The Private Retirement Schemes can also be used as a tool to retain talent in SMEs

Ooi: The cost of maintaining talent is a lot lower than losing or hiring new talent. SMEs have to look beyond profitability.

Malaysians looking to grow their retirement savings are likely waiting in anticipation for Private Retirement Schemes (PRS) providers to roll out their services soon.

But Edward Ooi, chief executive officer of Manulife Asset Management Services Bhd, said many more Malaysians are content with just maintaining their contributions to the Employees Provident Fund (EPF).

He noted that there is insufficient financial education in Malaysia and it is natural for Malaysians to be lured into a false sense of security that having the EPF is sufficient for their retirement savings.

 

Ooi said, however, it is a known fact that EPF savings are rarely sufficient to support a retiree as most would have exhausted their EPF savings within three to five years of retirement.

“By the time they realise that they don’t have enough savings for their retirement, it is too late. They are probably in their 40s by then, with not as many years left to save up from their earnings,” Ooi said.

For those not familiar with it, the PRS is a voluntary long-term investment scheme to help individuals accumulate savings for retirement.

The PRS will include a range of retirement funds that individuals may choose to invest in and is meant to complement the mandatory contributions made to EPF.

The Prime Minister launched the voluntary scheme in July to allow employees and the self-employed the opportunity to save for their retirement.

A total of 24 funds will be available under the first set of schemes and will be managed by eight financial institutions, namely AmInvestment Management, American International Assurance, CIMB-Principal Asset Management, Hwang Investment Management, ING Funds, Manulife Unit Trust, Public Mutual and RHB Investment Management.

“The public needs to be educated about their retirement needs. The question is whether they have adequate savings and how can they plug the short fall.

“The PRS disciplines you to invest in the long term,” Ooi said.

Most of the PRS providers have gone into full gear trying to educate the public on the importance of saving up for their retirement.

But more than just for individual retirement needs, Ooi said the PRS can be used as a tool to retain talent in small- and medium-sized enterprises (SMEs).

“In a lot of corporations in other markets where intruments like the PRS have become common practice, employers offer a certain amount of contribution to the employees’ retirement fund on a voluntary basis after a period of service. And this has worked well for them. The model can be used here as well,” he said.
However,this could mean that SMEs may incur higher costs as contributions above a certain threshold made by employers are not eligible for tax relief.

Under the scheme, employers are given tax deduction on contributions to PRS made on behalf of their employees of up to 19% of the employees’ remuneration.

Nonetheless, Ooi countered that retaining talent has been an issue with SMEs and building retirement savings for employees can be used as incentive for employees.

“The cost of maintaining talent is a lot lower than losing or hiring new talent. SMEs have to look beyond profitability. The PRS can be a good instrument for this,” he said.

Ooi is positive that the implementation of the PRS by employers will be welcomed, especially because the uncertain economic conditions around the world.

“Once employees realise the need to supplement their EPF with a retirement scheme, the PRS will be a great alternative. And we foresee that the tax relief of up to RM3,000 a year for contributors will be met positively as well,” he said.

Ooi added PRS providers merely need to offer employers with the right combination of funds that would appeal to their employees.

Employees and employers have the option to change their PRS provider after one year if the investment does not meet their objectives.

With some six million employees and two million self-employed adults in Malaysia, Ooi estimates that the retirement industry could be worth some RM18bil.

He expects the take-up rate for PRS to be slow in the first two years but is confident that with the right financial education, PRS will be a very big business for the financial industry.

“We have the experience of running the pension business. So we can bring in the expertise and infrastructure to bring in to localise to the needs of the Malaysia market,” Ooi said.

Comparing the EPF and PRS, Ooi said the EPF gives an average annual return of 5%, which is a decent return but is not enough to ensure a comfortable retirement savings.

He noted that the PRS could provide average returns of up to 6% to 8%.

According to Ooi, the underlying investments of the PRS can be divided into three categories; the aggressive type is 70% invested in equities, the moderate type is 60% invested in equities and the conservative type is 80% invested in fixed income.

“A basic calculation shows that you would need at least RM1.7mil to retire comfortably at age 55 at an inflation rate of 3% and RM3.04mil at an inflation rate of 5%.

“So, obviously, mandatory savings are not enough and people need to be aware of that,” he said.

Source: The Star Paper 7/9/2012