- 5 months ago
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The government is proposing a major restructuring of the Employees Provident Fund under the 13th Malaysia Plan. The idea is to split EPF into two components:
flexible savings, which can be withdrawn anytime, and retirement savings, which will be paid out regularly until depleted. It's a bold move aimed at strengthening old-age income security, as Malaysia prepares to become an aged nation. But can a new hybrid model safeguard retirement income for the long term without overriding the rights of contributors who’ve saved throughout their working lives? On this episode of #ConsiderThis Melisa Idris speaks with economist Dr Geoffrey Williams, Founder and Director of Williams Business Consultancy.
flexible savings, which can be withdrawn anytime, and retirement savings, which will be paid out regularly until depleted. It's a bold move aimed at strengthening old-age income security, as Malaysia prepares to become an aged nation. But can a new hybrid model safeguard retirement income for the long term without overriding the rights of contributors who’ve saved throughout their working lives? On this episode of #ConsiderThis Melisa Idris speaks with economist Dr Geoffrey Williams, Founder and Director of Williams Business Consultancy.
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00:00hi welcome back to consider this i'm melissa idris let's continue our discussion about a
00:15significant policy shift that's on the table under the 13th malaysia plan the government is proposing
00:22to split epf contributions into two parts one for flexible savings which can be withdrawn at any time
00:29and the other for income savings which will be paid out regularly until depleted now joining
00:35me on the show to discuss this further is economist dr jeffrey williams he's the founder
00:40and director of williams business consultancy jeffrey thank you so much for being on the
00:45show with me it's good to have you back um what do you see value in this proposal in this proposed
00:52dual component structure for epf i'm just wondering if um use this reform is headed in the right
00:59direction i think it makes sense uh doesn't it because the general pattern of savings for epf
01:08is that people tend to take it out at the moment that they're eligible if they haven't already
01:14withdrawn it and then it tends to last for a very short period of time for most people it lasts for
01:20less than two years and that's partly because at first they didn't have a great deal um in their
01:26accounts to to to at the end when when they reach retirement age and secondly the the general
01:33temptation is when you have a lump sum uh and you've retired you want to you want to spend it in
01:40different ways often people will pay off debt and they'll rebalance their financial position they don't
01:46want to be paying off debt when they're in retirement they pay off the card they pay off the
01:50credit card and so on and then it's all gone so what do they do after that particularly because
01:58life expectancy is now increasing and so they might have a long time you know decades to live
02:04after that so what epf are basically doing is to adopt a scheme which is very similar to many
02:11schemes around the world they give you um a monthly income from instead of giving you all in
02:18one big shot they give you a monthly income but they're still offering the opportunity for you
02:22for some flexibility for you to take a little bit out as and when you need it so this is actually quite
02:28common and it makes sense um but of course many people view the epf you know it's very precious to
02:36everybody because it's their savings and so they will say to themselves look uh you know it's my money
02:42i've reached the time and age you you've got to give it to me so that's really the issue okay yes
02:50i definitely want to talk to you about that but um i'm curious to learn more about how this is applied
02:54in other countries i'm just wondering um if this aligns malaysia a little closer to how um the kind of
03:03contribution-based uh payment uh defined contributions um system is done overseas what would that entail are
03:12there limitations and um drawbacks from systems abroad that we might be wary of if by in designing
03:24the policy here in malaysia well i can i can give give you an example from my own experience because i
03:31have a british pension a pension in the united kingdom which is the university superannuation scheme
03:37and just recently i become eligible for that and i know i i don't look as if i'm anywhere close to
03:45to retirement but actually i am just on the edge of the eligibility for that and what happens there
03:53is they give me a lump sum and then in addition to the lump sum they give me a regular payment and the
04:00regular payment is either on itself it's calculated on an annual basis but you can choose to take it on
04:06a monthly basis if you wish um that isn't the national pension scheme the national pension scheme
04:13is uh is a tax-based scheme and but that's the scheme that i have because i was an academic there
04:19and my dad had a similar scheme but he worked for the local um local authority so he has a civil service
04:27local civil service scheme and it's it's very helpful because you do get um your lump sum uh which
04:37helps you as i say to clear up some of the financial issues that you have when you retire and uh but
04:43nonetheless you don't spend it all and and you're still getting um an amount um every every month and
04:51that's in addition to your non-contributory um national pension scheme which we have in the uk which
04:57we don't have in malaysia right so that is a balance out yeah okay so if we were to think about this from
05:04the epf perspective would a reform of this type this dual component structure would that require epf to
05:12uh make any changes or restructuring or um uh change to the investment strategy or governance of epf
05:23um i don't i don't see in particular it would need in terms of its investment strategy because it's
05:28still a epf would still function in the same way individuals would have their account they would make
05:34the contributions in the same way that the employer would make a contribution as well as the employee
05:41it would accumulate over time and epf would invest it according to the current strategic asset allocation
05:49so it shouldn't really change that um of course it's going to require changes in the epf rules because
05:57the epf rules at the moment don't have this structure so that would have that would have to
06:02change but my understanding is that they're proposing that it would be voluntarily
06:06uh uh introduced that to begin with this is this is pretty normal you know i mean epf are really
06:14trying to do um uh a lot of things to help people and they're doing a really great job i mean i always
