Private Retirement Funds Find Malaysia a Tough Sell

July 24, 2013, 9:40 a.m. ET

Private Retirement Funds Find Malaysia a Tough Sell

People Are Slow to Sign Up to Program Meant to Supplement Government Pension Plan

JASON NG

Malaysia’s voluntary private-retirement savings program has gotten off to a slow start since being launched last year, despite lures of tax breaks for contributions and a high overall savings rate in the country. Employees in Malaysia are required by law to contribute to the separate Employees Provident Fund, or EPF, which holds assets valued at more than 536 billion ringgit ($169 billion). Returns on that government-run pension fund have been at least 4.5% annually over the past decade, while one-year fixed deposits in banks earn up to 3.2%.Still, authorities worry that Malaysians aren’t saving enough for retirement. And as the Employees Provident Fund gets bigger, the government is concerned it won’t be able to generate high enough returns to fund people’s retirements.

Last year, the government launched the private-retirement program in an effort to supplement the savings in the provident fund.

The government has licensed eight companies—including American International Group Inc., AIG -1.37% Hwang Investment Management Bhd. and ING Funds—to manage 24 funds. The funds have various levels of risk and hold securities such as stocks, bonds and money-market instruments.

Despite tax deductions on contributions and potential higher returns than in the provident fund, only slightly more than 30,000 accounts have been created, according to the Securities Commission. That pales in comparison with more than 6.4 million active contributors to the Employees Provident Fund.

The steady returns on the EPF are making it more difficult for the group of nascent private-retirement funds to persuade both employers and employees to sign up.

“One of the biggest challenges facing the industry in Malaysia is the soft competition with EPF because people feel more secured if they are seen as buying into the system,” said Bob Charles, Asia-Pacific managing director at consulting firm Towers Watson TW -1.29% .

Although Malaysia’s average age is relatively young at 26 years old, and private savings in the country exceed a third of gross domestic product, authorities say there is an urgent need to raise the level of awareness on boosting retirement savings as life expectancy rises.

Steve Ong, chief executive of the Private Retirement Scheme Administrator, a Malaysian state body set up to oversee and promote the industry, says the average Malaysian has saved about 160,000 ringgit with the Employees Provident Fund for roughly 20 years of retirement, which is insufficient.

“By 2020, 10% of Malaysia’s population will be over the age of 60.…Many are ill-prepared and have inadequate funds,” he added.

Employees are required to contribute at least 11% of their income to the EPF, and employers must contribute 13%.

But Mr. Ong says the public needs to set aside the equivalent of at least one-third of their income for retirement savings.

Jessie Lim, a 36-year-old sales executive who has more than a decade of savings in the Employees Provident Fund, said, “I’m not very comfortable investing in these private funds.…I would rather put my money into properties and collect cash. But I’m willing to reconsider depending on their performance.”

To help kick-start the industry and entice workers like Ms. Lim, the government gives annual tax deductions of up to 3,000 ringgit for the first 10 years on the new funds, while employers will be given tax deductions on contributions made on behalf of employees.

The Employees Provident Fund guarantees a minimum 2.5% annual dividend. It paid a record 7.7% in 1996.

For now, there isn’t a plan to allow contributors to withdraw their savings from the EPF for a private retirement plan, according to a spokesman. The private plan is voluntary and complements the mandatory program provided by the Employees Provident Fund, he added.

Retirement-fund managers such as RHB Investment Management are waiving sales fees to encourage participation.

Hwang Investment is seeking to raise awareness.

“There is an ongoing confusion between [the private retirement scheme], unit trusts, the public and mandatory savings scheme, and products and services offered by banks and insurance companies,” said Steve Lim, chief product officer of Hwang Investment.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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