Extra effort needed for retirement savings

In order to have a decent replacement rate of 70%, a person has to save close to 18% of their salary


MALAYSIANS and government bodies in charge of pension funds need to do more to encourage savings for retirement, as Malaysia’s demographics and low replacement rate do not bode well for the future of its citizens.

Principal International Inc president and CEO Luis Valdes said Malaysia’s fast-ageing population and low fertility rates show that citizens are likely to live longer, but with less support from family, yet savings appear to be on the shallow end.

“The Malaysian society really needs an extra effort to save more for their retirement. On average, every Malaysian should save twice as much for their retirement.

“In order to have a decent replacement rate of 70%, a person has to save — for pension purposes — close to 18% of their salary,” he told The Malaysian Reserve (TMR) in an interview recently.

The Organisation for Economic Cooperation and Development’s minimum replacement rate — the ratio of one’s retirement income to one’s salary before retirement — is benchmarked at 70%, while Malaysia’s replacement rate falls below 40%.

Valdes said the Employees Provident Fund (EPF) has assets under management (AUM) of about US$200 billion (RM830 billion), while Retirement Fund Inc’s (KWAP) AUM stands at around US$50 billion, for an economy of US$300 billion.

“There are some signs that we’re missing at least another US$200 billion in savings, so the money that’s flowing into the long-term savings and pension products in this country need to be doubled,” he said.

Under the EPF, the mandatory contribution rate for employees is 11% of their monthly wages, while employers contribute 13% (for employees earning RM5,000 and below) and 12% (for employees whose wages exceed RM5,000).

As mandatory pension savings are inadequate for Malaysians, Valdes called for greater participation in voluntary saving schemes such as the Private Retirement Scheme (PRS), a voluntary long-term savings and investment scheme designed to help individuals save more for retirement.

“We see voluntary savings as a very important area in Malaysia, although we believe the PRS needs some adjustment because it’s growing — but not growing enough.

“We are working with the regulators and the Private Pension Administrator (PPA) Malaysia to improve the system as we believe there needs to be some improvement,” he said.

He added that more efforts from the PPA together with the industry are also needed to increase financial literacy among citizens.

According to the official PRS website, each PRS offers a choice of retirement funds from which individuals may choose to invest based on their own retirement needs, goals and risk appetite.

The fund options under PRS are intended to enhance long-term returns for members within a regulated framework developed by the Securities Commission Malaysia (SC).

SC had announced earlier this year that the total AUM of the 56 funds under the PRS climbed about 47% to RM2.23 billion as at end-2017 from RM1.51 billion in 2016.

Launched six years ago, the scheme also saw its members jumping 36% to 301,279 from 221,235 the year prior, likely due to initiatives such as PRS Online — which allows individuals to enrol or top up their PRS contribution directly online — and an incentive whereby Malaysians aged between 20 and 30, who contribute RM1,000 to a PRS fund, will receive a matching RM1,000 contribution from the government.

Principal International, a global player in long-term savings solutions, operates domestically via its joint ventures (JVs) with CIMB Group Holdings Bhd.

In May this year, it upped its stakes in CIMB-Principal Asset Management Bhd and CIMB-Principal Islamic Asset Management Sdn Bhd to 60%, leaving CIMB with 40% in the JVs.

Principal International (South Asia) Sdn Bhd president of South- East Asia and India Pedro Borda said the group’s AUM currently stands at over RM80 billion for its Malaysian operations, while the group is the second-largest PRS provider locally.

“Our target is to continue growing at a higher average than the market. Our Malaysian business grew around 17% annually in the last five years versus an industry growth of around 11%.

“However, as Malaysia is a more mature market compared to others like Indonesia and Thailand, we believe the growth rates will moderate but still be decent at around 10% to 11% annually, as seen over the past two to three years,” he told TMR.

In Malaysia, the Principal-CIMB JV will focus on digitalising its business as it sees greater opportunities and market demand for direct online services.

Under the new shareholding alignment, it will also be able to offer more global products in addition to the Asean products and Asia Pacific ex-Japan products it already offers.