The Securities Commission Malaysia (SC) announced the initial list of eight intermediaries approved as providers of private retirement schemes (PRS providers) on April 5 this year, marking a significant milestone in the development of a long-term
sustainable private retirement industry for Malaysia.
The eight PRS providers that have been approved are:
· AmInvestment Management Sdn Bhd
· American International Assurance Bhd
· CIMB-Principal Asset Management Bhd
· Hwang Investment Management Bhd
· ING Funds Bhd
· Manulife Unit Trust Bhd
· Public Mutual Bhd
· RHB Investment Management Sdn Bhd
The PRS providers were selected on the basis of their expertise in investment and/or pension fund management, experience in global pensions management, financial strength, governance structure and proposed business model. The approval of the PRS providers follows the release and announcement in December last year of the SC’s “Eligibility Requirements for Private Retirement Scheme Providers” (Eligibility Guidelines) stipulating the expectations and requirements for interested and qualified parties to become PRS providers.
The SC has also issued the Guidelines on Private Retirement Schemes (PRS Guidelines), which set out regulatory and operational requirements that must be complied with by PRS providers, PRS scheme trustees and investments under PRS ventures.
The Capital Markets and Services (Private Retirement Scheme Industry) Regulations 2012, which came into force on March 19 this year, and the PRS Guidelines as well as a set of FAQs are available on the SC website at www.sc.com.my
Money Compass interviewed the SC as well as several PRS providers to find out how the market generally welcomes the initiative and for comments on how the initiative will benefit the market and contribute to market liquidity.
The SC emphasises that Malaysia’s PRS aims to promote the welfare of retirees by developing the private pension industry, which will complement the mandatory contribution to the existing Employees Provident Fund (EPF). The new PRS framework is intended to cater for as wide a segment of the population as possible and it is important that the framework does not restrict the potential for all individuals to save and prepare for retirement.
The self-employed, for instance, who take breaks from the labour market can top up their contributions after any period of non-savings. Another target segment are employers who may wish to make contributions above the statutory rate. The SC wishes to encourage employers by facilitating an environment that will lessen the compliance burden on these employers.
The government has been concerned about the inadequacy of EPF savings as statistics show that 50% of contributors exhaust all of their EPF savings within five years of retirement and only 18% of active members aged 54 have adequate savings of at least RM173,000. It is also estimated that about 70% of retirees use up their EPF lump-sum withdrawals within 10 years of retirement. This coupled with increasing life expectancy and living standards demonstrates the need for voluntary retirement schemes that benefit the public.
While maintaining its primary aim of increasing retirement savings for individuals, the PRS is also expected to serve as a growth engine to further expand the investment management industry, as set out under the second Capital Market Masterplan.
Development of the PRS industry would add depth to the capital market and produce positive spill-over benefits in terms of increased product innovation, intermediary activities and skill sets, particularly in promoting greater diversity in the management of long-term savings.
The creation of large institutional investors in the form of PRS providers would contribute towards improving market liquidity and foster good corporate governance practices in the capital market. Over the next 10 years, it is projected that assets under management in the PRS industry will grow to RM30.9 billion. (Source: CMP2)
2) What are the risks that the provider and the investor should be concerned about?
The amendments to the Capital Markets and Services Act (CMSA) was introduced to establish a regulatory framework for PRS.
The SC will approve and supervise the private retirement schemes, PRS providers and trustees. Under the PRS framework, assets of the private retirement schemes are segregated and held by independent scheme trustees under a trust structure. The approval and regulatory framework as well as protection of assets via a trust structure, detailed reporting and disclosure requirements would safeguard the interest of members.
Further, PRS providers must comply with the requirements under the PRS guidelines in offering or providing the schemes to investors. One of the overarching principles is that PRS providers must act in the interest of members as a whole with the aim of providing cost-effective voluntary retirement schemes and ensuring that the affairs of the scheme are operated in a proper and efficient manner. The permitted asset allocation and investment limits are also set out under the PRS guidelines.
Financial education is key to bringing about awareness of the need to save for retirement and manage expectation of members. A mindset or behavioural shift is needed to tackle the problem of inadequate retirement savings.
