Malaysia: Capital markets eye pension fund inflow

Malaysia’s capital markets are in line for a boost, as the introduction of private pension funds is expected to create a significant funding inflow that will be directed towards various investment vehicles. This should also serve to take some of the pressure off the state’s retirement schemes.

In early April, the Securities Commission (SC), Malaysia’s main financial regulatory authority, announced it had given approval to eight firms to offer private retirement scheme (PRS) services to the public, bringing non-state-backed superannuation funds a step closer. Most of those companies cleared to provide PRS services have said they will begin taking contributions in the second half of 2012.

The development of PRS services was set out in the Capital Market Master Plan 2 (CMP2), which was spearheaded by the SC and unveiled in April 2011. Among its key goals, CMP2 is intended to assist the markets in more effectively utilising domestic savings for capital formation, increasing the capacity and efficiency of the capital market in financing investment requirements for economic growth, and addressing efficiency of savings intermediation, with one of the paths towards these objectives being PRS.

At present, Malaysia’s main, state-backed superannuation programme is the Employees Provident Fund (EPF), which collects mandatory contributions from registered workers. The funds are then invested in a range of revenue-earning instruments. Estimates put the amount of funds under the control of the EPF at almost $165bn, roughly half of Malaysia’s GDP in 2011.

While generally seen as successful, the EPF only taps a relatively shallow pool of funds. PRS is considered an option that could siphon off more private savings and better utilise them in the economy, as well as spread investment risk and ensure that more members of society have their retirement needs met.

According to Yeah Kim Leng, the chief economist at RAM Consultancy Services, the launch of PRS will bring significant benefits to Malaysia’s capital markets.

“Besides relieving pressure on the EPF management, the PRS will help to mitigate over-concentration of investment funds in a single entity. It will add another layer of depth and liquidity to improve the efficiency of the markets,” Yeah said in an interview with the Malaysian Star in late April. “Secondly, well-designed PRS can better cater to the different income and age profiles, as well as risk appetites of contributors, as against the one-size-fit-all scheme currently in place.”

One of the eight firms given the green light by the SC to offer PRS products was CIMB-Principal Asset Management. According to the company’s CEO, Campbell Tupling, by supplementing the existing mandatory schemes, the PRS will promote greater flexibility in investments.

“With the emergence of the PRS industry, Malaysians will be further empowered to set aside additional voluntary savings for investment in a well-regulated and structured manner,” Tupling said in early April.

It will take time for PRS providers to sell their products to the public, which is long used to state-backed social insurance programmes. Some estimates suggest the level of funds under management through PRS will rise to around $10bn over the next 10 years. While a sizeable sum, and one that will be welcomed by the markets, it will be just a fraction of the total controlled by the EPF.

Though it will be up to PRS providers to promote their products and the concept of private pension programmes, the government has done its part to buy into the scheme. As an additional incentive for Malaysians to take out PRS coverage, workers will be able to get a tax write-off of up to $990 on their annual contributions, while employers will also be given tax deductions of up to 19% of their employees’ salaries on contributions to PRS made on behalf of their staff.

Few analysts or PRS providers are yet making predictions on returns from the investments, though most are upbeat about prospects for outperforming the EPF, which in February declared a 6% dividend for the 2011 financial year, posting investment gains of $9bn.

Having been given the go-ahead by the SC, Malaysians can expect the eight sanctioned PRS providers to start their respective promotional campaigns soon, and while it will be much longer before the full force of investments begins to be felt in the markets, that flow will serve to deepen the capital pool and stimulate growth.

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