Old-Age Retirements in Malaysia: Current Condition and Proposed Improvements

Old-Age Retirements in Malaysia: Current Condition
and Proposed Improvements
ECON 6999
APPLIED RESEARCH METHOD
SEMESTER: SEM 1 2016/2017
STUDENT: ISHAM SHAFARIN BIN ISHAK (G1128403)
EXAMINER: DR MOHD NAHAR MOHD ARSHAD
DATE: 31st
May 2016

TABLE OF CONTENTS
Introduction ............................................................................................................................................1
Section 1..................................................................................................................................................2
Background .........................................................................................................................................2
Categories of Old-Age Support ...........................................................................................................3
Existing Pension Programs in Malaysia...............................................................................................4
Malaysia’s Compulsory Contribution Rate and Retirement Age ........................................................6
Gross Replacement Rates and Pension Wealth for Select Countries .................................................7
Malaysia’s Individual Income & Retirement Saving............................................................................8
Coverage of the Active Population and GDP per Capita.....................................................................9
Malaysian Government Expenditure On Pension and Gratuities.....................................................10
SWOT Analysis of the Condition of Old-Age Protections in Malaysia...............................................11
Section 2................................................................................................................................................11
Consolidation to one single organisation for Old-Age Protection in Malaysia.................................11
Annuity as a structure of the consolidated old-age protection........................................................13
Increase government budget allocation to the old-age benefits .....................................................14
To increase The Gross Replacement Rate & Pension Wealth to be on par with other countries....15
Section 3................................................................................................................................................15
Model 1: Saving & Consumption of Retirement Fund......................................................................15
Model 1 Saving Period ..................................................................................................................15
Model 1 Retirement period ..........................................................................................................16
Model 1 Calibration ......................................................................................................................17
Model 1 Result..............................................................................................................................19
Model 2: Saving Rate vs Dividend Rate vs Gross Replacement Rate of Retirement Fund ...............22
Model 2 Saving Period ..................................................................................................................22
Model 2 Retirement Period ..........................................................................................................22
Model 2 Calibration ......................................................................................................................23
Model 2 Result..............................................................................................................................24
Analysis of The Result of Model 1 & Model 2...................................................................................26
Conclusion.............................................................................................................................................27
References ............................................................................................................................................29
Appendices............................................................................................................................................30

INTRODUCTION
Traditional Pension fund scheme all around the world is mostly inadequate to ensure the standard of
living of after a person is maintained after retirement. This is because most of them is established in
circa 1950ies. During that era, the life expectancy is around 70 years old for developed countries (US)
and 64 years old for developing countries (Malaysia), with a retirement age of 55. As standard of living
improves, the life expectancy increases to 79 years old for developed countries (US) and 75 years old
for developing countries (Malaysia). In the case of Malaysia, the increase of retirement age to 60 years
old from 55 (5 year increase) is inadequate to compensate the increase of expected life expectancy
from 64 to 75 years old (11 year increase). The escalating cost of medical treatment and inflation
eating into retirement saving also further exacerbate the lack of retirement saving to fund retirees
across their lifespan.
To understand this problem in its entirety, we started by looking at it from a holistic point of view, the
old-age retirements in Malaysia. In Section 1, we begin by examining the current macroeconomics of
Malaysia and the existing organisations and options available for the retiree, either officially endorsed
by the government or by private providers. We concluded our findings in this section in a SWOT
analysis format.
In Section 2, taken the opportunities to improve that we have identified in the previous section, we
used recognised frameworks to analyse the situation deeper to form an opinion on the exact changes
needed to progress the state of old-age retirements.
In Section 3, we built two (2) models that enabled us to investigate the various relationships between
the variables that we have identified which influenced the adequacy of the retirement savings for
Malaysia. The understandings would enable us to make policy recommendations.
In building the models, we also pursue these following objectives
1. To estimate the total savings required for an average retirees to live comfortably throughout
their lifespan
2. To calculate the savings that a person is able to save throughout their employment
3. To calculate the return that a retirement fund should give in order for no (1) objective is
possible
In Conclusion, we summarized our earlier findings in which can be carried further in other research
and/or policy study.

SECTION 1
BACKGROUND
Malaysia has benefitted from steady economic growth since its independence in 1957. Malaysia
Growth Domestic Product (GDP) has been growing on average 4.76 percent from 2000 until 20151
. It
is widely recognized as one of the most vibrant economies in the developing world; it was ranked at
no 14th
in the 2015 World Competitiveness Ranking by IMD.2
However, Malaysia is still considered as
a high middle-income nation with a GDP per capita of USD 10,538 in 2013 with a population of 29.72
million and a growth domestic product of USD 313.2 billion3
. With an ambition to achieved the develop
country status in the year 2020 as encapsulated in the Vision 2020, much focus has been on improving
the infrastructure and education level of Malaysian. However, not much attention has been given to
the retirees’ quality of life and standard of living.
With all the economics progress, the issue of inequality facing Malaysia is increasing. Employee
Provident Fund, which holds the retirement fund for all formally employed private sector workers in
Malaysia has a 13.92 million members or which 6.52 million are active. It has a total fund of RM 684mn
(2014) and thus can be used as a rich data sample to estimate the Gini Coefficient. A study by (Hwok-
Aun Lee 2014) showed that the Gini coefficient is steadily increasing from 0.643 in 2004 to 0.661 in
2013, and increase of 3% during that period. The study also showed that the top 1% of EPF
contributors owned 15% of EPF fund, doubles that of the bottom 50% contributors who only owned
8% of EPF fund.
Partly contributing to the inequality is the old age population or the retiree since they are not getting
a regular wage. The retirees are at risk of being left behind as the economics of the country improve.
They are not subject to the wage increase, but inflation erodes their wealth. According to the National
Population and Family Development Board (LPPKN), based on projections made by DOS, Malaysia is
expected to reach ageing population status by the year 2035, at which point 15% of the total
population will be 60 years and older compared to only 5% in the year 2000 (KRI July 2015). Serious
attention must be given to them from today. This is because the retirement planning should start
when they are still working so that enough saving can be made to fund their retirement well.
1
http://www.tradingeconomics.com/malaysia/gdp-growth-annual
2
http://www.imd.org/news/IMD-releases-its-2015-World-Competitiveness-Ranking.cfm retrieved 1/3/16
3
World Bank statistics retrieved 1/3/16

