Malaysians’ gross income replacement rate (gross income after retirement divided by gross income before retirement) is only around 30%, far behind the 66% rate recommended by the World Bank for the adequacy and sufficiency of retirement income. As part of the Government’s Economic Transformation Programme (ETP) to address the nation’s need to provide for adequate retirement funding, the Private Retirement Scheme (PRS) was launched on 18 July 2012, along with the inception of the Private Pension Administrator Malaysia (PPA) as the central administrator for the PRS industry.
Given that the infancy of the nation’s private pension industry, PPA acknowledges that “there is still a lot of work to do”. Nonetheless, it is heartened by the increasing momentum of the PRS.
Since the first PRS product was launched in October 2013, PRS contributions have been rising steadily. As at 28 February 2013, the total fund invested in PRS is RM72 million, from 24,000 PRS members, 18% of which are self-employed individuals. Given that some members signed up with multiple PRS providers, the total accounts opened were almost 31,000. The Securities Commission has given PPA the goal of achieving 50,000 PRS contributors by June 2013.
Among the eight approved PRS providers, CIMB-Principal Asset Management Bhd (CPAM) has launched 10 products; Hwang Investment Management Bhd, four; Manulife Unit Trust Bhd, three; Public Mutual Bhd, six; and RHB Investment Management Sdn Bhd, three. PPA expects the remaining three providers – AmInvestment Management Sdn Bhd, American International Assurance Bhd (AIA) and ING Funds Bhd – to launch their first PRS products in the second quarter of this year.
PPA CEO Datuk Steve Ong says: “The public awareness we are getting is encouraging. The PRS has received immense exposure and recognition since its inception in July 2012. Currently there are PRS members in every state, indicating that PRS has garnered nationwide awareness. In the previous few months, we have conducted corporate conferences to educate employers about the scheme and also participated in retirement exhibition and seminar to reach out to the broader public. Moving forward, we will continue to do the same and intensify our activities as well as go on nationwide roadshows.”
Indeed PPA and PRS providers have their work cut out for them.
Joyce Chua, CEO of boutique investment agency Success Concepts Life Planners, rates the general awareness of PRS at two, on a scale of one to 10.
She also notes that employers are also either not aware of the PRS or disinterested to put aside funds for their employees although contributions to the PRS scheme are tax deductible up to 19%. “Hence, demand is limited to the tax relief for the individual at RM3,000 per year and the employers’ demand is very limited to organisations with HR policies that favour the retaining of employees at an extra cost.”
Success Concept, which has a total asset under management (AUM) of about RM300 million, offers CPAM’s PRS schemes as part of its wide investment portfolio. “At the moment, we are actively pushing for Corporate PRS schemes and want to work with good employers who are willing to set aside funds for their employees over the long term,” Chua says.
PPA shares that it has received a lot of interests from employers in the last few months. Some employers are already contributing to the PRS and PPA expects more to join in over the next few months, “hopefully from reputable corporations.”
While the PRS is a good base from which to kick off one’s retirement fund, industry observers note that the schemes lack choices and variety. Many Malaysians are already investing in similar unit trust funds under the EPF (Employees Provident Fund) investment scheme or via their own savings and thus do not see PRS as a different investment tool.
A PRS investor reveals that she will only be investing up to RM3,000, which is the maximum tax relief offered under the scheme. “I have already set aside my retirement funds and would rather have my funds liquid than be subjected to 8% tax penalty should I need to withdraw the funds. Furthermore, the PRS schemes are similar to the unit trust schemes that form part of my retirement portfolio.”
Chua opines that what the PRS need is to provide access to investments that are usually reachable only to the richer investors, such as Exchange-Traded funds (ETFs), Real Estate Investment Trusts (REITs), Initial Public Offerings (IPOs), sovereign bonds, precious metals, options/futures and hedge funds. “These investments usually require higher capital outlay but if the PRS can provide Malaysians affordable access (in the PRS’ case, a minimum of just RM100), their retirement portfolios can be enhanced and sweetened to achieve higher portfolio returns together with the unit trust funds available in Malaysia today.”