Malaysia - Private Retirement Scheme

Malaysians will have more room to allocate part of their retirement contributions to Islamic investments under sweeping government reforms to the pension system.

At present, the Employees Provident Fund (EPF) receives public pension contributions and invests the money. Some of that investment is in syariah-compliant areas such as sukuk and halal stocks, but contributors have limited scope to ensure the money is being used that way. A maximum 20 per cent of savings can be placed through the EPF into a single mutual fund. As of March 31 the EPF managed assets worth RM488.5 billion ringgit. That is larger than the RM435.36 billion of assets under management in Malaysia’s entire fund management industry.

Under the new, voluntary Private Retirement Scheme (PRS), which will not replace the EPF but supplement it, contributors will be able to allocate money to a wide range of products offered by private-sector fund management firms. This will allow them, if they choose, to target syariah-compliant investment – potentially increasing the amount of money going into Islamic instruments.

The scheme’s governing body which will oversee how the fund managers operate, the Private Pension Administrator (PPA), was officially launched last week. The initial rollout of 30 PRS products will include six Islamic funds.

Under PRS, fund managers will be required to offer a minimum of three “core” products catering to different investor risk profiles. A maximum of seven products can be launched under the scheme by a single PRS provider, but if it intends to offer both conventional and syariah-compliant options, it can offer up to 10, according to securities commission guidelines.

This could encourage fund managers to launch Islamic products to maximise their access to PRS money. The initial products will be available from September. Guidelines also allow for the outsourcing of the fund management function, which could open the door for boutique firms to tap into the sector without the need for established sales channels.

In order to encourage take-up in the PRS scheme, the government is offering incentives such as personal tax relief, tax deductions for employers on their contributions to the scheme, and tax exemption on income received by PRS fund management firms.

Some details of how the PRS scheme will work, and whether it will impact Malaysia’s current retirement age of 55 years, are not clear. The personal tax relief of up to RM3,000 may need to be increased to make it enticing to higher income earners.