Is there more to private pension funds?

Written by Abd Ghani Hamat
Monday, 27 July 2009 00:45

IF all goes according to plan, at about this time next year we should be seeing the first of the private pension funds targeted at the self-employed. They number about two million, according to Tan Sri Nor Mohamed Yakcop, the minister in the Prime Minister's Department who announced the plan recently.

To be sure, the plan has not crystalised. Securities Commission chairman Tan Sri Zarinah Anwar, who was present at the announcement, said the regulator would gather input from successful private pension fund models in other countries with the view to adopting best practices.But already some analysts are questioning the benefits of setting up such pension funds, especially if they are no different from the EPF.

As it is, many private asset management funds are already providing services designed with old-age, post-retirement financial security in mind.There are also the government-backed unit trust schemes under Permodalan Nasional Bhd (PNB) to help the public plan for old age. Many of its latter schemes are opened to all races, not just the bumiputeras.

The PNB trust funds work much like pension funds in the sense that the returns are relatively stable and, in many cases, the saving (principal) is protected by the government. Another popular mode of providing for old age is by participating in insurance-linked annuity plans.So, is there more than meets the eye in the government's move? Nor Mohamed said that the move is part of the government effort to reform the country's pension fund industry.

There are still gaps in the existing pension framework, he said. He also pointed out that the local equities market is overly reliant on the EPF for valuation support, which is hard to refute. The EPF and other local social security institutions collectively own 30% to 40% of the Malaysian market.

That said, will the targeted two million self-employed be able to make any difference to the local market? For, if they a have a means to participate in the market either directly or indirectly via investment funds, they would probably have done that.

Interestingly, the minister also cast the private pension fund plan against Malaysia's ambition of becoming a high-income nation.Life for Malaysians as a high-income nation would probably mean less economic dependence on government. More importantly, will the government have the means to help even if it wants to? The richer people may look to sending their children for private education and providing private healthcare for family members.

In such a scenario, it would be absurd to assume the government will continue with its subsidy-giving ways, which has been causing a strain on federal coffers.Added to its own burgeoning pension commitment, thanks to a bloated civil service, the strain on the government's pocket from myriad subsidies will tell on the country's development.

Therefore it is understandable that the government should be concerned about the possible hardship that would be faced by the retired and the aged who have no pension to draw on.In fact, the prospect of being blighted by poverty in a high-income nation is just as scary to some 90% of the 5.7 million active members of the EPF who are said to have less than RM100,000 in their accounts.

The amount can hardly last five years. So, although it would be some time before we get to know the rules and mechanics of the private pension funds, their permissible risk profile, or an indication of the reception to the funds, it's consolation enough to know that the government is not acting too soon in trying to minimise a potential crisis.

But really, we have gotten hint of that intent earlier. Recall the second thrust of the econnomic stimulus package: easing the burden of the rakyat, in particular the vulnerable group.The question is, if the pension funds are all about creating a stronger social safety net, should the government look only at the financial (cash) return to participants?Hardship comes in many forms. funds.