Private Pension Plans

This is very good news for actuarial science students. Any pension scheme would require actuarial expertise. In fact, a large percentage of actuaries work with companies that manage pension schemes. With the introduction of private pension plans, there would be less dependent on the EPF to provide income to retirees.

To encourage the setting up of private pension schemes, amendments can be made to the law concerning contributions to EPF by employers as well by employees. Employers and employees involved in pension schemes can be allowed to reduce the contributions to EPF.

The above would then reduce the amount of fund handled by the EPF. A well-managed pension scheme should be able to provide a better retirement income than that provided by the EPF scheme.


Friday July 24, 2009
Private pension go-ahead
By YVONNE TAN and FLORENCE A. SAMY


KUALA LUMPUR: The much talked about private pension funds will kick off by the middle of next year.

Minister in the Prime Minister’s Department Tan Sri Nor Mohamed Yakcop, who announced this, said the new scheme would target the two million self-employed and those who were outside the current pension scheme.

He said the new pension funds could either be operated by new fund management firms to be licensed by the Securities Commission, or by existing firms.

The funds would be regulated by the Securities Commission.

“Several fund managers have already shown keen interest,” he told a press conference after delivering his keynote address at the Forum on Private Pension Industry Retirement Funds here yesterday.

Nor Mohamed said the scheme would target self-employed individuals who currently did not contribute to the Employees Provident Fund or those who wanted to contribute more than the EPF’s statutory requirements.

“We have to ensure it is well managed as it is a pension fund, a fund for individuals in their old-age,” he said.

He said the EPF had a government guarantee of 2.5% return.

“The private pension funds should be able to provide a ‘market return’ at any point of time,” Nor Mohamed said when asked on investment returns.

“The EPF has RM340bil in assets now. These private pension funds have huge potential,” he said, adding that there were currently 5.7 million active EPF members.

Nor Mohamed said the funds were part of the Government’s effort to reform the pension fund industry.

“This is crucial as Malaysia moves towards a developed and high income nation,” he said, adding that such funds would be a boost to the nation’s capital markets.

He said the SC had been tasked to prepare a report containing further details within the next six months.

“The Government at the same time will look at its own pension scheme and the Employees Provident Fund (EPF), and head a committee to coordinate all aspects of the pension reform,” he said.

In a survey by the EPF, it was found that around 90% of members have less than RM100,000 in their accounts and more than 70% would have exhausted their money within three years of withdrawing the lump sum upon retirement.

“This underlying trend reflects the sole dependence of retirees on their EPF savings as a safety net and as such, the inadequacy of sustainable levels of income after retirement,” he noted.

He said Malaysia had pension coverage via EPF, the Public Sector Pension Scheme and Lembaga Tabung Angkatan.

“However, there are gaps in the existing pension framework,” he said.

SC chairman Tan Sri Zarinah Anwar said the regulator would make capital preservation and investor protection top priorities when it came to the funds.

“We are gathering input from successful private pension funds models in other countries. We will then try and adopt the best practices to start off on the right footing,” she said.

Areca Capital Sdn Bhd chief executive officer Danny Wong said it “would take some time” to see the impact of the funds on the capital market.

“It all depends how individuals respond,” he told The Star.

Bank Islam Malaysia Al-Awfar Scheme

When I opened the website for this scheme the first thing that I noticed was the big sign that said "DEPOSIT RM100 AND YOU MAY GET RM100,000!"

http://www.bankislam.com.my/About_Al-Awfar.aspx

My immediate reaction was that this was gambling. If you paid some money with the hope of getting a much bigger amount of money through a lucky draw, I would classify it as gambling. Gambling is definitely not permitted in Islam. However reading further, I saw that there is no bet involved because your RM100 is not lost if you do not win, like you would if you buy a lottery ticket.

So the question is what is gambling? Is it the bet or the lucky draw or both? Definitely you will not have a gambling situation if you just have a bet and there is no lucky draw for determining the winner of the prizes. However, in the case of Al-Awfar, there is a lucky draw to determine the winner of the prizes but there is no bet involved. Is this the case?

Normally, lucky draws are done to determine who get prizes that are not substantial financially. For example, lucky draws determine who gets a hamper worth around RM250. If a lucky draw is carried out to determine who would get 1 million ringgit among a million or more hopeful people, this would bring it closer to an act of gambling.

One of the reasons for prohibiting gambling is so that people will work to earn the money and not hope for luck. If I have RM1000 to save, I should deposit it in a bank and hope that the bank will invest the money and I will agree to share some of the profit with the bank, but if I deposit the money in the hope that I will get RM100,000 through a lucky draw which the bank conducts periodically, I feel it is a wrong objective of depositing the money. It would be worse if I do not expect the bank to give me any profit (or I do not mind getting a lower than the normal profit given by the bank for a normal deposit without lucky draws involved), as long as I am eligible for the draw, and I would deposit more money so that my chance of winning the substantial prize is increased.

Looking at it superficially, it seems there is no bet involved because the money you deposited will still be there whether you win the prizes or not. So who pays for the prizes and where is the money obtained from? The bank says that the prizes are paid from the bank's fund and that it does not involve the deposits by the depositors. So where does the bank get the money to pay the substantial amount of prizes from, and at regular intervals?

There is also an explanation that since this scheme is similar to that of Skim Sijil Simpanan Premium (SSSP) of Bank Simpanan Nasional (BSN) and that the National Fatwa Council has declared that this scheme is "harus", therefore the Al_Awfar scheme must also be syariah-compliant.

A similar scheme is advertised by Ar-Rajihi bank (i-Zamzam) where lucky depositors can win a free trip to do the Haj or the umrah. I find this scheme very similar to that of the Al-Awfar scheme, the difference being the nature of the prizes.

Lucky draws have been practiced during the time of the Prophet (pbuhahf) but they were not to determine who would win a financial reward that was substantial. They were used mainly to decide who would do some good deeds if there were several people who wanted to do the deeds concerned. In the case of the drawing of lots to determine who (among them Nabi Yunus) should be thrown into the sea, I do not agree that this is a justification for making drawing of lots to make decisions permissible, and thus legitimizing the drawing of lots for winning substantial monetary prizes. The objectives of the two are very different.

I hope the Syariah Advisory Councils appointed by various financial institutions in Malaysia will re-look at this scheme as well as the SSSP, and determine its status with respect to being syariah compliant. I have read many fatwas online that consider schemes like this as similar to gambling. One such fatwa is from Islam-On-Line at


http://www.islamonline.net/servlet/Satellite?pagename=IslamOnline-English-Ask_Scholar/FatwaE/FatwaE&cid=1119503544118