Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

AMID renewed calls by opposition lawmakers to allow the targeted withdrawal of retirement savings from the Employees Provident Fund (EPF), CEO of Principal Financial Group Dan Houston says all stakeholders must play an intentional role to encourage retirement savings, from the government to financial market actors, employers and especially the employees themselves.

“Everyone should be even more intentional about setting aside more money for retirement. To the degree that there are tax policies to recognise and encourage people to save money for retirement, they should maximise them — and the government should think about that.

“There should be the element of portability, so people don’t lose pockets of money that they can roll those in together and have some consolidation of their accounts, so they can see that growing and become material,” says Houston in an interview with The Edge.

With assets under management of RM961.01 billion as at end-September 2022, the EPF is one of the biggest retirement funds in the world. However, a majority of its contributors still do not have enough funds in their EPF accounts to fund their retirement.

The World Bank has recommended an income replacement ratio of 70% at the age of retirement, which means that as one retires, one should be able to draw 70% of the last-drawn monthly salary from one’s retirement fund throughout one’s retirement.

According to Principal Asset Management Bhd CEO Munirah Khairuddin, Malaysia’s income replacement ratio is around 30% now. “So, that gap is huge,” she says at the same interview.

Principal Asset Management is a joint venture between Principal Financial Group — a Nasdaq-listed global financial services provider — and CIMB Group Holdings Bhd.

According to Deputy Finance Minister Datuk Seri Ahmad Maslan in a ministerial question-and-answer session in parliament last Thursday, the median savings in EPF accounts for all Malaysians stood at RM8,100 as at last year, declining 50% from RM16,600 in 2019.

At least 6.7 million members, or 51.5% of 13.1 million EPF members, had savings of less than RM10,000 as at September 2022. This figure was a marked increase from the 4.7 million members in 2020, which shows that many do not have a lot of savings to begin with, to be allowed to withdraw their retirement funds from the EPF.

With this in mind, there must be a concerted effort by all involved to replenish and rebuild retirement savings.

At the height of the Covid-19 pandemic, various iterations of EPF withdrawals to help members deal with the impact of the Movement Control Order — in the form of job losses and high costs of living — have left many with depleted compulsory savings meant for their retirement age. At least RM145 billion has been withdrawn by 8.1 million EPF members over four special withdrawal schemes: i-Lestari, i-Sinar, i-Citra and a special withdrawal programme from 2020 to 2022.

Prime Minister Datuk Seri Anwar Ibrahim has said, however, that the government will consider other methods to help the public address the issue of rising cost of living without resorting to their EPF savings.

Index highlights room for improvement in government support

Employers actively trying to retain employees have been resorting to offering better packages targeted at improving employees’ lives in retirement, says Munirah.

These changes in the workplace had contributed to Malaysia’s ranking in the Global Financial Inclusion Index, where the country is ranked 20th among 42 countries. In terms of employer support, Malaysia ranked fifth.

“We see employers participating in programmes such as ‘matching’ to encourage savings. So, if the employee puts in RM200 a month, the employer will either commit RM100 or match the RM200, for example.

“This is really encouraging. We also see that employers in certain segments, especially telecoms, fintech and digital, want to retain talents. So, if you are a high performer and you stay with me … I will contribute to your retirement, in addition to your EPF,” says Munirah.

Government support is still lacking in Malaysia, however, not unlike other emerging markets. This is where the government could step in to provide more incentives to encourage financial inclusion — especially when it comes to savings for retirement age.

The Global Financial Inclusion Index was crafted by Principal, along with the Centre for Economics and Business Research (CEBR), as a robust measurement framework to track financial inclusion on a global scale. The index measures the degree to which people have access to useful and affordable financial products and services in the markets that it covers.

CEBR is a London-based consultancy that provides macroeconomic and microeconomic research and indicators to corporates as well as national, international and supranational institutions and organisations.

In the foreword to the index report, Houston says the responsibility for a market’s financial inclusion cannot be shouldered by one system; it lies in finding a balance between government, financial system and employer support.

“Strengths and weaknesses in these systems vary, but a balance of public and private sector support is crucial to ensure a financial inclusive society which can drive broader economic growth and productivity,” says Houston in the report.

