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comparison between Malaysia and Dutch Pension Scheme


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comparison between Malaysia and Dutch Pension Scheme

  1. 1. Comparison between the Dutch & Malaysian pension scheme Compensation & Benefits Management BSMH5143 Kartini Binti Tajul Urus Annuar Aswan B. Mohd Noor Itsanne Fokkema 814244 815713 814853
  2. 2. Compensation & Benefits Model
  3. 3. Retirement Benefits • 2 types of retirement plans : Defined benefit plan: promises to pay a fixed dollar amount of retirement income based on a formula that takes into account the average of the employee’s last three to five years’ earnings before retirement and the length of employment. Employer assumes all the risk of providing the promised income to the retiree and is likely to make all of the financial contributions to the plan Defined contribution plan: the employer promises to contribute a specific amount of funds into the plan for each participant.
  4. 4. The Netherlands • Average Dutch worker, when they retire, can expect to receive about 70 percent of their income, every year, for the rest of their lives • 90% of Dutch workers will get these pensions • Pension system : a combination of a pay-as-you-go system and an individual system in which people save for their pension individually. • The Dutch pension scheme may be characterized in terms of three main pillars: - 1st pillar: basic state old-age pension under a statutory insurance scheme - 2nd pillar: supplementary pension schemes by virtue of the employer - 3rd pillar: private savings for retirement
  5. 5. The Dutch pension scheme Character Regulation What 1st pillar Public Regulated by law Basic state pension: AOW 2nd pillar Private Regulated by law Supplementary pension (collective schemes) 3rd pillar Private Individual action Supplementary pension (annuities, endowment) Table 1: The Dutch pension system with the three main pillars Note. From European Actuarial & Consultancy Services (EURACS), the Netherlands pension summary 2013.
  6. 6. First pillar • Dutch General Old Age Pensions Act (AOW) • Everyone who has lived or worked in the Netherlands between the age of 15 and 65 has a state pension and a right to earn a state pension benefit from the age of 65 (irrespective of nationality). • Entitlement to AOW pension is accumulated at a rate of 2% for each year of insurance  leads to a 100% entitlement to the relevant pension benefit upon reaching the age of 65, provided there are no gaps in the period of insurance. • AOW is financed by contributions levied on earnings at a rate that is statutorily limited to a maximum of: 18.25 percent
  7. 7. First pillar cont’d • Pension rates for singles is 70 percent of the statutory minimum wage per month. • Both partners in a couple (either married or living together officially) are each entitled to a pension benefit amounting to 50 percent of the statutory minimum wage. • A person aged 65 with a partner under 65 may be entitled to a supplementary allowance if the partner’s income is limited. • Single parents will receive 90 percent of the net minimum wage.
  8. 8. Second pillar • Mandatory participation, collective risk sharing and the system of transfer of pension value. • Collective pension schemes and is financed by capital funding and serves to supplement the first pillar  administered by a pension fund or by an insurance company. • No statutory obligation for employers to offer such a pension scheme to their employees, however, more than 95% of employees are covered  quasi-mandatory. • Employer has to deduct pension contributions from the salary and transfer these contributions to a pension provider. • Majority of Dutch employees are in a (DB) plan in which the financial risks are for the employer
  9. 9. Second pillar cont’d • In 2012, Collective Defined Contribution (CDC) plans were introduced which are plans that combine some of the advantages of a DB plan with the advantages of a DC plan. • Dutch government has proposed a new contract, the defined ambitions (DA) contract  employer contributions will become fixed but pension rights, benefits and targeted retirement age will become automatically adjusted in line with life expectancy • Article by Erik Schouten & Thurstan Robinson (2012): Defined ambition pensions: Have the Dutch found the golden mean for retirement savings?
  10. 10. Third pillar • Individual pension provisions, either through annuity insurance or endowment insurance (providing a lump sum)  Self-employed employees need to reassure to finance their living after retiring.
  11. 11. Legal Framework • Pension Act 2007 : safeguard the financial security of pension entitlements, individual security and protection of participants and security in the pension institution’s operational management. • Once an employer has made a pension commitment to his employees, this commitment must be implemented in the way prescribed in the Pensions Act. • The employer, employee and pension provider are in a triangular relationship. • Under the Dutch Pensions Act, the accrual of old age pension rights under a pension agreement begins no later than the date on which an employee reaches the age of 21.
