East Asia Group

Masakazu Someya

Nyamdavaa BatjargalOrkhon Sukhbaatar

Sol Elizah Roxas Tumangan

Dinar Dana Kharisma

Nur Iskandar Md. Nor

Kiatchai Sophastienphong

Malaysia Pension ReformWorld Bank Pension Core CourseWashington DC – November, 2010

MALAYSIA: Population

Total population (million): 28.25Population growth rate: 1.47%Population age 0 – 15 years: 27.2%Population age 16 – 64 years: 68.1%Population age 65 - above: 4.7%Life expectancy at birth (years): 71.6 (M) 76.4 (W)Total fertility: 2.35Total dependency ratio: 51Old-age dependency ratio: 7Statutory pensionable age: 55 (private); 58 (public)

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Malaysia is forecasted to become an aged nation by 2030 when 15% of population are the elderly.

WHAT HAS HAPPENNED?Demographic Trend

MALAYSIA: Labor ForceLabor Force (million): 12.22Employed (million): 10.9 Employers (million): 0.4 Employees (million): 8.15

• Private Sector (million) 6.95 • Public Sector (million) 1.2 • Self-employed (million) 1.86 • Unpaid Family Workers (million) 0.48

Labor force participation rate - Total: 63.5% Men: 79.8% Women: 46.5%

Unemployment: 3.6%Pension Coverage: 70.5% 4

MALAYSIA: EconomyGDP Current Prices (USD million, 2009): 219,941GDP per capita (USD, Nominal, 2007) 7,003GDP Growth (2007): 6.2%Potential GDP Growth (up to 2015): 5%Poverty line (USD) – Peninsular Malaysia: 232Population below poverty line (2007): 3.5%Percentage of Poverty among Elderly 34%Fiscal Balance (over GDP, 2007): -3%Non-Oil Primary Balance (2007) -8.8%Government Debt (over GDP, 2009): 55.4%Inflation (2010): 2%Future Inflation (up to 2015): 2.7%Gross National Saving Ratio (2007): 37%

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PENSION SYSTEM: Pillar 0

Program Resource-tested social assistance (Budget financed)Administrator: Social Welfare Department, Ministry of Women, Family and

Community DevelopmentBenefit: USD100/month (min)

USD1,200/yearGDP Per Capita (2007): USD7,003/year

Expenditure (recipients):

2005 - USD10.13 million 2006 - USD15.34 million 2007 - USD16.70 million 2008 - USD25.24 million 2009 - USD65.65 million

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PENSION SYSTEM: Pillar 1

Program Unfunded Defined Benefits (Public Sector)

Administrator: Public Services Department

Benefit: 1. Service Pension (monthly payment)1/600 x number of months of reckonable service x

corresponding last drawn salary.2. Service Gratuity (lump sum payment)

7.5% x number of months of reckonable service x corresponding last drawn salary.

3. Cash Award in lieu of leave, when applicable (lump sum payment).

4. Effective Replacement Rate: 30 % of last take home pay.5. Pension is revised in every 5 years in proportion to public

sector wage.

Public Employees 1,200,000 (approx.)

Pensioners 500,000 (approx.)7

PENSION SYSTEM: Pillar 1 EPF I

Program Fully Funded Mandatory DC (Private Sector)

Administrator Employees Provident Fund

Total Members (million) 12.07 (as at Dec 31, 2009)

Active Members 5,792,366 (as at Dec 31, 2009)

Mandatory contribution rate 11% employees; 12% employers

Contribution Floor/Ceiling None

Tax relief Employee - Up to RM6,000 (USD1,942)Employer – Up to 19% contribution rate

Accounts: Account 1 (Retirement Account) – 70% of savingsAccount 2 – 30% of savings

Dividend rate: 2005 - 5.00%; 2006 – 5.15%; 2007 – 5.80% 2008 – 4.50%; 2009 – 5.65%

Replacement Rate Average of Lump Sum: USD50,000GDP Per Capita (2007): USD7,003

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PENSION SYSTEM: Pillar 1 EPF II

Benefit MDC Contributions + Dividend – Pre retirement withdrawals

Pre-retirement withdrawals(from Account 2)

1. Purchase of house/Reducing mortgage2. Member/children university education3. Medical4. Age 50 years

Full withdrawal(from Account 1 and 2)

1. Age 55 years (Retirement)2. Incapacitation3. Leaving the country permanently

Mode of payout Options of 1.lump-sum or 2.monthly drawdown or 3.ad hoc or 4.combination of the three modes

Informal Sector Matching Defined Contribution with match or RM60 whichever is higher (coverage: 50,000)

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PENSION SYSTEM: Pillar 1

Investment portfolio

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Type RM billion USD billion (%)Malaysian Govt Securities 94.82 30.68 23.32Loan and bond 151.57 49.05 37.28Equity 130.94 42.37 32.21Money market instrument 27.61 8.93 6.79Property 1.61 0.52 0.40Total 406.55 131.56 100

PENSION SYSTEM Pillar 2 – Not available

Pillar 3 – 2011; to start with four approved funds

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Reform Needs I1. Social Assistance:• The national poverty is 3.5% (2007) but the elderly poverty is 34%,

quite high. Social assistance is US$100/month, low, 17% of GDP capita while national poverty line is US$232/month (Adequacy and Coverage)

• Social assistances are fixed at US$100/month. Therefore, as the national income rises, income inequality worsens (Equality)

Reform Needs II

2. Public Sector Pension:• The public sector pension is defined benefits. The system is

currently sustainable. However, it may not be sustainable in the long run due to fiscal space shrinking (Sustainability)

• The difference in the public pension (DB) and the private one (DC) makes labor mobility lower than otherwise (portability and economic efficiency)

• The level of public pensions are reviewed every five years and determined in accordance to public sector wage and not indexed (vulnerability to political shocks, predictability and transparency).