CATEGORIES OF OLD-AGE SUPPORT
The old-age support can be categorized from where the funding is coming from and how it is
structured. According to (Zvi Bodie 1988), the difference between Defined Benefits (DB) & Defined
Contribution (DC) plan is that the DC framework focuses on the value of the assets currently endowing
a retirement account. Benefits level depends on total contribution and the dividend or interest earned
on the contribution. The DC plan is a simpler version in which the employee & employer make a regular
contribution to the retirement fund in which later can be withdrawn gradually or in a single payment
during the onset of retirement.
The DB meanwhile plan focuses on the flow of benefits which the individual will receive upon
retirement. The level of benefits depends on a formula which takes into account the number of
working years and the last drawn salary. Because this scheme is government guaranteed, there is
much concern that this commitment is putting huge strain on government bu-dget and the future
generations to finance the generations who have retired.
TABLE 1 THREE (3) GENERAL TYPES OF GENERAL OLD-AGE PROTECTIONS
Government funded
social security plan
Defined Benefits Defined Contribution
Funding Government Employer & employee Employer & employee
Coverage Minimum coverage –
above poverty line
Monthly pension and
basic medical coverage
 Predefined benefits
 Have regular pension
and may have a lump
sum payment upon
retirement
 Annuity like with no
limit
 Regular contribution
to the scheme is
needed or require a
certain time of service
before activation
Tax deferred saving with
regular contribution and lump
sum withdrawal option after
retirement
In the majority of developed countries, there exists a government-funded social security plan that
ensures a basic coverage of old-age retirees needs of a monthly allowance, medical and housing, ex
in the US, the scheme is called Social Security, in Canada it is called Old Age Security (OAS). However,

such scheme is still non-existence in Malaysia, in which old-age security is expected to come from
immediate family members. However as demographic changes in which old-age percentage of the
population is increasing, and society becomes more individualistic, and family ties are weakening, a
rethought is needed on this matter.
EXISTING PENSION PROGRAMS IN MALAYSIA
(Holzmann 2015) has done a survey of all existing Malaysia’s Pension Programs and it is mapped to
World Bank’s five-pillar framework4
which is a response to the need to strengthen social insurance
and contractual savings systems providing old age support in developing countries.
TABLE 2: MALAYSIA'S PENSION PROGRAMS - MAPPED
Pillars Name of Program
Institution
Benefit Type Financing Type
Pillar 0: Basic benefits
through social pensions
or at least social
assistance
Bantuan Orang Tua
(Cash benefits)
Rumah Seri Kenangan
(retirement homes)
Pusat Jagaan Harian
Warga Emas (elder
daycare centers)
Basic cash benefit of
RM300 per month
In kind benefit
In kind benefit
General revenue
General revenue
General revenue
Pillar 1: Mandated,
unfunded, defined
benefit or contribution
schemes
Civil Service Pension
Fund
Socso
Old-age, disability,
survivorship
Work injury, disability,
survivorship
General revenue
Employer contribution,
Employer and employee
contribution
Pillar 2: Mandated, fully
funded, occupational or
personal schemes
LTAT (armed forces)
EPF(private sector)
All benefits
Lump sum/phased
withdrawal
contribution
contribution
Pillar 3: Voluntary, fully
funded, occupational or
personal schemes
PRS: Private Retirement
Scheme
Lump sum, (fixed term)
annuity
Voluntary premium, tax
incentives RM300
4
(World Bank Pension Primer 2008)

Pillar 4: Access to
informal and other
formal provisions, and
personal assets
Family
Basic health care
Public housing
Cash and in kind benefits Family members, budget
financed, budget
support
Source: (Holzmann 2015)
The pension scheme for the public sector in Malaysia which is a Defined Benefit (DB) scheme are
provided by KWAP (Kumpulan Wang Persaraan) since 2007. Their protection is comprehensive, with
monthly pension up to 2/3 of final drawdown salary, gratuity and cash award in lieu of leave and
medical care at government hospitals5
. As civil force is approximately 1.6mn in 2014 out of 14mn
workforce, they only cover 11.4% of total labour force in Malaysia. Even as the coverage of the scheme
is excellent, only a minority of the population get to enjoy its benefit.
Lembaga Tabung Angkatan Tentera (LTAT) is a Defined Benefit (DB) scheme that is only available to
the personnel of the Armed Forces of Malaysia. It provides a regular pension payment as early as 39
years old which is the earliest retirement age for them due to the special nature off their employment.
. However, as the number of members of the armed force of Malaysia is approximately 150,0006
in
2015, only 1.14% of labour force enjoy its coverage.
The Social Security Organization (SOCSO) which operates under the Employees Social Security Act
1969, is mainly an insurance scheme to protect employees from debilitating injuries in the workplace,
thus does not fall strictly into the old-age financial protection program. The coverage of an employee
is also limited to those earning below RM40007
, also limits its ability to provide a safe security net for
all employee.
Private Retirement Scheme (PRS) is a voluntary DC to compliment the mandatory EPF, introduced
recently in 2012. It is a collection of unit trust providers which is regulated by the Security Commission
of Malaysia, with incentive from the government in term of tax relief and central administration. It is
reported that 180,651 accounts have been created with a total fund size of RM1.17bn in the PRS
scheme in 2015.8
The biggest scheme for old-age protection system in Malaysia is EPF, with 46.5% of total Malaysian
workforce subscribe to it. It is a publicly mandated saving scheme with operates under the EPF Act
5
(Portal Rasmi Bahagian Pasca Perkhidmatan JPA 2016)
6
Wikipedia “https://ms.wikipedia.org/wiki/Angkatan_Tentera_Malaysia” , 24th May 2016
7
Malaysia Budget 2016
8
http://www.thestar.com.my/business/business-news/2016/03/10/sc-report-2015-prs-funds-net-asset-value-
in-2015/ retrieved 15/3/16

1991, amended 1995. Under the act, all employees of all salary range have to contribute 11% of their
salary and their employer will add another 12% to the scheme. The savings can be withdrawn entirely
at the retirement age which is 60 for Malaysia. It should be noted that EPF also provides flexibility to
withdraw the savings earlier for buying a house, medical and education purpose in which (Caraher
2000) mentioned that it is against the mandate to provide for the old age. With a fund size approaching
RM700bn, it is the biggest and also covers the most of the employee in Malaysia.
We would like then to compare Malaysia’s old-age retirement’s general condition with other countries
in the world. By doing this, we hope to understand better the strengths and weaknesses of our system
and work on the opportunities and weaknesses.
MALAYSIA’S COMPULSORY CONTRIBUTION RATE AND RETIREMENT AGE
We started by comparing the Compulsory Contribution Rate and Retirement Age as in the following
table.
TABLE 3:COMPULSORY CONTRIBUTION RATE AND RETIREMENT AGE OF SELECT COUNTRIES FROM (HOLZMANN 2015)
Country
Per capita
income 2012
(US$)
Employee
Contribution
Rate (%)
Employer
Contribution
Rate (%)
Total
Contribution
Rate (%)
Statutory
Retirement
Age
East Asia
China 6 091 8 20.0 28.0 50/60
Hong Kong SAR, China 36 796 5.0 5.0 10.0 65
Indonesia 3 557 2.0 3.7 5.7 55
Japan 46 720 7.7 7.7 15.4 65
Korea Rep. 22 590 4.5 4.5 9.0 65
Lao PDR 1 417 4.5 5.0 9.5 60
Malaysia 10 432 11.0 12.0 23.0 60
Mongolia 3 673 7.0 7.0 14.0 55/60
Philippines 2 587 3.3 7.1 10.4 65
Singapore 51 709 20.0 16.0 36.0 62
Thailand 5 480 3.0 3.0 6.0 55
Vietnam 1 755 6.0 12.0 18.0 55/60
Other Regions
Argentina 11 573 11.0 10.2 21.2 60/65
Brazil 11 340 7.7 20.0 27.7 60/65
Chile 15 452 10.0 0.0 10.0 60/65
Mexico 9 749 1.7 6.9 8.6 65
Poland 12 708 9.5 9.8 19 3 60/65
United Kingdom 39 093 11.0 12.8 23.8 68
United States 51 749 6.2 6.2 12.4 67
Average 16.0 62.7
3.72

