Investors drawn to local private retirement schemes only because of tax rebates

PRS has been made available in the market since July 2012 and is designed to help Malaysians save more
for their retirement

By MARK RAO / Pic By TMR File

DOES Private Retirement Schemes (PRS) help address the issue of insufficient retirement savings facing the majority of Malaysians today? The short answer appears to be “NO”.

Income replacement in the country, or the pre-retirement income needed to maintain a comfortable standard of living when retired, is currently insufficient to address the needs of an ageing population.

The Employees Provident Fund Board (EPF) — Malaysia’s largest pension fund highlighted that a total of 64% of its members reaching the age of 54 have savings below RM50,000 — a paltry sum to cope with rising cost of living and high household debt.

Low wages and leakages from pre-retirement withdrawals are among the reasons cited for the insufficient savings.

PRS — a voluntary long-term savings and investment scheme — was designed to help Malaysians save more for their retirement and has been available in the market since July 2012.

The scheme boasts minimum contributions as low as RM100 while contributors can enjoy a personal tax relief of up to RM3,000 per year.

2018 was a watershed year for PRS with the number of contributors reaching a record high of 416,913.

The total net asset value for PRS funds also rose by 20% year-on-year (YoY) to RM2.66 billion last year.

But an investment analyst working for a local bank said, without the tax relief, PRS is just another product in the market alongside other fund management services and unit trusts offerings.

“The tax rebate is a big incentive and, in my view, the only reason why PRS has grown in Malaysia,” he said, who is also a PRS contributor himself.

“These schemes are (also) managed by private asset managers and do not have a guaranteed or strong historical return rate compared to the EPF.”

The EPF targets to declare and pay out dividends at a rate that is at least 2% above inflation.

In 2018, the pension fund declared 6.15% and 5.9% dividend rates for its conventional and Shariah savings respectively.

This amounted to a total payout of RM47.31 billion and came amid a volatile and challenging year for financial markets globally.

In comparison, the annual returns from some 90 available PRS products in 2018 were mostly in negative territory for the same year, with many funds registering negative returns of above 10%.

This is in contrast to 2017 which saw only two funds fetching negative returns, while several funds boasted returns of over 20% that same year.

According to statistics from the Securities Commission Malaysia (SC), there are a total of 56 approved PRS funds as at July 31 this year, with 7.09 billion units in circulation and a total net asset value of RM3.07 billion.

Individuals can contribute RM3,000 a year to PRS and enjoy the tax rebate without worrying about how his or her investment performs.

Many of the PRS contributors who spoke to The Malaysian Reserve (TMR) said they were only contributing to the fund primarily for the tax rebate.

Of these contributors, one aged 28 and working in Kuala Lumpur said he would still contribute to the scheme but not up to RM3,000 a year and the rebate is the only pull factor to do so.

“If there is a proper channel and easier communication for PRS, I would sign up for a monthly contribution similar to the EPF,” he told TMR.

The Larger Issue of Income Inequality
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the PRS is seen as a complementary retirement scheme for private sector employees in addition to EPF savings.

Mohd Afzanizam says the rising cost of living in Malaysia may deter private sector workers from providing additional allocations for savings in PRS

EPF savings tend to deplete overtime once a person is retired and there is no regular income payment like a pension received by public sector employee.

“In that sense, PRS should be appealing to the private sector employee.”

He, however, noted the rising cost of living in Malaysia may deter private sector workers from providing additional allocations for savings in PRS.

The analyst said the issue of insufficient retirement savings in Malaysia is not down to the number of schemes available in the market but a structural issue of income equality.

“For low income earners, such as the B40 group as well as the lower M40 category, it is a day-to-day struggle to meet daily expenses. Putting aside extra into an additional savings account will be the last thing on their minds,” he said.

“There is nothing wrong with the PRS (as an avenue to generate additional savings), but it does not address the underlying cause of income inequality.”

He said Malaysia, which already has a mechanism in place to generate retirement savings via the EPF, could look to the high-income model which benefitted Australia’s pension funds.

“Even from a dollar-to-dollar perspective, the size of Australia’s pension funds are significantly bigger when compared to EPF despite registering lower contributions (in terms of percentage paid) and despite Australia having a smaller population,” he said.

“This shows that a high-income model is effective in generating sufficient retirement savings.”

Australia was the world’s fourth-largest pension market globally in 2018 with the market value at US$1.9 trillion (RM7.94 trillion).

Last year, the EPF’s total investment assets measured RM833.76 billion while registering a total of 14.19 million members — of which 7.36 million were active contributors.

For the time being, PRS is still an avenue to consider generating additional savings for those who can afford to invest in the scheme and while the tax rebate remains available.

SC-approved PRS Providers
The eight providers today are Affin Hwang Asset Management Bhd, AIA Pension and Asset Management Sdn Bhd, AmFunds Management Bhd, Kenanga Investors Bhd, Manulife Asset Management Services Bhd, Principal Asset Management Bhd, Public Mutual Bhd and RHB Asset Management Sdn Bhd.

The minimum contribution to a PRS fund varies from provider to provider as well as the other associated costs.

Each PRS provider must also offer three core funds as a default option. This includes a growth fund for those below 40 years of age which sees a maximum 70% invested in equity while the remainder is invested in debentures or fixed income and money market instruments.

The moderate fund, for those in the 40 to 50-year age bracket, sees a maximum 60% invested in equity while the remainder will go to debentures or fixed income and money market instruments.

Lastly, the conservative fund (50 years or older) sees 80% invested in debentures or fixed income instruments of which a minimum 20% must be in the money market.

A maximum investment of 20% in equity is allowed for this category.

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