Continuedfrom last week's discussion,
In the lead up to retirement, the key issue for most employees is - do they have
enough money to maintain their standard of living in retirement. Such anguish can
often turn to panic strategies and risky investment decisions in a last ditch attempt
to increase their retirement "pot".
Employees in such a position could simply have said to have failed to plan prudently.
To extinguish such anxiety, the alternative is an employer sponsored private pension
Private pension funds generally benefit employees as they receive a lump sum of money
in addition to their Employees Provident Fund (EPF) upon their retirement. This supplementary
income can assist to finance their retirement years and avoid a drastic drop in the
standard of living and provide some protection against the impact of rising cost
of living (inflation).
At a Mentor-business research conference on Private Pension Scheme held at Hotel
Nikko Kuala Lumpur recently, one of the speakers, Mr. Denrus Wilkie of Nomandy Advisory
Services commenting on Malaysia's leaders repeated call for more institutional representation
in the Kuala Lumpur Stock Exchange (KLSE), said:
"Growth of private pension plans should be encouraged as this will encourage
institutional participation". They will be an important source of capital for
private enterprise and infrastructure development. Moms and Dads can enjoy an additional
retirement benefit, often by sharing in their growth of their own employer via the
company pension fund. At the same time the growth of such funds will help Malaysia
by reducing reliance on foreign debt, as equity capital will be sourced locally,".
As money in pension funds will be managed by professionals, employees can basically
afford to sit back and relax to see their monthly contribution grow in value over
the long-term. However, some may argue that they are able to reap better returns
if they invest themselves rather than let the experts to manage their investments.
But what is the likelihood that a layman is able to beat the perfonnance of a full
time professional? It is common to see individuals make money during good times but
what about surviving a turbulence like what we experienced last year where the Kuala
Lumpur Composite Index shed half of its value?
Since most retail investors treat the stockmarket as a casino, can a stock punter
beat the performance of a fund manager over the long-term? The answer is almost without
qualification is an emphatic NO.
To support this, many retail investor's savings got burnt in the stockmarket as a
result of the meltdown last year. In contrast, prudent restructuring of portfolios
and adopting defensive investment srategies by some capable fund managers managed
to minimize losses.
The common goal of setting up a pension funds is to reap better rewards by at least
achieving a higher rate of return than the EPF and the local fixed deposit rates.
You may then as "can a fund manager beat the EPF or the fixed deposit rates?."
The answer depends largely on the investment ability of the fi,nd manager - how they
manage their assets during different investment cycles. The weekly-published Normandy's
fund performance table indicates that there are some good fund managers with impressive
results over the long-term who outperformed both the main Kuala Lumpur Composite
Index (KLCI) and local fixed deposit rates significantly.
The EPF has a ceiling of 25% in equities, and the balance in bonds' cash and direct
lending unlike pension funds which have higher ceiling for equities, a 25% floor
in Malaysian Government Securities and a ceiling of 20% in non-Malaysia assets.
This asset allocation is both reasonable and risk adverse. Given the enormous dependence
on the EPF for any benefit in retirement of any kind, Normandy believes the EPF asset
allocation is both prudent and appropriate.
The important point potential invesaors should note is the primary difference in
the asset allocation policy between pension funds and the EPF. Table 1 shows that
the asset mix of permitted investments of the EPF and pension funds are different
- pension funds have more flexibility. During a booming stock market, a fund manager
for a pensionfund will be able to invest more in the stock market to take advantage
of the higher ceiling imposed.