MALAYSIA is undergoing a significant demographic shift towards an ageing population. 

The World Bank has projected that with 14% of the population aged 65 and above by 2044, it will officially be an “aged society”. By 2056, Malaysia is expected to become a “super-aged society”, with over 20% of its population in that category. 

While this brings challenges in areas such as employment, income security and aged care, the shift also presents economic opportunities, particularly in the field of aged care services. 

Meanwhile, the United Nations’ (UN) World Social Report highlights disparities in saving for old age, with 46% of adults in high-income countries saving compared to only 16% in middle- and low-income countries.

Old-age pensions come in three primary types, namely tax-financed pensions, mandatory contributory pensions, and voluntary or private contributory pensions. 

Immense Pressure on Pension System

The Employees Provident Fund (EPF) told The Malaysian Reserve (TMR) that the phenomenon has placed immense pressure on the sustainability of the pension system due to low pension coverage, financial vulnerability among the elderly, income disparities and the potential for increased burdens on the government. 

EPF highlighted that over 40% of Malaysia’s workforce lacks coverage under formal pensions and retirement programmes, leaving them vulnerable to old-age poverty; and the coverage rate is only 60%, 8% lower than the global average. 

The uncovered group mainly composed of informal workers, including contract for service workers (CFS) and self-employed individuals. As the workforce becomes more informal, the coverage gap is expected to grow, putting more workers at risk of old-age poverty. 

Retirement savings among EPF members are also at a worrisome level, influenced by low wages, late implementation of the minimum wage, inconsistent contributions and early access to savings, such as Covid-19-related withdrawals. 

As of September 2023, 81% of EPF members below age 55 do not meet the basic savings requirements by age. Moreover, Malaysia lacks structured decumulation programmes, potentially leading to inadequate financial support for retirees. 

“Addressing these challenges requires comprehensive policy reforms, efforts to expand pension coverage, initiatives to enhance financial literacy and measures to encourage regular savings. 

“Ensuring the long-term viability of Malaysia’s pension system is crucial to provide financial security for its ageing population and prevent an increase in old-age poverty,” EPF said. 

EPF has undertaken and is planning numerous measures to enhance the pension system in the country including extending coverage to a broader range of the working-age population, restructuring the current accounts into three categories and mulling a conceptual framework of “Retirement Income” to provide retirees with a structured and sustained income post-retirement. 

Additionally, the government is actively implementing various strategies including matching contribution programmes like i-Saraan and i-Suri, tax incentives for contributions to the EPF and Private Retirement Scheme (PRS), and public education campaigns. 

Generations, National Revenue and Pension

Alpine Advisory director Rozanna Rashid said Malaysia’s civil service pension scheme is a defined benefit (DB), a non-contributory system directly funded from the budget. 

She also noted that an ageing population is funded by government revenue and subsequently needs to come from the younger population, who need to “work harder”. Furthermore, the current working class is a “sandwich” population, having young and elderly dependents in the household. 

Rozanna added that the Malaysian pension system is funded by general taxation. 

“The government has been running a budget deficit since 1998. Funding pensions means giving up government revenue in developing other areas such as healthcare, education, national security and infrastructure,” she told TMR. 

A Call for Holistic Solutions

Rozanna suggested several measures including transitioning government and civil servants to contribute to the EPF and Private Retirement Scheme (PRS) schemes, thus relieving the burden on traditional pension systems. Additionally, she said a moratorium has been implemented, freezing any new pension payments, meaning no future revision rates. 

She said efforts to boost labour productivity are also underway, including extending the retirement age to retain experienced workers and increasing the employee contribution rate. To incentivise contributions to the retirement fund, a higher tax relief is being offered to contributors. 

Rozanna added that the concerns regarding the adequacy of pension benefits for retirees in Malaysia has led to a series of steps, including freezing pension payment revision rates, increasing the retirement age and reducing the actual pension payments. 

“This approach seeks to strike a balance between addressing the concerns of retirees and ensuring the long-term viability of the pension system,” she said. 

To ensure the financial sustainability of pension funds, several strategies have been put in place including the removal of subsidies. Additionally, there is a need to expand social protection, necessitating capital investment in social infrastructure and services, including elderly housing, healthcare and career support with lifelong reskilling opportunities. 

Insufficient Pension Fund

Universiti Malaya’s Faculty of Business and Economics senior lecturer Dr Elya Nabila Abdul Bahri said from an individual standpoint, a pension system serves the vital purpose of providing financial security to an ageing population. 