SD 8.7 3.7
Source: World Bankpension database
Notes: If the country has two tier retirement age policy, we will take the higher age for the mean calculation
From the table above, we can see that Malaysia has one of the highest compulsory contribution rate
(23% compared to the average of 16%) but its statutory retirement age is at a low age of 60 years old
(compared to the average of 62.7 years old). These factors will contribute to the amount saved in the
retirement fund and will impact the Gross Replacement Rate & Gross Pension Wealth which we will
look at in the next table.
GROSS REPLACEMENT RATES AND PENSION WEALTH FOR SELECT COUNTRIES
TABLE 4: GROSS REPLACEMENT RATES AND PENSION WEALTH FOR SELECT COUNTRIES, 2012 FROM (HOLZMANN
2015)
Country
Men Women
Gross
Replacemen
t Rate (%)
Gross Pension
Wealth (Multiple of
Annual Earnings)
Gross
Replacemen
t Rate (%)
Gross Pension
Wealth (Multiple
of Annual
Earnings)
Singapore 38.5 6.8 34.4 6.8
Indonesia 14.1 2.6 13 2.6
Malaysia 35.1 7.7 31.9 7.7
Japan 35.6 6.5 35.6 7.5
Hong Kong, China 34.8 6.3 31.5 6.6
United States 38.3 5.9 38.3 6.6
Australia 52.3 9.3 47.8 9.7
Korea 39.6 7.1 39.6 8.3
Thailand 47.1 9.8 47.1 10.7
OECD(34) 54.4 9.3 53.7 10.6
Philippines 37.7 4.4 37.7 5.3
China 77.9 15.2 61 15.3
Vietnam 67.3 15.1 61.8 19.2
Average 44.05 8.15 41.03 8.99
SD 16.15 3.68 13.31 4.33
Source: OECD 2013a and b.
Gross Replacement Rate is the rate of which pension benefit as a percent of individual lifetime average
earnings for workers earning 100% of average earnings in the reference year9
. Gross pension wealth
9
All workers are assumed to start work at age 20, to work continuously, and to retire at the retirement age for
each respective country. Real earnings are assumed to grow in Malaysia at 6.0% per year, converging to an
OECD figure of 2.0% per year. Defined contribution benefits are assumed to be paid out in a price-indexed
annuity at an actuarially fair price.

shows the size of a lump-sum payment that is equivalent to the average promised benefit for an
average wage worker by the mandatory pension system in each country. According to (Holzmann
2015), Malaysia has low gross replacement rates (at 35.1% compared to the average of 44%) as well
as pension wealth for both men and women (7.7x compared to the average of 8.15x) among the
compared countries, even with the high contributions rate discussed previously. This is directly caused
by the lower retirement age at 60 years which has been discussed before.
MALAYSIA’S INDIVIDUAL INCOME & RETIREMENT SAVING
The data of Malaysian Employees Provident Fund (EPF) on individual incomes in Malaysia, which
includes salary or wages, overtime payments, and bonus shows that in 2013:
• 96% of active EPF members earn less than RM6,000 or USD 1829 a month
• 85% less than RM4,000 or USD 1220
• 62% less than RM2,000 or USD 610
This shows that the majority of income earner in Malaysia is still low income, i.e., less than RM2,000
or USD 610 a month. From Department of Statistic Malaysia, based on Household Income Survey 2012,
the average monthly household income was RM5,000 or USD1,636. However, our median household
income was even lesser at RM3,626 or USD1,187. Low income will lead to low saving for retirement
as compulsory saving is at a percentage of actual salary.
Malaysian population however has seen a significant increase in the standard of living as Malaysia
transformed itself from an economy based on agriculture & natural resources in 1970 with a GDP per
Capita of USD39210
to modern economy based on manufacturing and services with a GDP per Capita
of USD10,538 in 2013, an increase of 26.9 times in the span of just 24 years. This has lead into unofficial
inflation rate far beyond the official numbers averaging 3.66 percent11
from 1973 until 2016. This has
further eroded the sustainability retirement fund to fund retirement.
Using these data, we can deduce that the lower Gross Replacement Rate & Pension Wealth is partly
caused by
1. Lower income of the majority of contributors to the EPF.
2. The significant increase in the standard of living in Malaysia
10
World Bank database (Nominal GDP per Capita)
11
http://www.tradingeconomics.com/ retrieved 29/5/2016

We would take these into consideration when we build the model of saving and consumption of
retirement fund later.
COVERAGE OF THE ACTIVE POPULATION AND GDP PER CAPITA
FIGURE 1 RELATIONSHIP BETWEEN COVERAGE OF THE ACTIVE POPULATION AND GDP PER CAPITA
FROM (HOLZMANN 2015)
Table 4 sketches the relationship between income per capita (in US$) and old-age financial protection
coverage (for active members in the private sector). The relationship is statistically very strong and
suggests that coverage, as measured, is closely related to income per capita until it peaks at a very
high level. This relationship can be used as a benchmark for countries such as Malaysia. It can be seen
that Malaysia’s coverage rate is below this benchmark while some countries within a similar income
band have much higher population coverage rates.

MALAYSIAN GOVERNMENT EXPENDITURE ON PENSION AND GRATUITIES
FIGURE 2 MALAYSIA COST OF PENSION AND GRATUITIES AS PERCENTAGE OF GDP, 1994-2013
Source: Ministry of Finance Malaysia, Economic Report 1994-2013
The amount that the Malaysian government spends on pension and gratuities as shown in Figure 2
above which averaging around 1.3% of GDP is very low if compared to the European countries which
spend about 10% of GDP in pension, which is shown in Figure 3. This lack of spending explains the gap
of coverage of pension funds which only covers about 55% of Malaysia population. As Malaysia
population ages, their voting rights would pressure the government to increase the allocation towards
old-age protection.
FIGURE 3 EUROPEAN COUNTRIES COST OF PENSION AS PERCENTAGE OF GDP, 2012
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2

SWOT ANALYSIS OF THE CONDITION OF OLD-AGE PROTECTIONS IN MALAYSIA
Based on what that we have discussed in Section 1, we can conclude our findings in a SWOT Analysis
format as in the following table.
TABLE 5 CONDITION OF OLD-AGE PROTECTIONS IN MALAYSIA
Strengths Weaknesses
1. High compulsory saving rate
2. Strong existing organisations
3. Government allocation for pension is still
low
1. Low Gross Replacement Rate and Pension
Wealth compared to other countries due to
the low income of the contributors
2. Current pension fund coverage of the
population is low
Opportunities Threat
1. Consolidation of coverage to one single
organisation
2. Increase government budget allocation to
the old-age benefits
3. To increase The Gross Replacement Rate &
Pension Wealth to be on par with other
countries.
1. Rising standard of living might jeopardize
the saving accumulated in the fund
SECTION 2
In the previous section, we have studied the current situations with regards to Old-Age Protection in
Malaysia and come up with the SWOT analysis. In this section, we would explore more on the
Opportunities that we have identified in the previous section and get to more details of the changes
that we would like to propose.
CONSOLIDATION TO ONE SINGLE ORGANISATION FOR OLD-AGE PROTECTION IN
MALAYSIA
In a work by (Hinz, et al. 2010) in the World Bank’s publication, ‘Evaluating the Financial Performance
of Pension Funds’, in the rate of returns are a very limited indicator of pension fund performance and
that the reliance on this indicator can be counterproductive. This is because higher returns might be
due because of the fund manager taking a higher but unjustified risk. Good pension fund according to
them should score highly based on four criteria (not in order) which are as follow: -
1. Population/workforce coverage

