KUALA LUMPUR (June 6): Employers can take full advantage of the tax benefits for their contribution to employee remuneration, while retaining their talent pool, by participating in private retirement schemes (PRS) that are set to come into the local market as early as October.
Jason Chong, CEO of Manulife Asset Management (M) Sdn Bhd, said PRS can be structured to become a talent retention tool for the employer. "Vesting is one way. I give you an additional 3%, but if you leave within two years, you don't get anything. It can be a progressive scale. We hear about brain drain all the time… people going to work in Singapore and Hong Kong. This is one way of retaining talent in Malaysia," Chong said on Tuesday.
Moreover, the Malaysian tax structure allows employers to claim tax deductions of up to 19% of their employee remuneration under employment benefits, which is above the current statutory contribution rate of 12% or 13% to the Employees Provident Fund (EPF).
"Currently, employers give 12% [or 13% for employees whose monthly salary is below RM5,000], so potentially there is another 7% that they can contribute and still get tax deductions," Chong said, pointing out that statistics show most retirees using up an average of RM150,000 from their EPF savings within the first three to five years of retirement.
While tax benefits could help spur the initial take-up of PRS, Chong reckons individuals themselves need to understand what PRS is and whether the options available could help shore up savings for their old age. "There will need to be a lot of education on benefits, but that's part of the business plan."
Individuals can claim RM3,000 tax relief a year on voluntary contributions to PRS.
Manulife Unit Trust Bhd was among the eight Securities Commission Malaysia-approved PRS providers announced on April 5. The others were AmInvestment Management Sdn Bhd, American International Assurance Bhd (AIA), CIMB-Principal Asset Management Bhd, Hwang Investment Management Bhd, ING Funds Bhd, Public Mutual Bhd and RHB Investment Management Sdn Bhd.
Basic PRS products should come into the market from October this year, as the providers were given six months to come up with a plan for approval, Chong said. Market conditions should not affect the roll-out as the product is for the long term, he added.
The common questions that come up are: Can the PRS beat the EPF in terms of returns? And what happens if the fund ends up giving lower returns than the EPF?
"It depends on your risk appetite, growth, moderate or conservative. If you're aggressive and go for the more aggressive growth products, then you should. But if you're conservative, you go for the more conservative funds," Chong said.
"Part of the education process is to not look so much at the short-term performance, but at the long-term performance… sometimes [due to market conditions], you can't look over the one-year basis. You've got to look over the medium term," said Chong, who is not expecting a strong take-up until there is more awareness about PRS.
Studies have shown that putting money with Manulife funds delivers 200 basis points more returns a year on average over a 10-year period, net of management fees, than if one were to invest their money themselves, said Robert Boyda, head of Global Asset Allocation and senior portfolio manager for Manulife Asset Management in the US, where Manulife is the No 1 private pension scheme provider. It is also No 1 in Canada and No 2 in Hong Kong and Indonesia.
The difference of having funds professionally managed, Chong added, minimises the paralysis of herd mentality that individual investors are often caught in.
"When you invest yourself, you are hit by sentiment, you become emotional. When the market crashes, you panic and you sell. When the market rebounds, you miss the rebound because you're scared to jump back in wondering if [the uptick] is sustainable. A pension fund will take a long-term view and sit through [the shorter-term volatilities]," he said.
Sharing her experience in the Hong Kong market, Luiza Rosa Hung, CEO Manulife Provident Funds Trust Co Ltd, said the facilitation of an automatic enrolment on the private retirement scheme plans, while allowing the choice to opt out, could increase the chances of an individual saving more for their retirement. To ensure sustainability, the process for wage earners to make additional voluntary contributions should be simple, she added.
Source: This story appeared in The Edge Financial Daily on June 6, 2012