3) Will there be any announcement of a second batch of PRS providers in the near future?
The SC does not rule out the opportunity for additional PRS providers in the future. However, there is no fixed time-frame as it will depend on various factors, such as growth of the PRS funds, performance of the approved providers and capacity of the industry to sustain additional providers.
4) The implementation aspect of retirement schemes is to ensure that retirees plan their finances prudently. Educating the public to be more aware of this need is important. What can the SC do in this context?
As the private pension industry in Malaysia is a nascent industry, it is important for both the regulator and PRS providers to work together to increase the level of financial education and public awareness of PRS. Informed decision-making is a critical aspect and PRS intermediaries such as PRS providers, their distributors and licensed financial planners play an important role in advising and assisting members in making investment decisions and understanding the system.
It is also of utmost priority for people to go through a mindset or behavioural shift to appreciate the need to save for their retirement.
In this regard, the SC has initiated series of investor education efforts, including media profiling, roadshows, forums, as well as ongoing engagement with relevant stakeholders from both the public and private sectors.
An informed public will be better equipped to understand the risk and features of PRS and customise their
retirement plans through the various fund options to meet their needs. A key aim of the SC investor education effort is to ensure that members receive sound advice on various investment options and are not misled into investing in funds that are not suited to their needs. Hence, only intermediaries and representatives with the necessary qualifications will be permitted to advise on appropriate and suitable retirement funds.
Furthermore, a private pension administrator is being established whose duties and responsibilities under the law (Section 139H of CMSA) include taking into account public interest considerations in acting in the best interest of members and having regard to the need to protect members. In its efforts to promote efficiency and convenience to members, the private pension administrator will also undertake promotion and general education/awareness of PRS.
Datin Maznah Mahbob, CEO, Funds Management Division, AmInvestment Bank Bhd
The PRS is designed to help individuals accumulate long-term savings for retirement which supplements mandatory retirement savings (i.e. EPF) under a well-structured and regulated environment. As a PRS provider, we will promote the concept of savings at an early stage. Savings at an early stage (hence higher savings for retirement) are particularly important as the life expectancy for the Malaysian population has increased to an average of 75 years, but most people stop working when they reach their retirement age of 55-60. In addition, there are tax benefits when investing in funds under the PRS, whereby a personal tax relief of up to RM3,000 will be given to contributions by individuals to PRS approved by the Securities Commission. A tax exemption was also announced on income received by funds within the PRS.
There will be people who want to invest in PRS for tax benefits, or due to lower cost of investing. Also, competition amongst the players will grow the PRS industry. This will result in larger assets under management for the industry which will then stimulate capital market activities and improve market liquidity.
We will use various channels to reach investors. These will include, amongst others, educational articles on PRS industry topics, media briefings and interviews on investment topics, and participation in public conferences. We will also hold joint events with our distribution partners to reach out to their clients, hence helping to increase awareness.
As our commitment to the investor is to provide a retirement solution product which provides a real rate of return, our role as the fund manager of the retirement funds is to manage investment-related risks in order to achieve the investment objective of the fund.
The major risk to the investor is the mismatch of risk where the retirement fund chosen by him/her may not be suitable to his/her needs and circumstances. For example, it may be deemed unsuitable for an investor who is 50 years old to choose to invest in an aggressive fund, from a risk perspective at his current age. Hence,c areful consideration by investors is required before choosing a fund for investment.
Campbell Tupling, CEO,
CIMB-Principal Asset Management Bhd
As a PRS provider, CIMB-Principal will be offering a range of retirement saving choices for the public to voluntarily opt into. Once our proposal is approved, our key roles are to operate CIMB-Principal’s PRS and manage the retirement savings in accordance with the individual’s choice.
The PRS is the next step in the evolution of retirement planning. People are living longer and having fewer children. As such, rather than depending solely on their Employees Provident Fund (contributions) or their children, they need to start maximising all available avenues to save and invest for their retirement.
