MALAYSIA: Pension & Financial Market Reforms and Key Issues on Governance

R. Thillainathan

No 197, Discussion Paper from Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University

Abstract: The mandated contribution rate of Malaysia's Employees Provident Fund (EPF) is high. But as EPF operates both as a retirement fund as well as a multi-purpose savings fund with withdrawals allowed for housing, education and health, there is under-saving for retirement. Therefore, the paper considers the case for an increase in the contribution rate, a restriction on withdrawals and an increase in the retirement age as well as the case for the separate management of funds in different accounts and by different age groups. The adequacy of EPF as a retirement scheme and as a financial performer is discussed in relation to EPF's coverage, its design as a provident fund, the regulations to which it is subject, the under-developed domestic financial markets within which it has to operate as well as to its governance arrangements. The real returns generated by EPF since its inception in 1951 are respectable. But EPF's existing management practices with respect to accounting, performance measurement and dividends declared are distorting behavior and causing mal-governance. The failure to run EPF on a portfolio basis and in the best interest only of its members, has also raised serious governance issues. A key conclusion of this paper is that pension reform can drive capital market development only up to a point. Pension reform also requires a reform of capital markets. The paper discusses the required capital market reforms and their spin-offs for pension reforms.

Pages: 43 pages
Date: 2004-02
Note: International Conference on Pensions in Asia: Incentives, Compliance and Their Role in Retirement, Organised by PIE and COE/RES, Hitotsubashi University, Hitotsubashi Collaboration Center, Tokyo, Japan, 23-24 February 2004, For Private Circulation Only, Not for Quoting Without Permission, Draft: Feb 4, 2004
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