2. System efficiency which means low cost to manage fund
3. Intra and intergenerational efficiency which means there should be no subsidy of current
generation by future generations.
4. Income replacement adequacy
In the work, they concentrated on the no (2) System Efficiency. They are proposing that on an
economy-wide basis, the net value added of active management of a pension fund should be zero
unless they are actively engaged in the wealth-creation process (ex. infrastructure or private equity).
They are also agreeable to the Integrative Investment Theory (IIT) that hypothesize that large funds
that are managed on an arm’s length basis with good governance will generate greater stakeholder
value than funds that do not have these characteristics.
By using the framework (Hinz, et al. 2010), we tried to compare various pension organisation in
Malaysia.
FIGURE 4 COMPARISON OF EXISTING PENSION ORGANISATIONS IN MALAYSIA ACCORDING TO 4
CRITERIAS PROPOSED BY (HINZ, ET AL. 2010)
Organisations System Efficiency Population/
workforce coverage
Intra &
Intergenerational
Efficiency
Income replacement
adequacy
KWSP Efficient with cost to
manage asset at
0.26% and cost of
investment of
0.09%12
Fund size
approaching
RM700bn in 2016
46.5% (active &
contributing
members) of labour
force
Excellent in
generational
efficiency as it is a
fully Defined
Contribution (DC)
system which don’t
subsidize between
generations
Most contributors
saving is not enough
to cover retirement
needs
KWAP
(Government
Pension
Scheme)
Very efficient with
cost to manage asset
at 0.12% per annum.
Fund size
approaching
RM110bn in 2016
11.4% of the
population
(government
servants)
Not efficient as it is a
Defined Benefits (DB)
system with generous
benefits up to 3/5 of
last drawn salary with
medical benefits
Mostly enough due to
generous benefits
given
12
(EPF Malaysia Annual Report 2014 2015)

LTAT Fund size of RM9.3bn
in 2014
0.88% of labour force
(Malaysian Armed
Force)
Very efficient since it
is a fully Defined
Contribution (DC)
system
Very high dividend of
15% in 2014
PRS Fund size of
RM1.17bn in 2015
Cost is relatively high
at 1.5% of NAV per
annum
1.3% of labour force Very efficient since it
is a fully Defined
Contribution (DC)
system
On average return of
6% based on savings
Source: Author’s study on various news sources
From the assessment above, EPF is the only organisation that can leverage itself to provide old age
coverage to all Malaysian. Its current coverage of 45.6% of labour force and fund size of RM700bn is
the biggest. To compare EPF with KWAP, in term of participation, it is 4x bigger and in term of fund
size, EPF is almost 7x bigger. EPF is also very efficiently run and meet the criteria of ‘Intra &
Intergenerational efficiency’ since it is a fully DC system. For EPF, only from the criteria of ‘Income
Replacement Adequacy’ that is perceived not enough for most Malaysian. Thus we would allocate
Section 3 to analyse this issue and what can be done about it.
As EPF is the largest and most well run old age support organisation in the country, we thus proposed
that EPF coverage to be widened to cover all income generating sectors, such as self-employed,
domestic workers and family workers. As a DC plan, contributors have to contribute to the fund when
they just started working for the fund to grow and able to provide the subsistence when they retired.
We would demonstrate later in the second part of the paper how that it is the percentage of
withdrawal of the retirement based on last drawn salary that determines how long can the fund last.
ANNUITY AS A STRUCTURE OF THE CONSOLIDATED OLD-AGE PROTECTION
According to (Brown, et al. 2001), an annuity is the best economical option available for a retiree to
manage the longevity risk and under consumption risk. An annuity is defined as an insurance product
that pays out a periodic amount as long as the annuitant is alive, in exchange for an initial premium.
Retirees are at risk of either under consumption because they save too much or over consumption as
their wealth is not enough to last their lifetime. Life annuity offers retirees the opportunity to insure
against the risk of outliving their asset by exchanging the assets with a lifelong stream of guaranteed
income. By having that, they can maximize their consumption with a security of having to know that
the annuity will protect them from completely finish off their wealth. Insurers pool individuals and
couples with similar longevity expectations but varying longevity outcomes as a means to help protect

them against the longevity risk. Because of combined risk pool, an annuity can ensure that the retiree
will continue to enjoy regular cash stream for their lifetime even if their age exceeds the average.
To solve the fragmentation issue as highlighted previously we are proposing a hybrid system of DC
and DB in which combined the best element from both systems and minimized the negatives. The
hybrid system works by combining regular contribution to the retirement fund during working years,
and after retirement, the use of annuity to ensure regular cash to replace a percentage of salary until
expected lifetime. Because the system is compulsory to all, thus the longevity risk is expected to
spread out evenly. Thus, the annuity payment will continue to those who age beyond their expected
lifetime. Any shortfall of fund either during the purchase of annuity just after retirement or the
unexpected increase of lifetime should be borne by the government which will raise it through various
tax. This is to ensure the sustainability of the pension system even in the unexpected situation that
might disturb the DC saving system, ex-world wars & global economics depression.
INCREASE GOVERNMENT BUDGET ALLOCATION TO THE OLD-AGE BENEFITS
AS the government spending is for Old-Age Protection is still very low compared to other countries,
we feel there is a room to propose that the government to extend the old age coverage to cover 100%
of the population. The following table is the result of a simple estimation that we have done in
Appendix 1 & Appendix 2
TABLE 6 ESTIMATION OF COST OF ANNUITY AS % OF GDP
Additional Cost Item % of GDP
Annuity to cover all labour force not covered by EPF & Govt Pension 2.69%
Annuity to cover all population not covered by EPF & Govt Pension 5.64%
Malaysia Government existing expenditure for pension (2013) 1.4%
∴ Projected Cost of Old Age Protection if it combine existing pension and
annuity to cover all population, as % pf GDP
5.64%+1.4% = 7.04%
If we add this up to the existing government expenditure for a pension of approx. 1.4% of GDP (please
refer to Figure 5 Malaysia Cost of Pension and Gratuities as Percentage of GDP, 1994-2013 & Figure 2
European Countries Cost of Pension as Percentage of GDP, 2012, this would only bring up the
expenditure level to 7.04%, which is approximately equal to the lowest spending of a country in
Europe for old age protection. With the increasing number of a retiree in the voting public (15% of
total population of Malaysia in 2035), we project that they will demand greater attention and spending
to be given to their age group.