06:20uh praise epf but that's because they are they are actually being very innovative and trying to provide
06:26products and and new approaches to help people right um but there is always a lot of caution um and so
06:34introducing it on a voluntary basis to begin with and then seeing what the take-up will be will um
06:41will help them to to to know whether it should be a mandatory or the the regular routine standard
06:47approach well one of the biggest concerns when it comes to pension design globally is how to ensure
06:53that the income lasts as long as people live are that what options do epf have in terms of addressing
07:00this particular challenge but the answer is they have very few in the sense that they can put the
07:06products there and and the the schemes there um but the biggest challenge for um everybody is
07:18how much you're saving into your epf account that's the problem this is called the pension adequacy
07:24so even with this scheme that they're that they're um proposing um it will help people who have
07:32a very healthy level of savings at the time when when they reach the retirement age anybody who doesn't
07:40and that's almost everybody it's not going to help them very much and the reason it's not going to
07:46help them is they haven't saved enough now if you're young and you're at the beginning of your working
07:52life yes epf can help you to understand that it's important to continue the monthly contributions and
07:59not to withdraw now they've changed into three separate accounts more of the money will be saved than
08:06previously because we have it's about 75 will be saved you get flexible access on the account flexible you
08:15get about 15 but so more of it will be saved and if you're young that's going to be helpful but if
08:20you're already in your 40s or 50s uh and you're approaching retirement and you have withdrawn either
08:27you withdrew earlier or you withdraw you withdrew in particular during the covert period you won't
08:32have a lot in your account and so this scheme would not help you because the scheme is going to be
08:38based on your own individual and personal account so epf can't do very much about that that
08:45is a consequence of structurally low incomes um across uh everybody who's working we had the data
08:53from docum recently and the median salary of people in formal private sector employment is only 3000
08:59ringgit a month that means that half of people are earning less than 3000 ringgit a month and that
09:06makes it very difficult for them to save for anything at all let alone their pension so even if they are
09:11making their regular payments which they will be because they have a formal contract of employment
09:18they're only going to be making a the percentage is quite generous you know isn't it 11 and 13 24
09:26in total but it's 24 of a small number of less than three thousand so that's the real problem so epf can
09:33give you very good schemes and very good ways of dealing with your retirement income but if you don't have
09:40the money there already it's not really helpful i want to circle back to something you said earlier
09:46about how many malaysians view their epf savings as personal funds i mean something they've contributed to
09:51and should have full control over so some of the um feedback or the the response to this proposal by
09:58the government has been oh this is a paternalistic paternalistic view of how we should have um access to our
10:06our retirement funds how much of a challenge do you think it will be to convince the public to accept
10:14this new reform and how should policymakers respond to this i mean taking into account this is a very
10:20valid response um but at the same time the job of government is to protect long-term retirement
10:27security and prevent all age poverty yes well i mean it is true that it is the it is the the money
10:35of the of the account holder it it doesn't belong to the government it is you know i i have an epf
10:42account it's my money just like you do just like everybody else does it's our money that's that's the
10:46truth of it it is true and when we sign up we we sign up on a on a contract with an expectation of how
10:55we can get access to it so when the government changes that over time periodically as it did with
11:01introducing account flexible for example we still need to to feel that this is our money and uh not
11:08the government's money that's important and that's uh i think that's very deeply ingrained amongst
11:14Malaysians but then at the same time in you know you you mentioned that this paternalism thing i mean
11:21none of us like this paternalistic approach but at the same time if you don't save for your pension
11:28then somebody has to help you right and and in the end it will be either your family or it will be the
11:36government and if if your family is not able to help you or if you don't have children which is true
11:44for many people then that burden will will fall increasingly on the government and we're seeing of
11:50course that the government is giving people cash handouts and these cash handouts are going a lot
11:55of them are going to people who are retired and they're eligible for these cash uh handouts as right
12:01it's it's right that they should get it but they're eligible for it because they don't have any other
12:06form of income so they fall below the income um threshold and so they they are eligible for that so
12:12someone's paying for it one way or another so the government comes along and says look either you pay for it
12:17or we we will help you with attack with a with a with a government pension in the future but that
12:25means taxes that means higher taxes it's got to be paid for by somebody eventually and that's really
12:32what the government has to grapple with yeah yeah well this is going to be an interesting development
12:37are you watching anything in the immediate and near future to help you decide whether this is a reform that's
12:46actually going to be implemented well i think it will be implemented well because epf are fantastic
12:52at implementing these type of policies however i have to be absolutely clear to everybody this will
12:59only help people who have an epf account and it will only help people who have money in their epf account
13:07and the truth of it is that 97 percent of malaysians do not find themselves in that position so the
13:14government will have to bite the bullet at some point and introduce an alternative non-contributory
13:21pension scheme there is no alternative um through uh this scheme this scheme will help some people but
13:27it will not help millions of malaysians it's not going to solve the pension crisis well thank you so much
13:34for sharing your insights and for your time economist dr jeffrey williams there wrapping up this episode of
13:40consider this i'm elisa idris signing off for the evening thank you so much for watching good night
13:46you
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