Business

Saturday July 21, 2012

New initiatives to save for old age

Money and You
By CAROL YIP


MALAYSIANS may soon have two initiatives that will heighten their opportunities to make and save more money for retirement and old age the new minimum retirement age for private sector employees at 60 years old and a Private Retirement Scheme (PRS) is expected in the fourth quarter of 2012.

It is clear that the new retirement age will provide opportunities to increase retirement savings for those who are saving regularly. But for others who are not saving to build a retirement nest egg, it will likely still be a challenge to achieve financial adequacy for old age even if he or she waits until 60 to retire.

The introduction of PRS is timely. We must all seriously consider the need to save more money for retirement. One cannot deny that a system that “forces” us to save monthly will help us to build our savings since our propensity to spend these days is much higher due to our culture of consumerism and materialism, not to mention the increasing cost of living.

PRS will be the right channel for us to increase regular retirement savings regardless of whether we are contributing to the Employees Provident Fund (EPF) or not. For those who don't have EPF savings, PRS is the system to help save money for retirement regularly and consistently.

Combined with longer careers extended to 60 years old, the PRS will help to boost the private pension component for Malaysians, whether they work in the private sector, public sector or are self-employed.

But are Malaysians ready for such improvements to our national retirement system? And how far along are we in achieving an effective retirement system compared with other countries?

Best retirement system

The 2011 Melbourne Mercer Global Pension Index compares retirement income systems around the world and rates them based on their adequacy, sustainability and integrity.

It examined retirement plans in 16 different nations across Europe, the Americas and Asia using three criteria adequacy (appropriate provision of benefits); sustainability (the long-term durability of the system) and integrity (the regulation of private pension schemes, including the protection given to members).

The Netherlands comfortably topped the chart, followed by Australia and Switzerland in second and third place, respectively. The United States rounded out the top ten, but Asian nations fared significantly less well, with Japan, India and China coming in at the bottom of the survey.

The report showed that no country's system has an index value above 80, which is considered an A-grade retirement income system. However, six countries have an index value between 65 and 80, which represents a B-grade system and with some adjustments or improvements these countries could be re-classified as A-grade systems.

“The best pension systems adopt a multi-pillar approach to spread these long-term risks between governments, employers and individuals. Such an approach is also particularly relevant in periods of economic uncertainty, as we are now facing,” according to Dr David Knox, Mercer senior partner and author of the report. For instance, Australia's index value increased from 72.9 in 2010 to 75.0 in 2011 due primarily to a real increase in the size of the age pension and higher net household saving rate, but fell short of being the best in the world due to lower levels of adequacy.

“Australia is very much in reach of becoming the first in the world to receive an A-grade score if we can address the issue of adequacy by raising the level of compulsory savings via superannuation and continue reforms to reduce costs,” said Dr Knox. “Our superannuation system is in the middle of significant reform, some of which is likely to boost our score in the index in the future but our current B-Grade is an important reminder that our world-class retirement savings system is in danger of failing us unless we take action now,” he added.

No perfect pension system

According to the report, there is no perfect system that can be applied universally around the world. Indeed, even comparing the diversity of retirement income systems is certain to be controversial as every system is different and has arisen from each country's particular economic, social, cultural, political and historical circumstances.

However, there are certain features and characteristics of retirement systems that are likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community.

With recent global economic slowdown, inflationary pressure and euro crisis uncertainty, the risk of governments not being able to financially support their ageing population is becoming more of a reality unless some significant pension reform is made now.

The report has made several suggestions to improve each country's retirement income system. Although each system reflects a unique history, there are some common themes as many countries face similar problems in the decades ahead like:

Increasing the state pension age and private sector retirement age to reflect increasing life expectancy;

Promoting higher labour force participation at older ages including the provision of phased retirement;

Encouraging, motivating and requiring higher levels of private saving to reduce the future dependence on the public pension;

Increasing the coverage of employees and self-employed in the private pension system, recognising that many individuals will not save for the future without an element of compulsion or automatic enrolment; and

Reducing the leakage of funds from the retirement savings system prior to retirement, thereby ensuring the funds saved are used for the provision of retirement income as long as possible till end of life.

We face similar challenges in Malaysia. Though we have features like EPF, Socso and civil pension for government employees, we may not be saving enough to ensure financial adequacy and sustainability for our old age. Even with voluntary saving methods like bank savings, unit trust and other methods according to individuals' preferences, our propensity to spend can be higher than savings, from young to old.

Now that we may have two “new retirement features” retirement age at 60 and PRS to put in place, we could well be on the right track towards improving our country's retirement system. The Global Pension Index can be used as a benchmark to compare with other countries' retirement systems; helping us avoid certain risks and shortcomings that might adversely affect our retirement system efficacy and long-term sustainability.

However, we are a “new kid on the block” in terms of experience and enforcement of these features. Our success would require our regulators, PRS providers, employers and individuals to trust and make the system work, fulfilling the three important criteria of adequacy, sustainability and integrity.

Should the implementation and enforcement of the new retirement features become a challenge and take a longer time than expected, some of us will not live long enough to enjoy its fruits.

Still, we must continue to work towards an effective retirement system for our children and younger generations. They'll need it. We are paving the way for them. It may be difficult but it will be worthwhile walking the path!

> Carol Yip, founder of Abacus For Money, believes that if peopleunderstand their money mindset, behaviours and money psychology they can be financially happy and successful. She actively promotes financial literacy and intelligence within families and for women, youths and retirees. Email her at CarolYip@AbacusForMoney.com

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