TO INCREASE THE GROSS REPLACEMENT RATE & PENSION WEALTH TO BE ON
PAR WITH OTHER COUNTRIES
Based on the information in Section 1, we can deduce that The Gross Replacement Rate & Pension
Wealth is positively correlated to these following attributes
1. The compulsory contribution rate
2. Dividend or return of the retirement fund
3. Retirement age
And it is negatively correlated to the inflation rate, especially after retirement.
To investigate the relationship between all those factors, we have built a model of saving &
consumption based on Malaysia’s environment, which simulates the growth of the retirement fund
based on EPF and the staggered consumption as a stipend of the fund after retirement. The
withdrawal from the fund needs to be regulated because of our proposal for the government to
introduce annuity would require the average existing fund to be last the lifetime of the retiree. This is
to ensure that the system is self-sufficient and self-sustainable to ensure minimum use of public fund.
SECTION 3
MODEL 1: SAVING & CONSUMPTION OF RETIREMENT FUND
We aim to create a model of saving and consumption of a retirement fund. The model consists of two
parts; the first part during the individual is still working thus is forced to save a portion of his/her
income and after retirement in which the fund is staggered withdrawn with the objective to maintain
the standard of living and to ensure the fund will last the lifetime of the participant. The assumption
is that the retirement fund is insulated should be self-sufficient for the individual, i.e., no direct top up
from government and there is no annuity in place.
MODEL 1 SAVING PERIOD
Assuming t start when a person starts working
The total of retirement fund at year t is given by the following formula:-
Represent regular
contribution to
the retirement
fund
Represent the
dividend earned on
last year’s fund

𝑌𝑡 = 𝑐𝑤𝑡 + 𝑌𝑡−1(1 + 𝑑 𝑡−1) ----------------------------- (1)
in which t= (1… T)
𝑤𝑡 = 𝑤𝑡−1 ∗ (1 + ẃ 𝑡) ---------------------------(2)
Yt = total retirement fund, c = compulsory contribution rate to retirement fund,
wt = annual salary, t = no working year, T = period of working years
dt = annual dividend,ẃ 𝑡 = yearly wage increase
Assumption : 𝑤0 = 50% 𝑜𝑓 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑤𝑎𝑔𝑒 of that particular year
MODEL 1 RETIREMENT PERIOD
𝑌𝑘 = 𝑌𝑘−1(1 + 𝑑 𝑘−1) − 𝑎𝑤 𝑘 -------------------------------- (3)
in which k= (1…K)
𝑤 𝑘 = 𝑤 𝑘−1 ∗ (1 + 𝑖 𝑘) -------------------------------(4)
𝑤0 = 𝑤 𝑇 𝑤ℎ𝑖𝑐ℎ 𝑖𝑠 𝑡ℎ𝑒 𝑙𝑎𝑠𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑎𝑟𝑦 𝑏𝑒𝑓𝑜𝑟𝑒 𝑟𝑒𝑡𝑖𝑟𝑒𝑚𝑒𝑛𝑡
𝑌𝑘=amount left in the retirement fund, 𝑑 𝑘−1 = dividend earned on the fund,
a = portion of last drawn salary, 𝑤 𝑘 = last drawn salary, inflation adjusted
𝑖 𝑘 = inflation rate, k= retirement year, K = period of retirement,
To build the 1st
part of the model, we need to calibrate 𝑊0, initial wage level, wN annual wage increase,
C compulsory contribution rate, and the period of number of working years, T and period of retirement
years, K.
Represent amount
left in the fund which
continue to earn
dividend
Represent the
regular withdrawal
from the fund

MODEL 1 CALIBRATION
The Household Income Survey (HIS) is conducted by the Department of Statistics, Malaysia. The data
gathered from the survey is the best record on the state of income for Malaysian, and this has been
verified by many studies beforehand. From the DoS website, the data on the ‘Mean Monthly Gross
Household Income’ since 1973 to 2014 is shared. Since this data is on household, we have to make an
assumption that the household income consists of 2 income earning person, the husband, and wife.
Thus, the median wage that we put into our model is the gross household income divided by two. We
use a starting salary of 75% of the median age of that particular year as this is a reasonable assumption
also used in similar academic works such as this. As there are years in which the HIS was not
conducted, ex HIS was conducted in 1970, 1974 & 1976 but not in 1971, 1972, 1973 and 1975; we
made an assumption that income increased linearly in between the years the survey is conducted.
The median wage after 2014 has to be estimated. We used the projection by The Economist
Intelligence Unit (EIU) which is widely known to provide a forecasting and advisory services in the
financial industry13
. EIU provides an estimate for Labour Productivity Growth, which is a proxy for
wage growth. The numbers that they put for Malaysia is 3.1% annually from 2015-2030, which slows
down to 2.2% from 2031-2050. This number would be plug into the model after 2014, which is the last
HIS survey up to date.
The initial wage or 𝑤0 is set at 50% of the average salary of that particular year which is the first
quartile of the salary range. We will see later that the starting salary is not significantly affect how long
the retirement fund can last.
From the HIS Survey, the average annual income increase from 1970 to 2014 is 8.06%. If we use this
average income growth for the next 40 years after 2014, the final wage will be 21.72x the initial salary,
or 16.3x of the average salary. Given this numbers is obtained during the period of outstanding
economics growth of Malaysia, which averaging at 6.4%14
from 1970-2014, we feel this is too
optimistic assumption since the projection of GDP growth for Malaysia is in between 4-5% in the next
5 years. Thus we decided to use 6% instead which is an industry consensus for the salary growth after
2014 since this is more realistic and in line with the GDP projection growth number.
Note that a simulation of retirement saving requires 40 years of wage growth estimate, for most born
years would depend on the estimates from the EIU. The only born year between 1950 to 1954 would
be completely using data from the HIS survey.
13
http://www.eiu.com/
14
The World Bank ‘World Data Bank’ retrieved on 11/5/2016

For complete wage numbers that we used in the model, please refer to Appendix 3.
We derived the ẃ 𝑡 the annual wage increase from the increase of ‘Gross household income’ over the
years. Later on we would see that the median wage will be cancelled out and only annual wage growth
is important to determine the required dividend level and the saving rate.
The compulsory saving for EPF Malaysia is mandated by the EPF Act 1991. It is currently at 12% for the
employer, and 11% for employee, albeit for a review in 2016 in which the employee portion by default
is reduced from 11% to 8% unless the employee wanted otherwise. Throughout the years, the rate
has been changed a couple of times as listed here:
FIGURE 6 EPF CONTRIBUTION RATES SINCE 1952
Employee Employer Total
1952-1974 5% 5% 10%
July 1975-1979 6% 7% 13%
Dec 1980-1992 9% 11% 20%
1993-1995 10% 12% 22%
1996 onwards 11% 12% 23%
*reference: (Thillainathan 2000)
From the contribution to the retirement fund, 70% of it will go to Account 1, which withdrawal is not
allowed unless the sum exceed RM1million. The remaining 30% goes to Account 2, which withdrawal
is allowed for reasons such as buying 1st
house, medical and education. To be conservative, we only
take the 70% that goes to Account 1 or 16.1% from the salary, for the retirement funds model.
The T, which is the period of working, is derived from the retirement age and the working age. On July
2013, the retirement age for Malaysian is set at 60 years old, as stated by the Minimum Retirement
Age Act 2012. Before that, there is no official retirement age, but most public and private companies
in Malaysia set it at either 55 or 56 years of age.
Generally in Malaysia, most recent jobs require at least the Sijil Pelajaran Malaysia (SPM) which is
taken at 17 years old. To complete a diploma or certificate will require on average two additional years
of schooling which will bring the start working age to 20 years old. To take a degree course normally
would require 4 to 5 years of schooling which will bring the start working age to 22 or 23 years of age.
Thus to simplify the calculation, we choose 20 as the average start of working age, and thus the N
which is the working years is 60 – 20 = 40 years.

