Malaysia: Islamic finance pensions

Moves to liberalise Malaysia’s pensions market are expected to galvanise the Islamic finance market, already a key segment of the country’s economy, though greater regulatory oversight will be needed to bolster investor confidence in the sector.

On July 23, the international press reported that Malaysia was introducing “sweeping reforms” to its pension system. The changes introduce a new, voluntary Private Retirement Scheme (PRS) to run alongside the existing Employees Provident Fund (EPF). The PRS will allow Malaysians to purchase a wide variety of products from private fund management firms, making it easier for them to focus on Islamic investment. Currently, the EPF collects pension contributions and invests the cash; contributors can place up to 20% in a single mutual fund.

By facilitating investment in private products by individuals, the reforms are expected to kick-start the growth of Malaysia’s small private pensions sector, which the government now expects to be worth RM73bn ($22.92bn) by 2020. Though some think the prediction is rather optimistic, most agree that there is a lot of potential for growth given the regulatory changes, growing disposable incomes and a rising culture of saving for the future.

Officials – and the structure of the new regulations – make it clear that increasing investment in Islamic products is one of the aims of the changes. “The PRS will contribute to the growth of Islamic fund products,” Zakie Ahmad Shariff, a board member of the Private Pension Administrator (newly founded to oversee the PRS funds) and CEO of the Federation of Investment Managers Malaysia, told international press. Analysts agreed that those investing in the new system would gain from sharia-compliant offerings in particular.

Of the first 30 products offered through the PRS, only six will be Islamic, with the expectation that there will be more to come. The eight existing PRS providers ¬– all of which have sharia-compliant arms – can offer between three and seven conventional products through the system, but can provide up to 10 products if they offer Islamic schemes as well.

As the domestic market grows in new segments, Malaysia continues to cement its position as one of the world’s leading sharia-compliant sectors. It is particularly strong in sukuk (Islamic bonds), which accounted for 68.7% of the $84.4bn issued globally last year and 71% of the $43.5bn launched in the first quarter of 2012 (a 55% increase on 2011’s first quarter).

In July, Axiata, Malaysia’s leading mobile telephone operator, announced it was looking to raise up to $1.5bn in sukuk issues to tap low-cost long-term funds and increase its capital efficiency. It will be the first Asian telecoms firm to issue multiple currency sukuk, according to the company. The launch was “strategic” and targeted at investors in the region, as well as the Middle East and Europe, and officials said the move would help strengthen Malaysia’s position as a global sukuk leader.

The private sector and government bodies are likely to provide further issuances in the near future as Malaysia rolls out its ambitious Economic Transformation Programme, which envisages large investments in infrastructure and services and aims to develop the economy to boost value added and strengthen value chains.

While Malaysia’s Islamic finance sector continues to be a world leader, the industry’s rise to global prominence is relatively new. As elsewhere in the world, growth has brought on regulatory challenges, and some parts of the industry lag behind others.

“Sharia-compliant trustee management needs to move forward,” Abdul Jalil Rasheed, the CEO of Aberdeen Asset Management, which moved into Islamic finance in Malaysia in 2009 and counts the EPF as its biggest customer, told OBG. “Asset management is still a very locally driven business in Malaysia. There are currently 16 licences in the market for Islamic asset management, not all of which are doing well.”

Rasheed suggests that “innovation needs to slow” so that Islamic finance can put down deeper regulatory roots and to prevent firms from over-extending themselves, adding that the market may still not be mature enough for sharia-compliant hedge funds to flourish.

As Deputy Finance Minister Datuk Awang Adek Hussin noted last year, greater cooperation among Islamic finance experts, religious scholars, government bodies and the private sector is needed to support and consolidate the industry. “Although Malaysia’s Islamic financial performance has shown encouraging development, we should not be complacent with our achievements thus far,” he said.

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Malaysia: Islamic finance pensions

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Malaysia: Capital markets eye pension fund inflow

Malaysia’s capital markets are in line for a boost, as the introduction of private pension funds is expected to create a significant funding inflow that will be directed towards various investment vehicles. This should also serve to take some of the pressure off the state’s retirement schemes.

In early April, the Securities Commission (SC), Malaysia’s main financial regulatory authority, announced it had given approval to eight firms to offer private retirement scheme (PRS) services to the public, bringing non-state-backed superannuation funds a step closer. Most of those companies cleared to provide PRS services have said they will begin taking contributions in the second half of 2012.

The development of PRS services was set out in the Capital Market Master Plan 2 (CMP2), which was spearheaded by the SC and unveiled in April 2011. Among its key goals, CMP2 is intended to assist the markets in more effectively utilising domestic savings for capital formation, increasing the capacity and efficiency of the capital market in financing investment requirements for economic growth, and addressing efficiency of savings intermediation, with one of the paths towards these objectives being PRS.

At present, Malaysia’s main, state-backed superannuation programme is the Employees Provident Fund (EPF), which collects mandatory contributions from registered workers. The funds are then invested in a range of revenue-earning instruments. Estimates put the amount of funds under the control of the EPF at almost $165bn, roughly half of Malaysia’s GDP in 2011.

While generally seen as successful, the EPF only taps a relatively shallow pool of funds. PRS is considered an option that could siphon off more private savings and better utilise them in the economy, as well as spread investment risk and ensure that more members of society have their retirement needs met.

According to Yeah Kim Leng, the chief economist at RAM Consultancy Services, the launch of PRS will bring significant benefits to Malaysia’s capital markets.

“Besides relieving pressure on the EPF management, the PRS will help to mitigate over-concentration of investment funds in a single entity. It will add another layer of depth and liquidity to improve the efficiency of the markets,” Yeah said in an interview with the Malaysian Star in late April. “Secondly, well-designed PRS can better cater to the different income and age profiles, as well as risk appetites of contributors, as against the one-size-fit-all scheme currently in place.”

One of the eight firms given the green light by the SC to offer PRS products was CIMB-Principal Asset Management. According to the company’s CEO, Campbell Tupling, by supplementing the existing mandatory schemes, the PRS will promote greater flexibility in investments.

“With the emergence of the PRS industry, Malaysians will be further empowered to set aside additional voluntary savings for investment in a well-regulated and structured manner,” Tupling said in early April.

It will take time for PRS providers to sell their products to the public, which is long used to state-backed social insurance programmes. Some estimates suggest the level of funds under management through PRS will rise to around $10bn over the next 10 years. While a sizeable sum, and one that will be welcomed by the markets, it will be just a fraction of the total controlled by the EPF.

Though it will be up to PRS providers to promote their products and the concept of private pension programmes, the government has done its part to buy into the scheme. As an additional incentive for Malaysians to take out PRS coverage, workers will be able to get a tax write-off of up to $990 on their annual contributions, while employers will also be given tax deductions of up to 19% of their employees’ salaries on contributions to PRS made on behalf of their staff.

Few analysts or PRS providers are yet making predictions on returns from the investments, though most are upbeat about prospects for outperforming the EPF, which in February declared a 6% dividend for the 2011 financial year, posting investment gains of $9bn.

Having been given the go-ahead by the SC, Malaysians can expect the eight sanctioned PRS providers to start their respective promotional campaigns soon, and while it will be much longer before the full force of investments begins to be felt in the markets, that flow will serve to deepen the capital pool and stimulate growth.

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Malaysia: Capital markets eye pension fund inflow

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