More On PRS and 1Care In Malaysia

MORE POSERS AND RELEVANT UPDATES ON THE PRIVATE RETIREMENT/PENSION SCHEME AND NATIONAL HEALTH FINANCING SCHEME (1CARE PLAN) IN MALAYSIA

Further to my last commentary posted on Feb. 17, 2012, again I express my intense curiosity what will turn out as the ultimate outcomes of the private retirement scheme (PRS) and the national health financing scheme called 1Care – especially the details of the final models - proposed by the Government of Malaysia. I am now rendering my comments and raising posers in relation to the perspective of what will be in store for insurance companies and takaful operators.

With regard to the PRS proposal, which is said to be on voluntary basis as a supplement to the compulsory Employees Provident Fund (EPF), obviously insurance and takaful players did assume they were sure to be involved in the offer of the intended products as part of their portfolio array. I managed to source from the electronic net two past statements made by Malaysian Insurance Institute (MII) and Life Insurance Association of Malaysia (LIAM), which clearly indicated this hope.

In an article of MII on “Insurance Outlook 2011”, I picked up this excerpt: “…….there is much to look forward to for the life insurance industry, especially considering what’s in the pipeline for the year in place are stimulus packages such as the recently launched Foreign Workers Health Insurance Scheme, the Employee Insurance Scheme and the much touted Private Pension Plan.” (Note: I will touch on the Foreign Workers Health Insurance Scheme in the later portion (below).

The net also reproduced a press statement which was reported in Business Times on Oct. 8, 2011. Quote: “The Life Insurance Association of Malaysia (LIAM) believes the new tax relief of up to RM3,000 on contribution to a Private Retirement Scheme and insurance annuity for 10 years auger well for the industry.”

Checks with friends working in this joint segment revealed to me that they are still in the dark whether the two players would be involved in the development of the intended retirement products; and if at all they would be called in, what role they would play. As mentioned by me in my last commentary, so far only Securities Commission (SC) has had notified fund houses to submit their applications for participation, together with initial propositions, by Feb. 15, 2012 but there is no mention of life insurance companies and takaful operators. My contacts in the joint industry said they are not aware of any advice received from the nation’s central bank, Bank Negara Malaysia (BNM). Neither have they heard instructions from LIAM nor Malaysian Takaful Association (MTA) – the supervisory bodies for life insurance companies and takaful operators respectively. Yes, Recommendation 2.1.7 of the Financial Sector Blueprint launched in December 2011 does cite “annuity” (a product genre normally offered by life insurers) as one of the initiatives but nothing else seems to have surfaced till now. So, what’s up? Is there really a turnaround of decision by the Government for the insurance and takaful players in respect of involvement in product development? Or would they be invited to come in at a later stage by BNM via LIAM after SC has finalised screening through all applications from fund houses?

By logical definition of retirement or pension benefits, the immediate logical thought would be regular income (usually monthly) pay-outs from a consolidated fund to a participant upon his retirement. Fund houses’ expertise is in creating investment funds and managing the funds for growth. When it comes to administering regular pay-outs on an automatic basis like monthly modes, I doubt fund houses in Malaysia have the experience to handle such. Normally, they make lump sum payments upon tenure maturity or full withdrawal, unless there are ad-hoc requests by participants/investors for partial withdrawal. Without the facilitation of regular income pay-outs incorporated as a main feature of a retirement product, the plan would not fulfill the chief purpose  – i.e. a retiree receiving a monthly “pension”,  in addition to whatever personal accumulated financial resources, for as long as he lives – just like a retired civil servant. 

In the case of life insurance companies especially, facilitation of regular income pay-outs should not be an issue. Most existing or long standing life insurance contracts already hold an optional feature called “Settlement Options”, to cater for policyholders who wish to receive regular pay-outs upon maturity, or surrender, or demise (in which case, the regular pay-outs will go to the nominated beneficiary) instead of outright lump sum. The settlement options for election by policyholders are, either regular income for a fixed tenure, or a fixed amount until depletion of the fund, or 10 years certain and life payments thereafter (if demise within 10 years, the balance for the remaining years to be paid to the appointed next of kin, but if survive after 10 years, then the participant will continue to receive the same retirement income as long as he lives). The amount of regular pay-out will differ according to the option elected. At the same time, the balance of the fund after each pay-out will continue to accrue interest. The same principle could apply for annuity products. Although some insurers have chosen to drop off the feature from their new policy contracts, yet it could be easily revived if needed. Between life insurers and fund houses with regard to administration of automatic regular retirement income pay-outs, I would feel the former has the prior necessary experience. Bear in mind all life insurance companies have established actuarial departments in their stables which can work out the necessary statistics for such pay-outs. As for fund houses, currently they prefer to pay out lump sum. Perhaps, there may be a few which are willing to accommodate special requests for regular periodic pay-outs, but at large, such is not a common facility practised by them. 

