A step in pension reform
THE restructuring of the Employees Provident Fund’s (EPF) members’ accounts with the introduction of account 3 (Akaun Fleksibel) is a middle ground approach between meeting the contributors’ short-term needs and long-term financial security.
The initiative reflects EPF’S greater goal of addressing Malaysia’s social security coverage gap, which is still wide among Malaysia’s workforce.
However, there is a high likelihood of members making full or continuous withdrawals from Akaun Fleksibel, resulting in a zero balance and ultimately reducing their savings for retirement.
To minimise this risk, contributors should be made aware of the consequences of the withdrawals on their long-term savings, including missing out on the compounding effect. The coming months will be crucial in evaluating the impact of the accounts restructuring on attracting new members, reallocation of savings and withdrawal patterns.
In light of Malaysia’s rapidly ageing population and serious old age income insecurity, this initiative can be seen as a step towards a broader reform of the retirement ecosystem.
It is time to review the EPF’S existing withdrawal age policies considering that some were determined in the 1950s when life expectancy was much lower.
For example, the full withdrawal age at 55 years was set in 1952 when life expectancy was 54.2 years. Our life expectancy has now increased to 75 years. This means that retirement savings need to be adequate to sustain life for at least 20 years after the full withdrawal age.
Khazanah Research Institute’s (KRI) analysis indicates that extending the contribution period through a higher retirement age is expected to have the largest impact on EPF members’ savings, followed by progressive dividends and progressive contributions.
Beyond these, it is essential to emphasise that Malaysia’s multitiered retirement ecosystem has
nd yet to fully achieve its intended objectives and continues to grapple with coverage gaps, inadequate benefits and unsustainable financing.
The tax-funded old age pension scheme only covers civil service retirees and selected poor elders via the Bantuan Warga Emas (Welfare Aid for Senior Citizens).
Funding these pensions is challenging, particularly with the challenges associated with an ageing population.
Additionally, while EPF is meant to cover workers in the private sector, many remain unregistered, and among those who do, many have savings that are insufficient for a comfortable retirement.
We need to seriously explore other financing options as old age poverty is expected to be higher in the future. One alternative is a contributory pension within the EPF schemes, namely a hybrid of a defined benefit (DB) plan and defined contribution (DC) scheme.
In this scheme, retirement funds are saved collectively rather than individually, with everyone putting in a small amount into a collective fund when they are working. By a certain age, say 60 or 65, the fund can be dispersed to all the contributors as a pension until death (an annuity).
The government plays an important role in ensuring continuity of contribution even when we are unable to contribute, such as when suffering from illness or disability, after being laid off work or while taking time off to take care of young children or the elderly.
KRI’S report titled “Building Resilience: Towards Inclusive Social Protection in Malaysia”, unpacks the proposal with several options on how to make the scheme feasible. This might entail earmarking or ring-fencing a share of EPF contributions to the collective fund.
Ultimately, Malaysia must seriously consider moving towards a model where we minimise our individual risks and maximise our collective potential as we move towards an ageing society.