This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

MALAYSIAN employers can do more to help their employees prepare for retirement and play a larger role in building up a more sustainable pension programme here, says global human resources consultancy Mercer.

While the existing pension infrastructure has solid foundations, there are gaps to address to ensure the longer-term sustainability of the system moving forward, according to Hash Piperdy, CEO of Mercer Malaysia.

“While it feels like some of these problems are many years in the future, there are decisions we can make today which can safeguard the well-being of our future generations,” Piperdy tells The Edge.

The word “pension”, to most, means pension income for retired civil servants in Malaysia, but Piperdy is talking about post-retirement income for private sector wage earners, including the statutory savings with the Employees Provident Fund (EPF).

In the 2017 Melbourne Mercer Global Pension Index rankings released last month, Malaysia scored an overall 57.7 on the index, placing it in the C category. The annual survey, now into its ninth edition, evaluates pension systems in 30 countries covering 60% of the world’s workforce. Funded by the Australian state government of Victoria, it is a collaboration between Mercer and the Australian Centre for Financial Studies.

According to the grading system, the C rating pegs Malaysia as having a pension system with good features but also with major risks that need to be addressed lest its long-term sustainability be at risk.

The big gap, according to Piperdy, is in the employer-driven pension schemes. A voluntary scheme, on top of the mandatory EPF savings — either via contributions to a private retirement scheme (PRS) or a new fund to increase retirement savings among their employees, could help close this gap.

Such a scheme would fall into the third pillar of the World Bank’s Pension Conceptual Framework, which outlines five pillars that it deems essential for a wholesome pension system.

“We can start small. For example, in the UK, such a system started with a 1% contribution from your salary, which then increased gradually over the years. It wasn’t mandatory, but will you miss 1% of your salary starting out? Probably not,” Piperdy says.

Such a scheme could be set up by large companies or industry bodies, he adds. Another way forward may be to contribute more to existing schemes such as the EPF or the PRS.

“The benefit of having a separate branded fund is it increases the link and visibility. So as an employer, if the separate fund is part of your financial wellness programme ... if you’ve got your own fund or your own private retirement scheme, it’s easy to keep that separate [from EPF] and employees view it as an extra benefit that my company is providing.”

While that visibility may help in attracting and keeping talent, whether an added pension scheme is portable is an important consideration as people change jobs more frequently.

“If it’s set up under a private retirement scheme, it could be portable in that way because the account belongs to the employee. So they can take it with them when they move from job to job,” says Piperdy.

Financial wellness

So why aren’t most employers doing more in terms of providing retirement benefits just yet? The answer may lie in whether there are sufficient incentives to do so.

“Employers know that these days, people aren’t going to stay with them all the way to retirement, so why should I bother providing a retirement plan?” says Piperdy. “But it’s not just a retirement plan — it’s about the financial wellness of your staff.”

In a nutshell, financial wellness is a concept of looking after employees’ financial health by providing financial education, guidance and more access to investment and savings products, among others. It is gaining traction in a number of developing countries, including the US. He adds that these programmes can evolve as an employee progresses from being fresh graduates to buying properties, settling down and having kids — which changes their financial priorities too.

“It’s a case of doing the right thing. The other thing employers would complain about is, arguably, ‘we haven’t got the money’, but I’d say that’s not true because employers in Malaysia already spend an incredible amount of dollars on a lot of benefits and perks.”

Piperdy adds that Mercer Malaysia is already talking to a number of large employers with at least 5,000 employees in Malaysia, that are considering such programmes. When asked, he says these are a mixture of government-linked companies and other private sector employers.

How about low-income earners?

The suggestions form part of Mercer’s recommendations for Malaysia’s retirement framework. Other proposals include delaying retirement to enable more savings and introducing a requirement that retirement savings be taken as an income stream rather than as a lump sum withdrawal.

The latter may be similar to Singapore’s CPF Life scheme under its Central Provident Fund (CPF), whereby eligible pensioners receive a monthly payment for as long as they live.

“What that does is it gives you an amount of certainty on the amount of income you’re going to get,” says Piperdy, adding it helps people manage their finances better given the human tendency to “underestimate how much we need and how long we’re gonna live for”.

The EPF also encourages members to have a phased (instead of a lump sum) withdrawal so that their EPF savings last longer.

However, a stark Malaysian reality vis-à-vis retirement savings is that most Malaysians do not have enough savings for retirement. The EPF had previously said that two thirds of its members aged 54 and above only have RM50,000 or less in their accounts, which would likely run out within five years of retirement. That ties back to relatively low income levels and current costs of living. So, how can that problem be addressed?

Providing basic retirement income

A basic social security pension may be worth considering, says Piperdy, similar to what is in place in many developed nations. In essence, employees contribute to a pool of funds that would later provide them with a lifetime pension income subject to fulfilling certain criteria such as a minimum period of contribution.

“What I would love to see is a lifetime income provided in Malaysia and other countries, basic social security pension provided to the poorest members of society so they know they’re going to be covered for the bare essentials,” he says.

This would be an extension of existing one-off cash transfers in Malaysia such as the 1Malaysia People’s Aid (BR1M), he adds.

That said, Piperdy acknowledges that such a system would come at a huge cost. Countries with such systems had grappled with the growing financial strain of sustaining the social security pensions, which can raise heated political debates.

For example, by 2025, there will be an expected 3.2 million Malaysians over 65 years old, according to the Department of Statistics.

To provide everyone with RM950, the current minimum pension for retired civil servants, the total monthly bill would be a staggering RM3.05 billion — or over RM36.6 billion a year. That would be a fixed commitment regardless of economic cycles, financial crises and other factors.

Ultimately, there is a need for the nation to collectively decide on a longer-term strategy for retirement, says Piperdy.

“There needs to be a pretty wide-ranging debate (on where we go from here) and, firstly, we’ve got to reach consensus on the strategic direction we want to get to. The stakeholders, of course, will include the government, employers, as well as the big funds like EPF, KWAP and LTAT.”

“It would be good to see a blueprint to look at what sort of pensions system we want for our children in the next generation,” adds Piperdy.” Then the country can start planning and building towards that.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.