According to the report15
released by the DoS Malaysia, the average life expectancy for a 65 years old
in Malaysia in 2014 is for the male, 14.9, and the female is 15.9. By this, on average, a retiree at 65
years old will live to 80.9 years in 2015. Moreover, according to the data from developing countries,
the life expectancy will improve as the country advances, albeit not by much. Thus in our model, we
are assuming that the M, which is the age retirement period in which the fund should be enough to
sustain, is (81-60 = 21 years).
The inflation rate is taken from the database of World Bank. After 2014, we are using a formula of
average ten years back of inflation rate to project the future inflation rate. The number that we get is
around 2.8% per annum, which we used as the assumption for inflation rate from 2014 to 2100. The
withdrawal of fund after retirement is also tied to the projected inflation rate so that the retiree
standard of living is maintained throughout the years after retirement.
The dividend rate of the retirement fund, or 𝑑 𝑡/𝑘 in our model is taken from the historical record of
EPF which start from 1952 until 2015. From 2016 onwards, we used the average dividend for the last
10 years as a running estimate. The dividend converges to 6.1% from 2025 onwards. Please refer to
Appendix 3 for the full dividend numbers used in the model.
MODEL 1 RESULT
The following graph is a typical result that we get from our model.
15
https://www.statistics.gov.my/index.php?r=column/pdfPrev&id=cWxzRWcvMTZrWFp4UStqQmp3MG9QZz09
retrieved on 4th
April 2016

FIGURE 7 RETIREMENT FUND FOR AVERAGE PERSON WHO STARTED WORKING IN 1970, WHO
RETIRED ON HIS 60TH
BIRTHDAY, WITH CONSUMPTION AT 50% OF LAST DRAWN SALARY
The graph shows the Retirement Fund of an average person who was born in in 1950 and started
working in 1970. During his working life, he is required by law to save a portion of his salary to the
compulsory retirement fund. As his salary increases, so does the portion that goes to the pension fund.
He will work until at the age of 60 years old in the year 2010 and retires. After he retires, his
contribution stops, and he started to consume the retirement fund at a rate of a portion of his last
drawn salary to maintain the lifestyle that enjoys working life. Our average man in the graph consumes
50% of his last drawn salary. The amount that he has to consume increases every year due to the
inflation. According to the model, the fund can only last to his 75th
birthday.
We thus would like to see whether that the year the retirement fund last to from year start work in
1970 to 2020 as considered using our model.
We plot the data of how long the fund last against the born year. The different coloured lines
correspond to the percentage of expenditure on the last drawn salary. The target is the for the fund
to last at least to 81 years of age, which is the expected lifetime for a retiree in 2014.
RM(60,000)
RM(40,000)
RM(20,000)
RM-
RM20,000
RM40,000
RM60,000
RM80,000
1960 1970 1980 1990 2000 2010 2020 2030 2040
RetirementFundTotal
Years

FIGURE 8 AGE RETIREMENT FUND LAST VS YEAR START WORKING (RETIREMENT AGE AT 60)
The results show various possibilities of how the retirement can last the expected lifetime of an
individual with the current economic condition, and EPF dividend rate provided the retiree is
disciplined enough to restrict their consumption at a percentage of their last income.
From the simulation and the graph, we can see that on average, the age retirement fund expected to
last is steadily increasing over time. For expenditure of 50% of last drawn salary, it reaches 78 years of
age for Year Start to Work of 2003 and beyond. For monthly expenditure of 75% of last drawn salary,
the retirement fund only lasts up to 71 years for those who Start to Work in 2010 and beyond. For
monthly expenditure of 100%, which means the retiree spend exactly like before they retire, the fund
only last to 67 years of age for those who Start to Work on 1988 and beyond.
However, the fund will not be enough to reach the expected lifetime of 81 years old for retiree.
With that in mind, the Gross Replacement Rates can be increased if the saving or/and dividend of the
retirement fund or/and the contribution rate increases or the working years increases as discussed
before. That gives the motivation of our investigation of the relationship between saving rate and
dividend payout of the retirement fund. The relationship is interesting because if we know or can
predict the rate of dividend, we can estimate the percentage of saving of income needed to ensure
retirement fund can last the lifetime of a person.
Value of a,
percentage of
last drawn
salary

MODEL 2: SAVING RATE VS DIVIDEND RATE VS GROSS REPLACEMENT RATE OF
RETIREMENT FUND
To investigates that, the model we have constructed earlier need to be simplified so that we can now
fix some of the constant and varies the variables that we are interested to investigate. We need the
retirement fund to last until 81 years of age which is the expected lifetime of retirees at the point of
their retirement.
MODEL 2 SAVING PERIOD
Let assume that the following variables are constant
d = annual dividend of retirement fund, ẃ = annual wage increase
c = compulsory contribution rate to retirement fund, iM=inflation rate
period of working years
Using the ‘Geometric Sequence Sum’ formula, we can rewrite the equation (1) & (2) to
𝑌𝑇 = 𝑐ẃ0 ∑ ẃ 𝑡−1
𝑡
𝑇
(1 + 𝑑) 𝑇−𝑡
𝑌𝑇 = 𝑐𝑤0ẃ 𝑇−1 ∑ ẃ 𝑡−1𝑡
𝑇−1 (1 + 𝑑) 𝑇−𝑡
--------------------- (5)
Which YT is the total sum of retirement fund just at retirement age
MODEL 2 RETIREMENT PERIOD
To simplify Equation (3) & (4) in the previous model, we use the formula of ‘Present Value of
an Annuity Due’ enable us to calculate the future stipend that would be deducted from the
retirement fund. The formula is given by this
𝐹𝑉𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝐷𝑢𝑒 = 𝐶 [
(1 + 𝑟) 𝑛
− 1
𝑟
] ∗ (1 + 𝑟)
where C = Cash flow per period
r = interest rate
n = number of payments
If we take interest, r in the annuity formula as the difference between the given dividend rate,
d and the average inflation rate,i we can rewrite part 2 of equation (3) & (4) to

𝑌𝐾 = 𝑎ẃ 𝑇[
1−(1−𝑑+𝑖)−𝑁
𝑑−𝑖
]*(1-d+i)
𝑌𝐾 = 𝑎𝑤0ẃ 𝑇−1
[
1−(1−𝑑+𝑖)−𝑁
𝑑−𝑖
]*(1-d+i)
In which 𝐶 = 𝑎ẃ40 because we would like to calibrate the stipend to the last drawn salary.
As retirement fund should be equal to spending of the fund, or YT = YK, the starting and the last
withdrawn salary, 𝑤0ẃ 𝑛
39
cancel out
Thus
𝑐 ∑ ẃ 𝑡−1𝑡
𝑇−1 (1 + 𝑑) 𝑇−𝑡
= 𝑎 [
1−(1−𝑑+𝑖)−𝑁
𝑑−𝑖
] ∗ (1-d+i) with i = constant – (6)
Using simulation, we can now vary c & a & d to see the relationships between those variables
MODEL 2 CALIBRATION
To calibrate the model for Malaysia, we use the data that we have gathered in the previous
model and get the average. Case 1 is for retirement age of 60, Case 2 is for retirement age of
65. Here are the numbers that we use:
Constant Description Value
T Working years Case 1: 40 Case 2: 45
N Retirement years Case 1: 21 Case 2: 16
𝑤 𝑛
Annual wage rise 6%16
We don’t use 8.1% from the historical
numbers since it is taken from data since a low
base
Average rolling last 10
years
Inflation 2.86% annually after 2014
Here are the variables that we would like to investigate the relationship
Variable Description
d Average annual dividend
16
From (Holzmann 2015) and other industry sources

c Annual contribution rate
a % of last drawn salary as annual
withdrawal from retirement fund
MODEL 2 RESULT
Using simulation function in Excel, we test the sensitivities between the three variables

