This article first appeared in Forum, The Edge Malaysia Weekly on May 22, 2023 - May 28, 2023

When it comes to retirement, it is first about setting your retirement goals. And then it is about coming up with a sound and prudent savings programme that helps you achieve those goals. In Malaysia, we are lucky to have a national social security savings system, also known as the Employees Provident Fund (EPF), to help us save for retirement, so we can sleep soundly at night.

What should retirement be about? It should be about enabling you to continue with your economically and socially productive activities and lifestyle pursuits, be it for work or leisure. Since the proportion of time you allocate to each category will change from your working years to retirement, you have to be sure of three things on the financial front so you can freely pursue your goals and activities, and meet your consumption and healthcare expenses, even while in retirement:

1.     That you receive a reasonable retirement payout every month.

2.     The payouts should last for as long as you live.

3.     It should preferably be indexed to the cost of living.

Addressing that, [Cherian] wrote in a Singapore newspaper in 2014 about the “Seven Pillars of a Good Retirement System”. That was indeed a long time ago, but the article rings true even today, that is, it remains time-invariant in applicability. Here they are:

1.     Keep it simple - go back to the basics as to why the retirement pot exists, and recall the three fundamental financial issues raised above.

2.     Resist the temptation to dig into your retirement pot early, and worse still, withdraw too much, be it for housing, education, floods or pandemics.

3.     Ensure the sponsor offers an option that translates your accumulated sum at the point of retirement to a life-long income stream in retirement, like an annuity. The more guaranteed by a sovereign entity, the better. Additionally, the payouts should preferably be inflation-indexed throughout the annuity’s life, and not cause panic just when inflation is high. For that to happen, the Malaysian government must issue inflation-indexed bonds as well.

4.     This fourth pillar requires that the retirement products offered, be they unit trusts, insurance-linked products or mutual funds, should be extremely cost-efficient. Fees for retirement products are way too high in Malaysia and the rest of Asia. In fact, there should be well-diversified and low-cost asset allocation funds, be they life cycle or life goal (target risk), offered as the default investment strategy for those who don’t have the time nor the ability to manage their retirement money.

5.     If the temptation to withdraw money is high at the point of retirement, limit the lump sum withdrawals.

6.     If you own a home, consider monetising your house via a reverse mortgage to supplement your retirement income. Many countries offer government-subsidised reverse mortgages. Malaysia’s National Mortgage Corporation - Cagamas - has launched an excellent reverse mortgage scheme for retirees in Malaysia to help them supplement their income in retirement.

A side note on reverse mortgages: The way a reverse mortgage works in Malaysia is like a home equity loan in the US, except that the primary purpose of the loan is to fund one’s retirement with a level income stream until one passes away. No loan repayment takes place until the loan’s termination, at which point the house is sold and any residual equity in the home belongs to your beneficiary.

The most important takeaway is that the level of income payments you receive from Cagamas - until you pass away - helps supplement your retirement income, especially since many of us are asset rich and cash poor in retirement. In an ideal world, the reverse mortgage payment stream would have been indexed to inflation, as they are in many developed countries.

7.     While not a panacea to the problem of financial literacy (or the lack thereof), the seventh pillar calls for the government, non-governmental organisations, academia and so on to offer public education on retirement savings for everyone using social media, traditional media, soundbite-size jingles, community activities and government-subsidised continuing education programmes, among others. We spend more time planning for a vacation in Genting Highlands than we do on matters to do with our life cycle saving and investing.

Having highlighted the above seven pillars, we note that Malaysia faces a retirement savings crisis, especially for the B40 and M40 (bottom 40% and middle 40% income groups). The median savings for both groups are vastly inadequate.

What could we do to help nudge our nation’s retirement savings path towards a more correct direction? Here are three basic proposals we suggest:

1.     The default mode on retirement should be a version of the EPF periodical payment withdrawal scheme. This provides for a regular income stream during retirement instead of a lump sum withdrawal. The latest EPF 2021 annual report states that only 271 members are on this scheme. Down south, Singapore’s Central Provident Fund (CPF) has implemented such measures more than a decade ago with the introduction of the Retirement Sum Scheme (RSS) and later, the CPF LIFE scheme.

2.     To help the B40 and M40 groups accumulate more retirement savings during their working years, the employer contribution portion needs to be increased for these groups. On the other hand, for the T20 (top 20% income group), the employer contribution amount can be capped at a certain income limit. This capped contribution to tax-advantaged retirement funds has been a feature in many countries including Singapore and the US.

3.     Last but perhaps most important, form a “The Future of Malaysian Pensions Advisory Panel” comprising industry financial experts, finance academics, EPF, financially trained civil servants from the appropriate ministries and so on to review Malaysia’s pension and social security savings scheme. It can perhaps be chaired by the most knowledgeable person with reference to pensions from EPF (or co-chaired with a secretary-general from the Ministry of Finance). The panel should come up with recommendations that can be considered by the government and/or parliament for implementation. That’s what Singapore did in 2014 via its CPF Advisory Panel, where the panel made important, value-added changes to the CPF scheme, which were all implemented by 2016 (just two years later).

Given the dire state of inadequate EPF savings in Malaysia, with around 73% of members having too little savings by EPF’s definition, the need to set up some kind of Malaysian SuperFund to support a Basic Pension Scheme appears imminent to some experts - that is, a Basic Living Wage provision within the SuperFund that is means-tested and needs-based given that the well-to-do don’t need subsidies or government handouts.

Prof Geoffrey Williams suggested during the Policy Roundtable to use excesses from a Malaysian petroleum fund (creating one if it doesn’t exist). Just the way Norway funds its pension system via the Norges Bank (NBIM or the Government Pension Fund Global), which states, “The aim of the oil fund is to ensure responsible and long-term management of revenue from Norway’s oil and gas resources, so that this wealth benefits both current and future generations.” This is something the Malaysian pensions advisory panel can perhaps take up as part of its deliberations.

In conclusion, these principles and ideas are presented here to hopefully ensure that Much Ado About Our EPF doesn’t turn into Much Ado About Nothing (of Shakespearean proportions)!

Joseph Cherian is practice professor of finance at the Asia School of Business in Kuala Lumpur and Cornell University (visiting) in New York. Ong Shien Jin is professor of practice at the Asia School of Business and an international faculty fellow at MIT Sloan.

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