This is the second in KPMG’s three-part series on A Penchant for Pensions? Part 1 appeared last Friday.
IN the first article, we discussed the public pension model and why it is considered by many as an unsustainable, standalone model. Today, we will be looking at two other models.
The private, occupational pension model
This model is mooted on the concept of instilling and rewarding employees’ loyalty.
Employers value the loyalty of their employees and in return endeavour to look after the welfare of their employees upon retirement.
Often, companies would offer pensions and other benefits such as healthcare, share option schemes and medical expenses, and in a unionised environment, this would be in consultation with the workers’ unions.
However, in the recent bankruptcy filing by General Motors (GM), a private, occupational pension model could be self-defeating if managed poorly. Moreover, in the event that the organisation collapses completely, the savings are effectively wiped out. Fundamentally, the sustainability of such a pension model depends largely on the continuous success of the company.
Even then, such a model will strain the company’s financial resources and eat into profits, especially if the number of people covered under this scheme burgeons.
Worse, what happens if the company stops growing or run into tough times, for instance during a financial downturn?
This was when things started unraveling for GM. Faced with obligations to cough out significant pension amounts yearly (that ran into billions of US dollars) and the inability to service its debt obligations, the once highly regarded US automaker and employer of choice finally buckled under the weight of such a scheme.
Even in Malaysia, some companies that previously offered such pension schemes and/or retirement lump sum payments are now trying to re-negotiate with their staff in lieu of the high annual maintenance costs involved or have dropped this scheme completely for new staff.
Instead, many Malaysian employers prefer to opt for an increase in employer’s contribution to the Employees Provident Fund (EPF) by a certain percentage (typically 3%-5%), which is above the minimal statutory requirement of 12% of the employees’ wages.
Instead of trying to manage their staff’s pension system, they are effectively outsourcing the management to another party and that brings us to the next model.
Provident fund model
The provident fund, better known as the EPF to Malaysians, has been in existence for many decades.
Like its peers in a number of developing countries in Asia, Africa and the Pacific, provident funds are inherently linked to employment and are obligatory for employers with more than a specified number of employees.
Characteristically, an employee makes continuous contributions at specified percentage rates of their wages and this is commonly supplemented by employer contributions.
In the past, the provident fund model itself is often not likened to a pension scheme but over the last few years, many provident funds now also offer a pension-like option as well as a lump sum option.
Similarly, our EPF offers such a scheme with the EPF Flexible Age 55 Withdrawal option to retirees.
The scheme is somewhat comparable to a pension model with a monthly withdrawal option alongside the choice of withdrawing all or a hybrid combination (a large sum and a fixed monthly payment), upon reaching one’s retirement age.
A recent report has indicated that the number of applicants who opted for this in the second quarter this year improved by 105.45% compared with the same quarter in 2008.
However, this is still overshadowed by those preferring large sum withdrawals with a ratio of 3:1.
Interestingly, governments are beginning to encourage more retirees to consider taking the monthly option as findings have shown that those who take out all their savings at once typically exhaust their monies entirely within a short duration.
In Malaysia’s case, a recent survey by EPF revealed that over 70% would exhaust their total contributions within three years of withdrawing a lump sum at the retirement age of 55. This is an alarming fact considering that many Malaysians now have a longer life expectancy.
Perhaps more worryingly, 90% of the 5.7 million active members of EPF have less than RM100,000 in their accounts.
One recently mooted model is a “private pension” scheme and this is the final model that we will be discussing tomorrow in the concluding part of our series.
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