FIGURE 9: TRADE OFF BETWEEN AVERAGE SAVING RATE, AVERAGE DIVIDEND RATE, AND RATE OF
CONSUMPTION OF RETIREMENT FUND FOR 60 & 65 YEARS AS RETIREMENT AGE

Based on historical records, EPF’s dividend payment is between 6% to 8%. Thus, we focus on the
dividend rate between 6% to 8% which is shown in the following table.
TABLE 7 REQUIRED CONTRIBUTION RATE BASED ON GROSS REPLACEMENT RATE, DIVIDEND RATE
AND RETIREMENT AGE FOR THE RETIREMENT FUND TO LAST UNTIL 81 YEARS OF AGE
Gross
Replacement
Rate
Dividend rate (retirement age 60) Dividend rate (retirement age 65)
6% 8% 6% 8%
50% 20% 11% 14% 8%
75% 29% 17% 21% 12%
100% 39% 23% 28% 16%
Range in which the current rate of
contribution to Account 1: 16.1% fall
into
ANALYSIS OF THE RESULT OF MODEL 1 & MODEL 2
Based on the analysis, we can draw four findings:
1. That for a retirement fund to last the expected lifetime of retiree which on average is 81 years
of age, with an average saving rate of in between 11% and 20%, a retiree has to reduce their
consumption to 50% of their last withdrawn salary. Given the Malaysia historical parameter
of retirement fund compulsory saving which is between 16.1% for EPF account one fall into
this range, which means it agrees with the finding of our investigation.
2. A much easier solution to improve the Gross Replacement Rate & Pension Wealth is to
increase the retirement age to 65 years old which is standard in most of the developed
countries. With the retirement age increase, the Gross Replacement Rate can go up to 75%
3. At a retirement age of 60, for a retiree to get a stipend of 75% of last drawn salary, with an
average dividend rate of 6%-8%, he needs to save 17%-29% annually. Assuming the retiree
has fully paid his housing debt which constitutes on average 30% of annual salary, this would
mean that his/her would get the same disposable income as during working years. This
numbers also we feel very achievable since EPF current dividend rate of above 6% and
compulsory contribution to Account 1 of 16.1% is quite close to our estimated numbers of 8%
dividend rate and 17% of compulsory contribution. To increase the dividend rate, EPF needs
to increase the allocation of investments towards higher return asset class such as Private
Equity and Infrastructure together with sophisticated diversification to minimized the

investment risk. The government should consider to increase the compulsory contribution to
around 1% to 17% or more to ensure the fund’s sustainability until the retiree’s average
lifetime.
4. The graph also gives a trade-off between dividend rate, saving rate and standard of living in
which a retirement plan can be built around the projection given by the graph. For example,
for someone who want to maintain his/her income throughout retirement, he needs to follow
the yellow line which gives the minimum dividend rate and saving rate he needs to ensure
that his/her saving is enough to sustain himself to his/her expected lifetime.
To extend the average dividend to be on average 8% from the current 6%, a major change in portfolio
allocation is needed and the pension fund needs to be more sophisticated and should be equipped
with a higher competency needed to manage a different portfolio allocation. Currently approx. 50%
of the fund is invested in a fix income instrument which gives a less risky steady but low return of
about 4% annually. To achieve an average of 8%, a bigger percentage of investment in the higher
return but higher risk instruments such as direct equity and infrastructure investments are needed.
To do so, would require the mind-set and policy change which even though difficult, but necessary as
pointed out by our study here. The pension fund should also consider doing more direct investments
rather than investing in fund managers which do charge a significant fee which take a cut from the
return of the fund.
As this is a very simple estimation, more works are needed to identify and to officialise those in the
informal sectors so that the benefits of having a retirement fund can be extended to them too. As we
have mentioned before too, the Malaysian government spending on pension can also increase closer
to the develop the world to ensure retirees from informal sectors would be getting a better standard
of living.
CONCLUSION
For Malaysia to enhance its old-age protection, the most straightforward and likely to succeed is to
expand EPF/KWSP scope as it is the best organisation in Malaysia which currently provide such
services. We proposed EPF/KWSP become a hybrid Defined Contribution/Defined Benefit system
which is made possible if we include a compulsory annuity that has to be purchased after retirement.
The annuity will ensure a steady stream of income and protection against longevity risk for retirees. It
also simplifies how the current EPF/KWSP scheme can be extended to the whole population and make
it straightforward for the government to budget the future cost of old-age protection.

Based on our analysis, the current Defined Contribution run by EPF/KWSP is not enough to sustain the
fund until the expected lifetime of retiree at 81 years of age. Our further analysis shows that in order
for the fund to fund retirement at a respectable rate of 75% of Gross Replacement Income until 81
years of age, it either needs to
1. Increase of retirement age to 65 years of age, or
2. Increase of contribution rate to 25% (or 17.5% to account 1) and to increase dividend rate to
average at 8%
With these adjustments to the return characteristic or the contribution/saving rate, the fund should
be able to last the average lifetime of a retiree.
Further research and study should be carried out on how this can be achieved.

REFERENCES
Brown, Jeffrey R., Olivia S. Mitchell, James M. Poterba, and Mark J. Warshawsky. 2001. The Role of
Annuity Market in Financing Retirement. Massachusetts, Cambridge, England: The MIT Press.
Caraher, Kevin. 2000. "Issues In Incomes Provision For The Elderly in Malaysia." International
Research Conference on Social Security . Helsinki.
2015. "EPF Malaysia Annual Report 2014."
Hinz, Richard, Heinz P. Rudolph, Pablo Antolín, and Juan Yermo. 2010. Evaluating the Financial
Performance of Pension Funds. The World Bank.
Holzmann, Robert. 2015. "Old-Age Financial Protection in Malaysia: Challenges and Options." IZA
Policy Paper Series.
Hwok-Aun Lee, Muhammad Abdul Khalid. 2014. "Is Inequality in Malaysia Really Going Down?" FEA
Working Paper 2014/9.
KRI, Khazanah Research Institute,. July 2015. "Population Ageing: Can We “Live Long and Prosper”?"
The New Economy.
Malaysia, Ministry of Finance. 1994-2013. "Malaysia Economic Report ."
2016. Portal Rasmi Bahagian Pasca Perkhidmatan JPA. March 2.
http://www.jpapencen.gov.my/english/pension_benefits.html.
Thillainathan, R. 2000. "The Employees Provident Fund of Malaysia: Asset Allocation, Investment
Strategy and Governance Issues REvisited."
Wolfram J. Horneff, Raimond Maurer, and Michael Z. Stamos. 2006. "Life-cycle Asset Allocation with
Annuity Markets: Is Longevity Insurance a Good Deal?" University of Michigan: Retirement
Research Center.
World Bank Pension Primer. 2008. "The World Bank Pension Conceptual Framework." 8.
Zvi Bodie, Alan J. Marcus, and Robert C. Merton. 1988. "Defined Benefit versus Defined Contribution
Pension Plans - What are the Real Trade-offs?" Pensions in the U.S. Economy.