“It is designed not only to ensure a smooth consumption pattern during retirement, but also to safeguard against the risks of longevity and inflation. 

“The significance of the pension system has grown as it guarantees that future retirees can maintain their living standards after concluding their working years,” she told TMR. 

She added that three essential factors come into focus, namely adequacy, coverage and sustainability of the pension system. 

Elya Nabila said a primary concern stems from the fear that the accumulated retirement savings might not suffice to secure individuals over their extended life expectancy. This leads to worries among retirees that unexpected health-related expenses could deplete their retirement funds rapidly, leaving them financially vulnerable. 

Furthermore, external factors like global inflation and economic crises raise concerns about the pension system’s reliability and the ability to withstand such unpredicted events. 

Elya Nabila opined that the government’s pension system reform initiatives demand comprehensive research into policy development, execution and potential impact on individuals, the government and the nation. 

Notably, the government’s public pension liability presently stands at RM31 billion, equivalent to around 10% of its operational expenditure. Projections indicate that the figure is expected to rise to RM46 billion by 2030. 

“A striking 97% of contributors fall short of the ideal retirement savings target of RM600,000. 

“For a more comfortable post-retirement life, individuals would require at least RM900,000 to RM1 million in savings, underlining the need for an extended working life to bolster these retirement funds,” she said. 

Elya Nabila added that address- ing the challenges involves reconsidering the upper limit for tax relief on retirement savings contributions, which is currently capped at RM6,000. 

Impact on Insurance Industry

Uno Advisers founder and CEO Ian Wong said when Malaysia’s population ages, there is typically a surge in healthcare demand. In response, insurance companies find themselves paying out more claims, which impacts their profit margins. 

Consequently, insurance companies are compelled to raise their premiums to maintain financial viability. Concurrently, Wong clarified that insurance should not be seen as a traditional “investment”, but rather as a fundamental risk management tool. 

Among the government policies and incentives worth noting to promote older individuals in purchasing insurance are the annual tax relief of RM3,000 for medical insurance premiums, albeit this limit is shared with education-related policies. Additionally, insurance providers have been encouraged to offer more affordable basic policies. 

Wong said the insurance industry employs several strategies to tackle the prospective healthcare and long-term care expenses associated with an ageing population. Partnerships with prominent hospitals enable insurance companies to negotiate more favourable pricing terms. 

Insurance companies are also introducing co-payment clauses like “deductibles” or “co-insurance”. This is a practical alternative, ensuring that individuals can access necessary care even if it comes with a financial contribution. 

Wong also noted that Malaysia’s medical and healthcare insurance stands out favourably compared to other countries with an ageing population. 

“Present policies offer substantial claim limits in the multimillions without co-payments or deductibles. However, maintaining such extensive benefits over the long term may be unsustainable as healthcare costs continue to rise,” he told TMR. 

All in all, Malaysians may have to work longer in the future to ensure adequate financial security in their golden years. The government may need to introduce policies that provide opportunities for training and lifelong learning to foster the working population’s continued employability and contributions to EPF, as well as measures to sustain retirement savings for longer.

EPF’s Strategies to Enhance the Pension System

i) Extension of EPF Coverage to the Working-Age Population.

EPF is working to extend its mandatory coverage to include a broader range of the workforce, including CFS workers, business owners, and self-employed individuals. 

This move aims to make the retirement system inclusive and accessible for all Malaysians, recognising the evolving nature of work patterns, including gig economy jobs. 

ii) Account Restructuring. 

EPF is restructuring the current accounts into three categories — namely Retirement Account (for retirement), Value-Add Account (for pre-retirement) and Flexible Account (for various purposes). 

There is a focus on increasing the allocation into the Retirement Account to boost savings, while providing members with control and empowerment over the Flexible Account. The restructuring aims to offer a more holistic approach to financial planning, allowing members to have a clearer vision of their financial goals and make informed decisions on fund allocation. 

iii) Retirement Income. 

EPF is considering a conceptual framework of “Retirement Income” to provide retirees with a structured and sustained income post-retirement, as an alternative to lump-sum withdrawals. 

Pension Reform Initiatives 

AMONG the reforms proposed by experts and stakeholders include:

i) National Pension Reform in Accordance with the ILO Multi-Pillar Pension Framework.

Malaysia aims to establish a contributory-based national pension scheme with a redistributive mechanism. This system is designed to provide a basic, lifelong income for the elderly. 

ii) Establishing the Social Protection Floor (SPF).

The SPF is essential in reducing poverty, vulnerability and social exclusion over an individual’s lifetime. 

 

 

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