13MP: EPF pension plan aligns with global trends, but key gaps remain

New Straits Times

2 days ago

KUALA LUMPUR: The government's proposal to introduce a monthly pension scheme through the Employees Provident Fund (EPF) could mark a major shift in Malaysia's approach to retirement security.
Economists view the proposal as a step in the right direction, but cautioned that its success will depend on how well the government expands EPF coverage, safeguards member flexibility, protects against inflation and enforces strong governance measures.
Dr Geoffrey Williams said the proposal aligns with global best practices but pointed out a critical shortfall in EPF participation, with only 8.8 million of Malaysia's 24 million working-age population actively contributing to the fund.
"Many people do not have EPF and those that do have savings are too low to meet pension requirements. So even with this scheme there is a pension adequacy crisis.
"The government must consider a non-contributory pension scheme in addition to this proposal," he told Business Times in response to the 13th Malaysia Plan (13MP) tabled by the Prime Minister yesterday.
Under the 13MP, the government is exploring a more effective mechanism to ensure a steady stream of income after retirement, recognising that sufficient savings are crucial to safeguarding workers' well-being in later years.
The mechanism would separate EPF contributions into two components, one for retirement savings and the other for a monthly pension. This would allow workers to withdraw part of their savings while also receiving a steady income upon reaching retirement age.
ENGAGEMENT KEY TO SUCCESS
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said engagement with all relevant stakeholders, particularly EPF members, is essential.
"From what I've observed, EPF has always been careful in crafting its plans and ensuring that any measures announced are implemented in a robust manner. So, engagement sessions along the way would be valuable," he said.
Afzanizam said that offering contributors a range of options could improve participation, as members are more likely to support policies that give them control over their retirement funds.
"We've seen this flexibility before, for example, with the introduction of EPF Account 1, 2, and now 3. Despite the changes, the element of choice and flexibility for members remains intact.
"Of course, this is still a work in progress. But it's part of EPF's broader effort to ensure that Malaysians have a solid social safety net, especially in terms of retirement savings. These are the kinds of mechanisms that could help improve the current system," he added.
HYBRID MODEL PREVENTS EARLY DEPLETION
UCSI University Malaysia associate professor in finance and research fellow at the Centre for Market Education Dr Liew Chee Yoong said the initiative allows workers partial access to savings while ensuring a monthly pension upon retirement.
He said a balanced assessment reveals significant potential benefits alongside critical challenges that must be carefully addressed.
"The proposed hybrid model addresses a fundamental weakness in the current EPF system, the high risk of retirees outliving their savings.
"EPF data indicating that half of members exhaust their savings within five years underscores the urgency for longevity protection.
"A dedicated pension component offers a crucial safety net against old-age poverty, particularly vital for lower-income groups," Liew said.
He added that allocating a portion of contributions solely for annuitised income aims to prevent early depletion of savings, such as what was seen during crises like the Covid-19 pandemic.
The proposed structure also provides flexibility by allowing lump-sum access for urgent needs while maintaining a steady income stream through the pension component.
INFLATION, SUSTAINABILITY AMONG KEY RISKS
Liew said the reform's success hinges on overcoming major challenges, particularly inflation risk.
A fixed monthly pension, he said, could rapidly lose value over time unless it is explicitly tied to inflation benchmarks like the consumer price index.
Based on Malaysia's past inflation patterns, Liew said the real value of unindexed payments could fall by half within a few decades.
"Ensuring the long-term financial sustainability of the pension fund is equally paramount. This demands robust, actuarially sound fund management capable of meeting future liabilities amidst demographic pressures like an aging population."
GOVERNANCE AND DESIGN MATTER
While EPF's investment record is reassuring, Liew said the long-term nature of pension commitments requires stricter governance and thoughtful design.
"Potential dangers arise if higher-income workers can opt out or divert pension contributions into the savings pool, undermining the risk-sharing mechanism essential for viability. The funding mechanism itself requires clarity.
"The nature of the pension payments, whether defined-contribution or defined-benefit, carries significant implications for stability and member security," Liew said.
He also highlighted that the administrative complexity of managing dual accounts would require efficient and transparent systems to avoid leakage or mismanagement.
FOLLOWING GLOBAL TRENDS
Liew said Malaysia's proposal reflects a global shift toward hybrid retirement models, similar to Singapore's CPF LIFE scheme, but is unique in blending flexibility with long-term security under a unified fund.
"Lessons can be drawn from international experiences, such as the low payout challenges faced by Chile's individual pension accounts or the balance sought in Australia's superannuation system between lump sums and annuities," he said.