IN April this year, a new chapter opened in personal financial planning for Malaysians when the Securities Commission (SC) gave the go-ahead to eight institutions to operate private retirement schemes (PRS).
The private pension industry is intended to complement the Employees Provident Fund (EPF) by encouraging the public to add to their compulsory savings under the EPF, which is inadequate to ensure a sustainable retirement income for a large segment of Malaysians.
It also helps the self-employed to build up their savings, and encourages employers to provide extra benefits for their workers beyond their mandatory contribution.
The introduction of PRS is an exciting milestone for Malaysia's pension industry and a long-awaited savings opportunity for middle-income earners.
The scheme offers an additional income tax relief of RM3,000 on top of the existing RM6,000 tax break for EPF and life insurance contributions. This incentive alone should motivate people to participate.
Even with the best of intentions investing can be wrought with challenges. Experience shows that Malaysian investors often neglect to prepare themselves for the ups and downs of investing.
A good example is the unit trust industry, which is littered with cases of investors who jump in without being adequately informed, run into difficulties and have to bear irrecoverable losses.
Much work needs to be done to educate potential investors about the range of options before them and the ramifications of their decisions.
All parties including the regulators, fund providers, agents, advisers, and especially the investors themselves have a role to play in creating a well-informed public.
Investors need to be educated regarding the pros and cons of the PRS products in order to choose funds that match their retirement goals and risk appetites. To protect their best interests, investors should bear in mind five key points:
Quality of a fund's assets
First, they should be aware of the quality of the underlying assets in the fund and the risks involved in investing in those assets.
Unlike the EPF, where the contributors' money is protected, your savings in the PRS may or may not bear fruit, depending on how the fund performs.
If investors are not well informed, they may act out of fear when they find their funds are making losses. This could happen, should the marketing of the PRS funds dwell on the potential benefits of the investment rather than provide a balanced forecast outlining potential market conditions and risks.
Many investors do not know what steps to take when a fund underperforms. Many sit on their investment, hoping that one day it will recover. However, in many cases, a sinking ship is unlikely to recover. In such a situation, it is better to shop around and switch funds to another offering a proven track record and return potential.
To illustrate, when selecting a China equity fund, a best practise approach would be to take the time to choose a first quartile performer and avoid poor performers. Should the fund drop, the investor does not sell his units, because he has already done his research and knows that this is best performance he can expect from a China equity fund.
Compare sales charges
Just like any investment, investors must be mindful of the charges imposed when they enter into a contract. With PRS, potential investors need to be aware of two types of charges imposed by the PRS providers.
The first being sale charges which can range anywhere between 0% and 3%, and annual management fees, from as low as 1% to a high of 2.25%. Suffice to say, potential investors who make the effort to shop around will stand to benefit. Remember that all charges are built into your investment, whether the fund makes a profit or loss.
Meanwhile, investors who prefer professional guidance in making their money-making decisions can access PRS funds through institutional PRS advisers, such as banks and corporate PRS advisers.
These organisations may have contracts with multiple PRS providers which enable them to generate fund comparisons resulting in independent information and advice to consumers.
It is also possible that these entities, due to the volume of business that they command, do not impose any additional charges for their advice and may even lower the sales charge because they are able to negotiate for better terms.
Management experience
The performance of a PRS fund depends very much on the fund management experience. This elementary rule applies to all investment funds. Just as you should look at the fund manager's track record in managing unit trusts, you should also evaluate their experience in managing pension funds.
Some PRS providers have foreign partners with pension funds management experience in Canada, Australia and Hong Kong, whereas some local PRS providers are entering uncharted territory.
Ease of switching
The establishment of a Private Pension Administrator that was set up in July 2012 to protect investors' interests is viewed as a positive development for the pension fund industry. Among other functions, this statutory body supports investors in switching PRS providers.
The rules governing PRS allow investors to switch provider once a year, so that consumers have the choice to switch to another PRS provider when they are not happy with the existing provider.
Quality of servicing
Finally, investors should be aware about the quality of servicing they may receive from the sales representative. If you invest only RM3000 to enjoy the tax relief benefits and your investment is managed by an agent you met stationed at a shopping mall, you should carefully consider whether your account will be managed satisfactorily.
Clearly, a lot of ground has to be covered in order to protect consumer's interest and to ensure the healthy long-term growth of the PRS industry. - The Star
> Yap Ming Hui (yap@yapminghui.com) is an advocator of the new private retirement scheme if all parties are open and transparent. He is a bestselling author, TV personality, columnist and coach on money optimisation. Yap heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their wealth and achieve financial freedom since 2000.
