Monday, July 27, 2009

Revamping Our Pension Scheme

  • News reports indicated that the government will roll out a private pension scheme initiative by the middle of next year, as part of its reforms to the existing pension funds industry.
  • Securities Commission task force will submit a report on the private pension scheme to the government in the next six months.
  • "There will be three legs under the pension reforms - the government pension scheme, the EPF and the private pension funds," he said. Nor Mohamed said the EPF scheme will be reviewed since the government does not want one fund to constitute the major portion of the Malaysian capital market.
My views:

- Will this mean EPF does not have the capacity to invest more funds? Or is EPF running out of local cagamas / bonds to park the funds to?
- EPF might be taking the proper route here in that it can only manage a certain projected return of 4%-6% if 70% of their funds are in top rated ringgit papers, the rest primarily in local stocks and the rest in overseas stocks. If they put too much in foreign currency bonds or foreign stocks, EPF will have a lot less control of the investments. The foreign currency aspect will swing returns to unacceptable territory. How would you like your EPF annual returns to be swinging between the range of -3% to +8%?
- The major development is to help cover those 2 million currently outside the ambit of EPF, that is a noble thing to do.
- The secondary objective is to provide "approved funds" to take the burden off EPF. If it was up to me, I would suggest that one should have the option of putting 50% - 100% of contribution for EPF to manage. If you wish, you can allocate up to 50% of your EPF funds into approved funds.
- Let's remember the wonderful example of the USA's 401k, you get to choose to put your 401k into funds. Many people lost 30%-60% of their 401k. Now please imagine losing 30% to 60% of your retirement EPF funds in just one year.
- Sure you could also get those who can get superior returns in the 401k, but is that what a superannuation fund is for? You do not need the 20%-30% return a year for something like your superannuantion fund. First objective of a super fund: DON'T LOSE ANY MONEY. Second objective: Make something decent that is a bit above prevailing interest rate.
- Anything more than that will result in greater returns, yes, but as well as greater risk. Talk to those who lost 30% to 60% in their 401k, I am sure they would have loved to have been in EPF from day one.
- Some who speculate that compulsory contributions to EPF will be cut is looking at the wrong angle. Overall contributions won't be cut, but the public will have the choice to allocate to other approved funds.
- This WILL NOT mean EPF will then cut their stakes in local companies, that is flawed thinking. EPF will not need to cut its stakes at all.
- The SC will have to be very careful in selecting the approved funds. I hope not to see favouritism. Approved local funds should have size (proven size, managed decent sums before, RM300m for equity, RM1bn for bonds), proved records for at least 3 years, preferably 5 years. I would want to see some foreign funds being approved as well, the criteria could be more stringent, minimum US$500m for 5 years of beating respective benchmarks, US$3bn for bond funds and minimum 5 year track records. Some attention should be paid to foreign currency exposure - while most international funds are valued at USD, a fund that is somewhat "hedged to the ringgit" will help. For example if Aberdeen Asset wants to be an approved fund, it will need to mark their returns for that fund back to ringgit even when running a foreign equity or bonf fund.
- When selecting an approved fund, do not get bogged down using too many parameters. The alphas, betas and gammas can be very distracting. The risk measure is ok as its a good indicator to see how much risk is required to get their required returns. Turnover is a so-so measure, let the fund manager manage his/her way. Is it a personality driven fund or otherwise, state out how you would regard each category, what to do when the star fund manager leaves. I would watch closely the cost of entry and exit as this is public money. I would strongly advise to have lots of indexed funds, which will have very low management fees (many are below 0.75% p.a.). Many funds have to charge 3% to buy into their funds because they rely too much on agents, discard them. If you want to be an approved fund, entry/mgmt fee together should not be more than 1.5% p.a., the public should not have to bother with the fact that you do not have size. Its not a personal investment issue, its a national retirement fund.
- While we are at it, revamping EPF, please come up with a viable ANNUITY plan. Its a simple plan, it has been mooted before, why are the insurance companies so greedy - kick out those greedy ones. This is very pressing because we know that more than half of all retirees finish ALL their EPF monies within 3 years. That defeats the purpose of retirement income.
- An ANNUITY plan would allow pensioners to buy units of Annuity for life. For example, if it cost RM60,000 for one unit that would pay RM500 per month for life ... (an expert could come up with a more realistic calculation, I am not an actuary). Then one could buy 3 units for RM180,000 upon retirement and will be guaranteed RM1,500 tax free per month for life, and so on.
- It does not have to be compulsory, but there has to be a credible choice upon retirement.

p/s photos: Cherry Ann Kubota

1 comment:

Chowpiao said...

the 2mil outside EPF...are either very rich or very poor. If they r rich, wud they want to "declare" their savings? May be they are already managing their own investments? or already parked in some unit trust or etf funds or equities? or parked offshore? so, private pension fund....this is gonna be fun!