia, Chile and the United States.

The Australian superannuation pension system has been cited by many industry observers as one of the most successful pension schemes in the world.

Under this scheme, employers are required by law to pay a proportion of an employee’s salary and wages (currently 9%) into a superannuation fund, which is accessible when an employee retires or is in that transition state.

After over a decade, it is reported that Australian workers have more money invested in managed funds per capita than any other economy.

J. Campbell Tupling ... ‘Funds must incorporate sufficient tax benefits.’

There are currently about 300,000 superannuation funds in operation in Australia.

To enhance flexibility, Australian employees can now choose which fund their employer’s future superannuation guarantee contributions were paid into.

The Chile pension system which started operations in 1981 is a retirement and welfare system managed entirely by the private sector. It is estimated that 97% of the country’s civilian salaried workers are officially in the private system.

As at Oct 30, 2007, it has accumulated US$100bil, which is equivalent to 70% of the gross national product of Chile.

Under this system, all civilian salaried workers must contribute 10% of their salary to a privately run pension fund and workers can choose any of the country’s six private pension funds to place their monies with. They are also allowed to change the funds at will.

Supporting the Australian and Chilean pension systems, Federation of Investment Managers Malaysia (FIMM) president Tunku Ya’acob Tunku Abdullah says these systems are viewed as worldwide role models for private pension administered schemes.

He says although Australia has a slightly smaller population than Malaysia, their pension schemes have grown by leaps and bounds.

The Australian mutual fund industry, according to Tunku Ya’acob, is about RM2.5 trillion as compared to Malaysia’s RM170bil.

He attributes this to strong participation due to the high personal tax rate and the tax relief obtained when they invest in pension schemes.

The proposed Malaysian private pension schemes should, therefore, allow for greater participation among the public.

“Even though the scheme is meant to be voluntary, incentives should be given to encourage the employed, self-employed and non-working spouses to participate. A high participation rate will also lower costs as there will be economies of scale for the managers,” he notes.

“The investment policy should be more liberal than the one governing EPF as appropriate diversifications, including offshore investments and across various asset classes, will improve returns.

Nor Zahidi Alias ... ‘Pension funds should be managed conservatively.’

“Given that the investment horizon is on a longer term basis, any market volatility will be smoothened out for these funds,” he stresses.

Lending credence to the liberalisation of pension funds, Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong says local pension funds should be liberalised along similar lines to the Australian and other models in developed nations to give savers the options how they wish to manage their savings nests.

HwangDBS Investment Management Bhd head of equities Gan Eng Peng says savers should be given a choice as the current “one size fits all” scheme may not be ideal for them. However, he feels there must be some form of control.

He says the Singapore experience, where investors have a choice on the type of private funds to buy using their Central Provident Fund money, did not do well.

“The key stumbling block is poor market timing, getting into the flavour-of-the-month funds and to a certain extend, excessive fund charges.

“Perhaps the solution can be the adoption of a cost averaging plan to circumvent poor market timing decision and a strict filtering of fund offerings,” Gan explains.

Unlike Australia, our current pension schemes also do not offer extensive health and medical benefits. Over there, pension schemes offer retirees a universal health care system known as Medicare, Gan adds.

Under Medicare, retirees can enjoy medical treatment from a choice of hospitals and ancillary medical benefits.

In Malaysia, the two main public pension funds currently is EPF and Lembaga Tabung Angkatan Tentera (LTAT), apart from a few smaller private pension schemes run by multinational companies which are approved by the Inland Revenue Board.

CIMB-Principal Asset Management Bhd CEO J. Campbell Tupling suggests local private pension funds must incorporate sufficient tax benefits and subsidies similar to 401(k) and IRA (Individual Retirement Account) plans in the US.

The former allows a worker to save for retirement and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal, he adds.

According to a report released by the Employee Benefit Research Institute and the Investment Company Institute (2007), investments of long-term 401(k) investors have grown at close to 9% rate annually in recent years.

Americans who invested in a 401(k) plan from 1999 through 2006 saw, on average, an 8.7% annual increase in their balances in a period that included bear and bull markets, the research adds.

Tupling says automatic enrolment for participation should become a standard feature for private pension funds for those who are eligible as this will allow more people to join and to save sooner.

Another important aspect, he says, is to encourage people to save more as earnings increase.

Since pension funds are essentially a collection of hard-earned money from individuals, Malaysian Rating Corp Bhd’s chief economist Nor Zahidi Alias feels they should be managed conservatively, with a large portion invested in the relatively safe government bonds.

“In Malaysia, for example the EPF has provided relatively high returns since its establishment in 1951 despite having various constraints in terms of instruments it can invest in.

“Being conservative pays-off in times of extreme volatility in financial markets. This is evident from the massive losses experienced by foreign pension funds that are less conservative in their investment approaches. For instance the US$181bil California Public Employees’ Retirement System (Calpers) lost 23.4% in the fiscal year ended June, erasing six years of its earnings,” Zahidi notes.

Prudent risk management is critical in managing pension funds. Therefore, proper regulations and guidelines are needed to ensure that funds are managed in the most efficient manner.

  • E-mail this story
  • Print this story