  12. 12. Malaysian Pension Scheme • Public sector employees in Malaysia are covered by the Government pension scheme. • Benefits provided by the scheme include: Retirement benefits Survivor benefits Disability benefits • The Government pension scheme covers employees in the public sector who are on pensionable status.
  13. 13. Malaysian Pension Scheme • On the other hand, employees in the private sector are not included in this scheme. They and their employers are instead required to contribute to the employees’ provident fund (EPF) or the social security organization (SOCSO). • According to Law of Malaysia, Pension Act 1980, “public service” was defined those who worked for: 1. The Judicial and Legal service 2. The General Public Service of the Federal Government 3. The Police Force 4. The Railway Service 5. The Education Service 6. The Joint Public Services common to the Federal Government and of one or more of the States 7. The Public Service of each State 8. The Parliamentary Service or 9. Such other service as the Yang di-Pertuan Agong may determine to be public service
  14. 14. Types of Pension schemes RETIREMENT BENEFITS • Is a monthly pension and gratuity as well as cash reward for accumulated leave. • Considered as the most important benefits provided by the Government pension scheme • Furthermore, to have some form of equity in retirement benefits, the computation of retirement benefits is based on formulae which vary the amount of benefit received with the length of pensionable service credited to the retiring employee and his last drawn salary
  15. 15. Types of Pension schemes DEPENDENT’S PENSION SCHEME: Dependent’s Pension is an additional pension benefit given to dependents or a pensioner or officer who dies from injury obtained during the course of performing his official duty or contracting a disease or travel accident on condition: a) The officer died in any one of the above conditions; and b) The death of the pensioner or officer occurs within seven years of sustaining the injury or contracting the disease.
  16. 16. Types of Pension schemes DISABILITY PENSION SCHEME: Disability Pension is and additional benefit given to a Government officer who is required to retire because of health reasons due to: a) In the course of performing his official duty; b) Contracting a disease to which he is exposed by the nature of his duty; or sustaining an injury due to a travel accident.
  17. 17. Compulsory retirement The Malaysian Government has several times changed the policies regarding retirement: • First, employees must reach the age of 55 for male employees and 45 years old for female employees (Pension Act, 1980) in order to receive pension benefits. • Chee (1997) stated, at least ten years of service in the public sector is compulsory for the individual’s including a probationary period of three years before qualifying for a pension.
  18. 18. Changes of the retirement age 1st October 2001, 55 to 56 years old 1st July 2008, 56 to 58 year old 1st January 2012, 58 years to 60 years old
  19. 19. Suggestions for improvement  Provide a preparative pension training program: • Most employees are not well prepared for their lives when they retire. • During the training program they will be explained what kind of preparations they need to do before they retire and how they can wisely spend their retirement benefits.  Social security should not be a function of the Government alone : • The future is unknown and Malaysian citizens should be encouraged to participate in the determination of their future retirement needs, such as through private saving and asset ownership. • Important for the retirees to have their own private saving because they cannot rely on pension alone.
  20. 20. Comparison
  21. 21. NO CRITERIA 1. Pension Scheme NETHERLANDS i. ii. 2. Types of pension scheme i. ii. iii. MALAYSIA Dutch General Old Age Pensions (AOW) – basis state pension (Public) Supplementary pension (Private) a. Collective schemes b. Annuities, endowment i. 1st pillar - basic state old-age pension under a statutory insurance scheme (Public) 2nd pillar - supplementary pension schemes by virtue of the employer (private) 3rd pillar - private savings for retirement (private) i. ii. ii. iii. 3. Retirement Age 4. Law 5. Suggestions for improvement 65 years old Dutch General Old Age Pension Act (AOW) 1957 –State Old Age Pension Government pension scheme – applicable to public sector employee who choose pension scheme when they retired (Public) Employees’ Provident Fund (KWSP) and Social Security Organization (SOCSO) (Private) Retirement benefits - monthly pension and gratuity as well as cash reward for accumulated leave Dependent’s pension scheme – additional benefit given to dependents or pensioner who dies from injury obtained during his official duty or contracting a disease or travel conditions Disability Pension scheme – additional benefit given to government officer who is required to retire due to health reason in the course of performing his official duty 60 years old Law of Malaysia Pension Act 1980 Dutch Pensions Act 2007 Improvement suggestion by the Dutch government. The 1. Provide a preparative pension training program: provision of defined ambitions contracts in order to financial planning, what steps to undertake before and replace the costly, time-consuming defined benefits during retirement. Emotional support. plans. 2. Encourage retirees having personal savings plans so that they did not depend solely on the pensions funds.