The seemingly paradox surrounding the final “fate” of insurance companies and takaful operators up to this juncture relating to PRS is further illuminated by the new Part IIIA of the Capital Markets and Services Act 2007. Article 2.01 of this part defines a “Financial Intermediary” as “a management company approved under Section 289 of the CMSA, CMSL holder for fund management, insurance company licensed under Insurance Act 1996 for life insurers, or takaful operator registered under the Takaful Act 1984 for family solidarity business.” Article 3.07 spells out that “the applicant must, within its group of companies, have relevant experience in fund management, pension fund management or life insurance investment, including in the operation and administration of retail or pension funds, or life insurance business.” So, I am still intrigued by the fact that life insurers and family takaful operators have not been roped in as yet to be involved……..hopefully, it would be a later stage, but if they do finally get involved, in what role? And what does the broad definition of “financial intermediary” mean?.......as a PRS product provider, or mere sales distribution for the retirement products churned out by a panel of fund houses? And why have not the life insurance/family takaful side received any signals to be ready to participate no matter whatever role they are expected to be in? What is the end in mind of the authorities now?

Of course, there is nothing to prevent insurance and takaful players from developing their own products akin to or in line with the features of the final products launched by fund houses. They can always coin their own names without insinuating to PRS products. As it is now, a life insurance company already has two investment-linked  products that cater for retirement by providing guaranteed monthly income. So, I guess the plausible alternative move for them, in order to keep up with the new trend, is to churn out more such products in the market in order not to lose out to fund houses.

Meanwhile, the ground rules set by SC for PRS providers, i.e. selected fund houses as it stands now, require them to enter into a tie-up with an appointed PRS administrator which will act as the central repository of information and data of members of the scheme, as well as to serve as the coordinator for enhancing overall administrative efficiency in the PRS industry. The ground rules also touch on the appointment of independent trustee (for funds) by PRS providers. I believe the services of the PRS administrator and independent trustee will not be free, therefore certain fees can be expected to be paid by PRS providers to the two parties. I may be wrong………I understand that PRS providers may also have to pay a fee to SC? Question: Would not the anticipated fees  “eat away” a significant portion of the accumulated fund value of investors? I guess that would depend whether the charges are at nominal or substantial rates, and in what mode, i.e. whether annual or one-time fees. As at now, I am unable to source out for any clues on fees. 

Another pertinent point that needs to be ascertained is whether the proposed PRS allows contributions to be made via deductions from Employees Provident Fund (EPF) account. If we follow the rationale that EPF contributors are currently allowed to withdraw from their EPF account to fund their purchase of unit trusts, then the logical conclusion should be “yes”. However, an excerpt extracted from  kpkk.gov.my portal, initiated by the Ministry of Information, Communication & Culture, said: “Private pension funds will supplement existing public pension schemes and offer non-EPF and self-employed people a way to save for retirement. Participation will be voluntary.” If we were to interpret literally the fine print of the excerpt, we could possibly conclude that withdrawal from EPF to fund purchase of a PRS product by an EPF contributing member may not be encouraged. I will try to source out for more information and if available, will then keep all of you further posted in my next round of sharing.

Of late, I have not encountered comments from trade unions regarding the PRS proposal. I remember way back in year 2000, the proposed EPF-annuity scheme was launched and then rescinded shortly after because of non-acceptance by a main trade union. The same union, in October 2010, called on all 10,000 EPF contributors not to participate in the proposed Private Pension Fund introduced by the Government because the investments were not guaranteed. A news agency quoted the deputy president of the same union on Oct. 7, 2011 that he “welcomes the scheme as it provides more incentives to private sector workers.” Other than these, I am unable to trace further responses from the union in 2012. I will be curious to find out what is or will be its current stand on PRS; if I can source out any latest information, I will keep you posted again in the next sharing.

On 1Care, it is categorically stated to be for all Malaysians. However, no specific mention has been spelled out to exclude legitimate foreign workers and permanent residents. Will they be covered or not under the proposed scheme?

A prominent consultant group reported in its portal on October 12, 2011 that Malaysian Trade Union Congress (MTUC) had proposed to the government the following:

*Foreign workers to be allowed to join trade unions.

* Freeze on bringing in new foreign workers but backs equal rights for those already in Malaysia.

Should the Government agree to MTUC’s requests, would that mean legitimate foreign workers would also be covered by 1Care? I know the Foreign Worker Hospitalization & surgical Insurance Scheme was launched on January 2011, making it compulsory for employers to provide health insurance coverage for their legitimate foreign workers as the condition for obtaining and renewing working permits. A total of 32 insurers were said to be registered on the scheme. So, would there be two separate health financing schemes when 1Care comes into play – one for Malaysians and the other for non-Malaysians? And what about permanent residents who hold red identify cards? Would they be deemed as Malaysians? Or would there finally be one scheme for all in Malaysia regardless of nationality? 

While waiting for more details to unravel later, I feel it is incumbent on representatives of the insurance and takaful players to start making queries for clarification on the grey areas pertaining to PRS and 1Care. I hope to see official statements from LIAM and MTA. Proactive moves should commence now if they do not wish to lose out, especially on PRS.

I rest my case for now………until new developments materialise to the fore. 

NOTE: I wish to highlight that I may or may not be totally right in all aspects of my commentary. My intention is to share, for the consideration of relevant interested parties. If you feel any of the contents are not in the right note, please feel free to express your discord. As I have used some excerpts taken from various sources, please note I am not in the position to affirm the veracity of the facts and quoted statements.