The PRS is a structured and effective avenue to accumulate retirement monies because it gives people the opportunity to adjust their savings and investment decisions to reflect their own financial situation and preference. The PRS will also help boost the existing retirement landscape as it acts as an additional avenue for Malaysians to save for their retirement. As it is a voluntary scheme, there are no required fixed amounts or fixed intervals for an individual’s contributions to his or her PRS account. In addition, the PRS will be able to help those who do not have an EPF account to accumulate their additional savings for a comfortable retirement. Everyone above the age of 18 is eligible to open an individual PRS account and he/she can do so once the scheme becomes available.
We will be coming up with an attractive array of PRS products that will suit investors’ needs and risk profile, which will be announced upon approval from the Securities Commission Malaysia (SC).
Currently, the main avenue to educate the public is via the media. Not many specific details can be shared until a company’s PRS proposal is approved by the SC. Once that happens, outreach and education will come via traditional communication and sales distribution channels. We believe that the media remain the single most powerful means to educate the wider population out there on the potential of PRS.
As with any investment, there will be risks attached to it, depending on investors’ investment profile and risk-return tolerance. In terms of investment returns, we are expecting a well-balanced portfolio to provide returns that are at least on par with that of EPF’s to encourage contributors to invest. For others, we are looking at equity-fund type of returns.
At CIMB-Principal, we are able to leverage on the strength of CIMB Group and Principal Financial Group (PFG), including PFG’s experience as one of the top PRS providers in the industry. As such, we believe we will be able to showcase our expertise and system function in investment and administration of our PRS participants’ contributions.
Steve Lim, Chief Product Officer,
Hwang Investment Management Bhd
Research has revealed that up to 70 per cent of the EPF contributors exhaust their savings within 10 years of retirement. This is an alarming finding given that the average life expectancy now is up to 75 years of age. This means that retirees will need to either depend on their children to support all their financial needs or start working again when funds run out. As such, whilst this initiative may not be well received at this juncture due to reservations with regard to the ability of the new infrastructure to deliver EPF-like returns and the need for employees to top up their savings, with much education, the public will realise its importance gradually.
The PRS is set up to ensure sufficient savings for retirees in their old age. The government understands the need to encourage the public to start taking their retirement planning seriously and start early as without such funds, there are dire economic implications on society and the country’s economy as a whole. As such, the PRS should be driven by strong benefits to the market, employers and employees.
This initiative benefits both contributors and the industry:
a) Provides the public with an alternative investing option, especially for the self-employed and business owners.
b) Creates confidence through hiring the industry’s best as PRS providers, who will play their part in ensuring Malaysians will have sufficient funds for a comfortable retirement.
c) Over the long term, a society that understands and practises good money management, such as starting early and having a consistent commitment to building up funds for retirement. This will lessen the burden on the younger generation as well as the government if retirees are financially independent.
d) An added layer of customisation – allowing contributors to this scheme to determine investments that best suit their needs.
e) Promotes growth of domestic capital markets in the long run.
f) Encourages development of the financial advisory industry: both PRS providers and non-PRS providers need to upgrade their products and services to be competitive and generate better investment performance.
Benefits to employers
a) Tax deduction claim on the amount of contribution made (up to 19% of employees’ remuneration).
b) Be able to position the offering of PRS contributions as additional benefits to prospective and existing employees .
Benefits to employees
a) Have access to efficient, low-cost retirement savings funds – the front-end cost should be competitive or lower compared to investing in unit trust funds outside this scheme.
b) Personal annual tax exemption of RM3,000 for investing in the portfolios under the PRS.
c) An early start means they will be able to enjoy the benefits of the power of compounding over time. It takes the stress of last-minute investing in efforts to build up an equitable sum for retirement.
d) Simplicity and ease of starting up a regular investing/savings portfolio with trusted and award-winning fund managers.
e) Be in control of their pension fund: they have a choice of the fund manager and funds/category. This is currently not available through any retirement scheme.
Eventually, the PRS will offer fresh capital market injection as funds under management grow to form a significant percentage in the fund management industry. This growth means there will be more funding inflow that will be directed towards various investment vehicles.
