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Malaysia’s pension system ranks 4th in Asia, calls for strengthening elderly support and tackling household savings and debt

In the latest Mercer CFA Institute Global Pension Index, Malaysia’s EPF ranked 32nd out of 47 systems with an overall score of 56.0, placing it fourth in Asia.

Recommendations to enhance its value include augmenting support for the elderly and addressing household savings and debt levels.

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MALAYSIA: On Tuesday (17 Oct), Mercer and the CFA Institute unveiled the 15th annual Mercer CFA Institute Global Pension Index (MCGPI).

In the rankings, the retirement income system of the Netherlands has reclaimed the leading position, closely pursued by Iceland and Denmark securing second and third places, respectively.

Meanwhile, Singapore’s retirement income system has displayed significant progress, ascending two positions to secure the 7th place out of 47 systems, maintaining its dominance in the Asian rankings.

Hong Kong SAR (64) and Japan (56.3) follow in the rankings.

Specifically, Malaysia’s Employee Provident Fund (EPF) secured the 32nd position out of the 47 systems reviewed in the 2023 index, achieving a score of 56.0 for the overall index, placing it fourth in the Asian rankings.

The report emphasized that Malaysia’s EPF covers all private-sector employees and non-pensionable public-sector employees.

Under the EPF, certain benefits can be withdrawn under predefined circumstances, including education, home loans, and severe illness, while other benefits are reserved for retirement.

Concerning the adequacy of retirement income for EPF members, EPF scored only 41 out of 47, suggesting that their members might not be saving enough for their retirement.

The report suggested that the overall index value for the Malaysian system could be increased by:

• Increasing the minimum level of support for the poorest-aged individuals

• Raising the level of household savings and lowering the level of household debt

• Introducing a requirement that part of the retirement benefit be taken as an income stream

• Increasing the pension age and the labour force participation rate at older ages as life expectancy continues to rise

“The Malaysian index value decreased from 63.1 in 2022 to 56.0 in 2023, primarily due to the significant reduction in the net replacement rates published by the OECD from the rates previously used, ” the report stated.

The report noted that the OECD has published an updated version of Pensions at a Glance Asia/Pacific 2022, which updated several data items for the relevant systems.

In particular, the net replacement rates were halved for Malaysia and dropped by more than 5% for China and Hong Kong SAR. These changes affect the adequacy sub-index score for these systems.

The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking into account personal income taxes and social security contributions paid by workers and pensioners.

Global retirement systems face unprecedented strain

Dr. David Knox, Senior Partner at Mercer and lead author of the study, underscored that retirement income systems around the world are under pressure as never before.

Several factors are emerging that will affect the long-term efficacy of these systems. The demographic structure of most countries is changing significantly as birth rates continue to fall.

Inflation has also reemerged and has damaged the community’s confidence in the ability of pension programs to deliver adequate retirement benefits over the longer term.

Although inflation may be falling in some economies, its reemergence has highlighted this risk to current and future retirees.

“At the same time, we are witnessing the ongoing global trend of moving from defined benefit (DB) to defined contribution (DC) arrangements, in which individuals carry all the risks relating to investment returns, inflation and, often, longevity.”

“Very few systems have solved the dilemma of how to move from an individual-based DC accumulation system to a postretirement system that provides adequate and secure income to retirees while also providing them with the same flexibility that was available during their working years.”

Dr Knox also highlighted the challenge of integrating gig workers and informal labourers into pension systems.

As traditional employer-employee relationships shift, individualized pension structures are increasingly crucial. Implementing technology necessitates robust government guidance. Consequently, long-term planning assumes heightened significance.

The growing impact of AI and its benefits to members

In addition to identifying the world’s top pension systems, the report examines the potential of artificial intelligence (AI) to improve pension and social security systems and provide people a better quality of life in retirement.

“The ongoing expansion of AI within the operations and decisions of investment managers could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members,” commented Dr Knox.

“AI also has the potential to improve member engagement and help individuals make long-term decisions about their financial decisions. Both advances should improve retirement outcomes.”

The report, however, makes clear that AI is not without risks, including modelling challenges and ethical concerns as well as the need for optimal data privacy and cybersecurity. In developing these systems, it is essential that AI models have strong governance and clear accountability to reduce biases and unjustified responses. Safeguards are critical for pension plans to retain their members’ long-term trust.

“AI by itself is not the complete answer. There will always be a need for human oversight. Despite these risks, AI has the opportunity to deliver a higher standard of living in retirement — a worthwhile objective for all pension systems,” Dr. Knox continued.

The Global Pension Index is the outcome of a collaborative research endeavour backed by CFA Institute, a worldwide organization of investment professionals, in partnership with the Monash Centre for Financial Studies (MCFS), which is a part of the Monash Business School at Monash University.

Additionally, Mercer, renowned for redefining the realm of work and shaping retirement and investment outcomes globally, also contributed to this project.

 

 

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Scare no buffer zone for you leaders to be Reapers to collect dead ppl asset?!? Pretending to be concern and enact a compulsory CPF system like your neighbour SG to subtly collect leftover resources from the ppl? Nowsday Leaders are a joke!!!!!

Whole day create WARS to be Reapers to collect resources if not to Expand Empires by offering to rebuild.

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