One of the key themes found by the index is that strong support from the government and the financial system often results in lower employer support. Markets that exhibit this characteristic are often developed markets, while developing markets score higher in employer support.

For example, the UK ranks ninth for government support and 10th for financial system support, but 39th for employer support. Similarly, Canada ranks 12th for government support, seventh for financial system support, but 37th for employer support.

Therefore, there is still room for the Malaysian government to improve its support to encourage better financial inclusion across the country, especially in retirement funds.

Government support through tax measures can be considered

During the interview, Houston says governments worldwide provide support in different ways to encourage more money to be set aside for retirement savings. In some cases, tax credits are given to the lowest-income individuals to encourage them to save for retirement.

“Another instance in the US is a tax deferral. So, you don’t pay the tax today, but post the accumulation of those incomes or savings on a tax deferred basis, which means it is compounding at a higher rate.

“Once you start drawing down those benefits in retirement, those then become taxable, so the government is foregoing taxes they might collect today to a different period of time,” he explains.

There are also schemes that do not tax amounts that are saved for retirement, he adds.

“It isn’t for us to decide what is in the best interest of the government, only that the tax policy encourages people to set their money aside and, again, the more incentive there is to do that, the better the outcome,” he says.

On the same point, Munirah says the current tax incentive that the government provides today to encourage people to save in a private retirement scheme (PRS) led contributors and investors to think they should deposit only up to RM3,000 in such schemes.

This is because the government provides tax incentives of up to RM3,000 for PRS savings.

“What we’ve seen in some other markets is, to Dan’s point, encouraging more than that. So, perhaps, it could be a variable tax incentive and you could do a step up, and in many ways, the more you save, the more I’ll give you some incentives, to encourage a bigger pool,” she says.

Instil discipline in young to set aside funds for retirement

Munirah says the people themselves have to have the discipline of putting aside a percentage of their monthly income into retirement savings. The government and employers can only do so much.

Although she acknowledges that, for many, there is just not enough to make ends meet, saving for retirement has to start somewhere. Educating the young to save for retirement is another step that everyone in the system can take, she says.

One of the things that Principal is experimenting with, in partnership with TNG Digital Sdn Bhd, is offering simple plans for people to start with in their journey towards building their pension nest.

Munirah says: “We need to get the young, in particular, to [put] up to three to six months — or, actually, the barometer is about 18% of your payroll — in savings. But if you can’t hit that, we need to start teaching them how to save even a small amount, because that amount will compound.

“So, it has to start somewhere, and it takes a concerted effort by the media, the players including us, to go down and really do that because the rate of bankruptcy among the youngsters are also increasing.

“Digital is an important platform … They need to be reached not in the traditional way. Everything is in your palm now; Instagram, TikTok, gamification and all that. We need to start teaching youngsters, nudging them.”

Another way in which Principal is helping to encourage more retirement savings is a target-date solution called Lifetime, comprising investment funds that rebalance the investor’s portfolio based on his or her age.

Say, Person A is 25 when he starts to invest with Principal’s Lifetime funds and stays invested until he retires. He does not need to worry about what asset class to get into, as the professional managers will do that for him, says Munirah.

“We will rebalance as you get nearer to retirement. It goes by blocks: At age 25 to 35, we put your money into equities; at 36 to 44, it moderates — some fixed income and so on. Once he hits 55, he doesn’t take out everything but does so on a monthly basis,” she says.

In times of inflationary pressure, hold on to assets

Saving for retirement is a long journey, as the rewards will be reaped some 30 years down the road. In the short term, the global economy is expected to experience a slowdown this year, with some major economies expected to fall into a recession. How, then, do investors protect their incomes and funds from the vagaries of the global economy?

Houston says Principal is mindful of the inflationary pressures, and its products and services are aimed at helping to mitigate some of the exposures. He adds that in inflationary periods, investors should hold on to their tangible assets and actively manage their investments.

“The Lifetime funds in fact anticipate that reality; these are actively managed strategies to anticipate inflationary times. For retirement savings, a benefit is we are not trying to solve for 2023; we’re trying to solve for the next 30 years.

“We have to look at the global economy, and volatility is during those periods of time in which assets have been discounted because of macro events. If I don’t need the money, it is the best thing that could happen to me [owing to the discounted assets],” he says.

 

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