Reform Needs III3. Private Pension – EPF:• Despite life expectancy increasing, the retirement age is too low (55), which

discourages workers from staying in the labor market and adversely affects the economy (Economic Efficiency)

• The pensions are given in lump sum (Predictability). • Famers and informal workers can join voluntary scheme of the private pension

with no restriction on contribution and 5% of matching by government. However, its participation rate is extremely low (Adequacy and coverage)

• Diversity of the retirement income sources is limited. However, the new voluntary private pension scheme will be introduced in 2011(Robustness)

Enabling Conditions I1. Macroeconomic Conditions:• GDP growth rates 5.6% (2003-7 average) and potential growth rates

5% (up to 2015).• Rate of inflation 3.5% (2003-7 average) and medium term rate of

inflation 2.7% (up to 2015).

2. Fiscal Space: • Pension system's fiscal burden is not significant yet but expected to

increase. Need to have sustainability.• Fuel subsidies are 2% of GDP, which can be gradually reduced to

make fiscal space for social pension and matching.• Oil fund is currently used to finance fiscal deficits, which can

alternatively be used to finance an initial cost of reforming pension.

Enabling Conditions II3. Financial Market and Saving Rates• Financial markets are rapidly developing (175% of GDP) and saving

rate is high, 36.6% (2003-7 average). • Postal Offices and cooperatives (financial institutions) are located

everywhere in the country and accessibility to the financial institutions are very high (Reach-out).

4. Administration and Governance• The administration cost is low,2% of gross income, compared with

4% on average in other countries (Administration efficiency).• Overall governance is fairly good. Government effectiveness index is

ranked 80 out of 214.Regulartory quality 60.• The governance of pension fund is fairly good; Independent board

member and separation between investment and management.

Enabling Conditions IIIMalaysia Indonesia Thailand Philippines Japan Mongolia

GDP growth (%, 2007)

6.2 6.3 4.9 7.1 2.4 10.2

Market capitalization (% of GDP, 2007)

175.1 49.0 79.3 71.7 101.7 15.6

Inflation rate (2007)

2.0 6.3 2.2 2.8 0.1 9.0

Inequality-adjusted income index (2010)

0.49 0.42 0.40 0.36 - 0.40

Doing business rank (2011)

21 121 19 148 18 73

Reform Options

Social Pensions:1. Gradually raise the social pension benefit from US$ 100/month to US$ 232

(39% of GDP per capita). 2. Gradually increase the social assistance coverage by relaxing the resource test

criteria, particularly targeting the elderly.3. Index with nominal wage which has to be reviewed every 5 years.

Public Pension System:1. Gradually raise the retirement age from 58 to 60.2. Index with wage, which has to be reviewed in every 5 years.3. Gradually shift from DB to DC, to increase financial sustainability and labor

mobility between private sector and public sector.

Private Pension System (mandatory):1. Gradually raise the retirement age from 55 to 60.2. Gradually shift from lump sum to monthly provision to increase financial

stability of the retirees.3. Improve voluntary MDC for informal sector: increase matching rate by

government from 5% to 100%.

Technical Feasibility of Reform Options

Social Pensions:• For the proposed increase in social assistance level, estimated fiscal cost is less than 0.7%

of GDP (assuming if all the elderly whose income is less than US$ 232 receives the benefits) while fuel subsidies is 2% of GDP

Private Pension System (mandatory):• For the increase in matching contribution for the informal sector to 100% for contribution

of US$ 80, fiscal cost is 0.7% of GDP.

Reform Proposal: Objectives

1. To strengthen social assistances in terms of coverage and adequacy.

2. To increase the coverage in voluntary portion of private pension without endangering fiscal sustainability.

3. To adjust the system in accordance with demographic and macroeconomic changes.

Reform ProposalsSocial Assistance:1. Gradually raise the social assistance benefit from US$ 100/month to US$ 232

while fuel subsidies, 2% of GDP is gradually reduced. 2. Need to improve and relax the criteria for eligibility to assistance.3. Index with nominal wage but its formula has to be reviewed in every 5 years.

Public Pension System:1. Gradually raise the retirement age from 58 to 60.2. Index with wage, which has to be reviewed in every 5 years.3. Gradually shift from DB to DC.

Private Pension System (mandatory and voluntary):1. Gradually raise the retirement age from 55 to 60 while carefully monitoring the

impact on the labor market and private firms.2. Gradually shift from lump sum to monthly withdrawal. The monthly pension

withdrawal is administered by the public sector. 3. For informal sector, improve MDC: Gradually increase matching rate by

government from 5% to 100%.

Communication and Public Information Strategy• Set up the training course for local government staff to

understand the objectives of the system and improve operational familiarity.

• Disseminate information on pension system reforms including social assistance to the public through local governments, postal office and cooperatives.

• Use TV commercial to notify public.• Hold workshops in key cities of the country.• Work with existing cooperatives for farmers and fishermen,

post office and banks for other self employed individuals and social welfare department for low income cohorts to expand pension coverage.

• Start financial education at school.

Propose Coalition/Consensus Building Strategy

-Social Welfare Department

-Public Services Department-Employees

Provident Fund (EPF)

-Securities Commission

Pension Reform Committee

Stakeholders:-Prime Minister

-Parliament-Cabinet

-Ministry of Finance

Summary

• Overall pension system is in a good shape.• Need to cover the low income cohort.• Use of existing systems and congenial enabling

conditions.

THANK YOU

Terima Kasih BanyakBayarlalaa

Arigato GozaimasuMaraming Salamat Po

Kop Khun Krap