Full disclosure: at the time of writing I am not personally invested in Malaysia’s retirement savings scheme EPF. But as someone who used to work on pension (superannuation) policies in Australia, the fire still burns. Enough that when the 13th Malaysia Plan and the purportedly ‘expert’ debate associated with it completely missed the point I couldn’t help but weigh in.
Key takeaway: policymakers should be spending the next five years overhauling a retirement system that is failing working Malaysians, not considering paternalistic measures that blame savers and would further entrench a broken system.
The New Straits Times was kind enough to publish a shortened version of my piece, but readers can find the ‘director’s cut’ below.
Retirement Pension Scheme Would Further Entrench A Broken Retirement System
The 13th Malaysia Plan (13MP) signals that the government will consider creating a monthly pension scheme under the Employees Provident Fund, ostensibly to reduce the number of retirees who quickly exhaust their savings.
In disagreement with the views of early commentators, I would urge policymakers to instead focus on the actual drivers of retirement poverty and resist further expanding the EPF’s monopoly.
Those who argue for compulsory pension schemes (annuities) seek to blame retirees for not managing their savings instead of taking accountability for why they are too low upon retirement.
Through such smoke and mirrors, they seek to create a problem that can be solved by further expanding EPF’s empire instead of reforming its many shortcomings.
There are many reasons why less than five per cent of Malaysians have sufficient retirement savings, but to keep this discussion contained, let’s focus on EPF and its orbit.
The first problem is that EPF has too many conflicting mandates, as evidenced by the proliferation of accounts.
Accounts 2 and 3 — for wellbeing and flexible needs respectively — take 25 per cent of contributions away from retirement income accumulation.
Not only does it allow members to drain their savings, but it also forces EPF to maintain additional liquidity instead of investing in longer-term growth assets. This, in turn, reduces the growth of retirement savings.
The second problem — heading off arguments that the extra accounts provide members with emergency funds now — is that a large chunk of this money should not be with EPF in the first place.
Mandatory contribution rates totalling 23 to 24 per cent are a significant drain on household incomes now and arguably well in excess of what should be necessary to support adequate replacement rates in retirement.
Excessive contributions mean households accumulate more debt early in life, most likely with repayment costs that exceed EPF investment returns.
And the large impost on businesses almost certainly suppresses wage growth and promotes exploitative employment where contributions are not made at all (reducing overall system coverage).
Problem three is that EPF delivers suboptimal returns for members, meaning retirement savings grow far too little.
EPF invests as if its members are already drawing down on savings, not with up to 40 years until retirement, investing half of its assets in fixed-income and 30 to 40 per cent in equities.
The difference in compound annual returns can be enormous over one’s career — a 20-year-old consistently earning RM5,000 per month, who retires at 60 and makes mandatory contributions of 23 per cent, would have more than double the inflation-adjusted retirement savings if managed by the average high-growth Australian superannuation fund than under EPF’s conservative approach (around RM858,000 vs RM399,000).
Worse still, members who are behind on their basic savings target have no flexibility to choose a more aggressive strategy for their Account 1 contributions.
A key reason why EPF adopts such a conservative approach is because it is focused on political not competitive pressures. It is a government-run monopoly that worries more about Putrajaya’s ire in a really bad year than achieving high long-term investment returns on member savings. Policymakers also direct it to invest in “national interest” projects, constraining its freedom to invest for maximum returns. Were it subject to serious competition and a legal duty to maximise retirement savings, one could expect far superior outcomes for Malaysians.
There are additional intersecting concerns like Malaysia’s mandatory retirement age not keeping up with population aging, barriers to post-retirement employment, inadequate social safety nets, and a need to increase financial literacy. Indeed, the government could start with strengthened efforts to raise financial literacy across all age groups before creating annuities that further restrict individual rights to make financial choices — including to invest their money better than EPF.
The 13th Malaysia Plan touches on some of the other concerns but reforms feel a long way off. What the 13th Malaysia Plan should be promising is a critical appraisal of the existing retirement system and EPF’s costly monopoly over it. It should assess whether contribution rates are too high, investment returns too low, the diluting effects of account proliferation, and whether EPF should face some competition or at a minimum offer members greater investment options. Excessive contributions to EPF are a tax on Malaysian workers that could either be returned or channelled into something worthwhile like a national medical insurance fund.
Malaysians exhaust their retirement savings because they are far lower than they should be under EPF’s stewardship. If only more Malaysians understood and cared about the management of their retirement money; enough to hold policymakers and EPF to account.
Stewart Nixon PhD 