APPENDICES
APPENDIX 1: CALCULATION FOR EXPECTED ANNUITY REQUIRED IN 2016 TO MAINTAIN MINIMUM
WAGE WITHDRAWAL TO THE LIFETIME OF 81 YEARS, ASSUMING RETIREMENT AGE AT 60 YEARS OLD
Minimum Salary 2016 RM 1000 Avg EPF
Dividend
6%
Est inflation rate 3%
Year Annual income (year),
inflation adjusted
Index for
NPV
NPV
1 RM 12,000 1.000 RM 12,000
2 RM 12,360 0.940 RM 11,618
3 RM 12,731 0.884 RM 11,249
4 RM 13,113 0.831 RM 10,891
5 RM 13,506 0.781 RM 10,545
6 RM 13,911 0.734 RM 10,210
7 RM 14,329 0.690 RM 9,885
8 RM 14,758 0.648 RM 9,571
9 RM 15,201 0.610 RM 9,266
10 RM 15,657 0.573 RM 8,972
11 RM 16,127 0.539 RM 8,686
12 RM 16,611 0.506 RM 8,410
13 RM 17,109 0.476 RM 8,143
14 RM 17,622 0.447 RM 7,884
15 RM 18,151 0.421 RM 7,633
16 RM 18,696 0.395 RM 7,390
17 RM 19,256 0.372 RM 7,155
18 RM 19,834 0.349 RM 6,928
19 RM 20,429 0.328 RM 6,707
20 RM 21,042 0.309 RM 6,494
21 RM 21,673 0.290 RM 6,288
Total RM 344,118 RM 185,924
Inclusive of estimated Management fee (10% of fund) per
person
RM 204,516

APPENDIX 2: CALCULATION FOR ESTIMATED COST TO PROVIDE ANNUITY TO THE LABOUR FORCE AND
POPULATION OF MALAYSIA WHO ARE NOT COVERED BY EPF & GOVERNMENT PENSION
Average Labour Participation Rate 45-54: 76.60%
Population retiring/year (Dept of Statistic -
50-54 male & female divide by 5)
179561.2
Coverage by EPF 46.50% of labour force
Coverage by government pension 10.00% of labour force
Est cost to provide annuity/person in 2016 RM
204,516.12
(refer to Appendix 3)
Labour Force to retire every year (76.6% of
population)
137,544
Coverage by EPF every year 83,496
Coverage by govmnt pension every year 17,956
Labor force not covered by EPF & gov
pension
36,092
Cost to provide annuity to Labour force not covered by EPF & pension RM 7,381,355,039
Cost to provide annuity to all population not covered by EPF & pension RM 15,974,574,337
Malaysia Government announced budget for 2016 RM 267,200,000,000
Annual Cost of Annuity as % of GDP to cover all labour force not covered
by EPF & Govt Pension
2.69%
Annual Cost of Annuity as % of GDP to cover all population not covered
by EPF & Govt Pension
5.64%

APPENDIX 3: ASSUMPTION ON INDIVIDUAL MEDIAN INCOME, ANNUAL SALARY GROWTH AND
ACTUAL EPF DIVIDEND
Year
Median Gross Household Income (box in yellow is
given by the HIS survey)
Est median income (half of HIS Household
Income)
Est
Salary
growth
Act EPF
Dividend
Rate
1970 RM 166 RM 83 8.0%
1971 RM 181 RM 91 9.2% 8.0%
1972 RM 197 RM 98 8.4% 8.0%
1973 RM 212 RM 106 7.8% 8.0%
1974 RM 227 RM 114 7.2% 8.0%
1975 RM 268 RM 134 17.8% 8.0%
1976 RM 308 RM 154 15.1% 8.0%
1977 RM 348 RM 174 13.1% 8.0%
1978 RM 389 RM 194 11.6% 8.0%
1979 RM 429 RM 215 10.4% 8.0%
1980 RM 502 RM 251 16.9% 8.0%
1981 RM 574 RM 287 14.5% 8.0%
1982 RM 647 RM 323 12.6% 8.0%
1983 RM 719 RM 360 11.2% 8.5%
1984 RM 725 RM 363 0.9% 8.5%
1985 RM 732 RM 366 0.9% 8.5%
1986 RM 738 RM 369 0.9% 8.5%
1987 RM 777 RM 389 5.3% 8.5%
1988 RM 816 RM 408 5.0% 8.0%
1989 RM 903 RM 452 10.7% 8.0%
1990 RM 990 RM 495 9.6% 8.0%

Year
Income)
Est
Salary
growth
Act EPF
Dividend
Rate
1991 RM 1,077 RM 539 8.8% 8.0%
1992 RM 1,177 RM 589 9.3% 8.0%
1993 RM 1,277 RM 639 8.5% 8.0%
1994 RM 1,377 RM 689 7.8% 8.0%
1995 RM 1,551 RM 775 12.6% 7.5%
1996 RM 1,724 RM 862 11.2% 7.7%
1997 RM 1,714 RM 857 -0.6% 6.7%
1998 RM 1,704 RM 852 -0.6% 6.7%
1999 RM 1,819 RM 910 6.7% 6.8%
2000 RM 1,934 RM 967 6.3% 6.0%
2001 RM 2,049 RM 1,025 5.9% 5.0%
2002 RM 2,130 RM 1,065 4.0% 4.3%
2003 RM 2,211 RM 1,106 3.8% 4.5%
2004 RM 2,325 RM 1,162 5.1% 4.8%
2005 RM 2,438 RM 1,219 4.9% 5.0%
2006 RM 2,552 RM 1,276 4.7% 5.2%
2007 RM 2,691 RM 1,346 5.4% 5.8%
2008 RM 2,830 RM 1,415 5.2% 4.5%
2009 RM 3,095 RM 1,548 9.4% 5.7%
2010 RM 3,361 RM 1,680 8.6% 5.8%
2011 RM 3,626 RM 1,813 7.9% 6.0%
2012 RM 4,106 RM 2,053 13.2% 6.2%

Year
Income)
Est
Salary
growth
Act EPF
Dividend
Rate
2013 RM 4,585 RM 2,293 11.7% 6.4%
2014 RM 4,723 RM 2,361 6.2% 6.8%
2015 RM 4,864 RM 2,432 6.0% 6.4%
APPENDIX 4: EPF DIVIDEND RATE SINCE 1952 TO 2015
195
2 to
195
9
196
0 to
196
2
196
3
196
4
196
5 to
196
7
196
8 to
197
0
197
1
197
2 to
197
3
197
4 to
197
5
197
6 to
197
8
197
9
19
80
to
19
82
19
83
to
19
87
19
88
to
19
94
19
95
19
96
19
97
to
19
98
199
9
2.5
0%
4.0
0%
5.0
0%
5.2
5%
5.5
0%
5.7
5%
5.8
0%
5.8
5%
6.6
0%
7.0
0%
7.2
5%
8.0
%
8.5
%
8.0
%
7.5
%
7.7
%
6.7
%
6.8
4%
2000-present[edit]
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
6.00
%
5.00
%
4.25
%
4.50
%
4.75
%
5.00
%
5.15
%
5.80
%
4.50
%
5.65
%
5.80
%
6.00
%
6.15
%
6.35
%
6.75
%
6.40
%

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