We may not see this immediately, but in the long- un, we should see the PRS investments dominating the institutional landscape the way EPF does now. Let’s take a simple illustration: if the total PRS investment in the first year amounts to RM12 million, with additional investment of RM1 million every month and growing by a compounded annual growth rate of 6%, in 10 years, this amount will equate to approximately RM380 million.
The first step to the success of the PRS is building awareness by educating the public about PRS, investment and retirement subjects. For starters, we need to ensure that all the pieces are in place before we start communicating with the public. Once the infrastructure is in place, we need to ensure that all staff subscribe to the scheme. This helps build confidence and reassures the public that we have confidence in what we are offering. This is the first step to building a successful scheme.
We are committed to investing our resources in the initial stage of the programme to penetrate the local retirement investment market and build interest and momentum for this scheme. We are ready to plough back all our fees earned from this project at the initial stage into the infrastructure and marketing activities in order to get the scheme going. Additionally, we will be conducting training and education sessions to support this programme in order to help the public understand and practise
For those who are already contributing to some kind of retirement savings/investment scheme, or are saving and investing on their own, we will need to educate them on objective-driven investments to ensure what they have and further contribution will be sufficient for their needs.
Prudent risk management is critical in managing retirement funds. Therefore, proper regulations and guidelines are needed to ensure that funds are well managed.
As a PRS provider, the key is in delivering strong investment returns that commensurate with the risk undertaken. Most importantly, it should not disappoint as we have only one shot to gain contributors’ trust to participate in this scheme.
Investors need to be reminded that this is not a risk-free investment. All investments carry some sort of risk and investment in PRS funds is not excluded. Therefore, it is important that PRS contributors understand the risk involved, have the basic knowledge of investments and engage a PRS provider who understands their needs and requirements.
Having said that, the investment horizon in PRS is on a long-term basis. We believe that any market volatility should be smoothened out over the long run.
Edmund Ooi, CEO, Manulife Unit Trust Bhd
We definitely believe that the market will benefit from this initiative. First of all, the PRS will offer flexibility to the investors. It will allow them to invest and manage their retirement scheme based on their risk appetite. This will complement their EPF savings. Together, it can help ensure more members of the society plan better for their retirement needs. Second, it is expected to create fund inflows to the various investment vehicles in the market, which would benefit the overall market liquidity.
The total employed individuals in Malaysia as of end-January 2012 is approximately 12 million. If half of that population wants to utilise the RM3,000 tax relief per annum given by the government when they invest in the PRS scheme, we may see an addition of up to RM18 billion worth of assets that can be injected into the Bursa Malaysia market annually. Currently, Bursa Malaysia capitalisation stands at RM1.28 trillion and the amount of unit trust assets is RM249.5 billion as at end December 2011.
The successful adaptation of the PRS in Malaysia will depend on educating the public on the importance of having sufficient funds upon retirement. Many Malaysians are living too comfortably with the false assumption that their EPF funds will be sufficient. Also, there may be the misconception that investing in another similar fund would mean that they are signing up to handle more tedious processes. We are talking about fundamental shifts in how people perceive pension schemes, which is why education is key.
Firstly, the Malaysian population needs to understand that the EPF system is not sufficient for them to secure a good quality pensioner lifestyle due to the rising costs of living in Malaysia. With the introduction of the PRS, they are now given a choice to bring their retirement savings up a notch, depending on how much they can handle based on their risk appetite.
We also aim to educate the public on investing in this scheme. We feel that our responsibility lies in educating the people that we are coming up with a system infrastructure that allows the smoothest transaction possible for our investors. We plan to carry out promotional and educational activities for the general public, including advertising.
Any investment carries with it an element of risk. Therefore, prior to making any investment, prospective investors should consider the following risk factors such as market risk, liquidity risk, management risk, inflation risk, interest risk, currency risk (if investors invest outside Malaysia), etc. Investors need to understand all these risks before investing. The provider should also aim to educate the public on the objective of these funds, i.e. risks involved, investors’ investment horizon, funds’ investment objective, etc, when it comes to investing in this private retirement scheme.
Source: Money Compass Magazine