Providers’ Perception on the Legal Framework of Malaysian Private Retirement Scheme Under CMSA 2007
In 2010, the Government established the 1Malaysia Pension Scheme (SP1M), for the self-employed without fixed income to contribute voluntarily to the Employees Provident Fund (EPF). The Government recognizes the importance of savings from an early age to ensure sufficient savings after retirement. To further increase savings, the Government encourages youth to undertake long-term investment through the Private Retirement Scheme (PRS). After five years been introduced to the public, it is significant to evaluate the perception of PRS providers in relation to the existing scheme. The objective of the paper is to discuss the perception of PRS providers on the legal framework of the private retirement scheme under CMSA 2007. This paper adopts a qualitative research method by conducting interviews with the providers of PRS. In analysing the data, thematic data analysis was employed to deduce findings from the respondents’ views. The thematic analysis is sorted out according to the legal framework of PRS in the CMSA 2007. The finding of the research shows that majority of respondents agreed that the legal framework of PRS is adequate to protect investors and providers. However, there are a few suggestions to improve the legal frameawork and governance of PRS i.e. internal guidelines, provider’s fee and etc.
Keywords: Private Retirement SchemeProviders of PRSPrivate Pension SchemeLegal Framework of PRS
In 2010, the Government established the 1Malaysia Pension Scheme (SP1M), for the self-employed without fixed income to contribute voluntarily to the Employees Provident Fund (EPF). To date, about 66,000 contributors have participated in the scheme with total savings exceeding RM240 million. To encourage more people to participate in the scheme, the Government increases its contribution from 5% to 10% or from a maximum of RM60.00 to RM120.00 per year employee provident fund (Employees Provident Fund, 2014). The Government recognizes the importance of savings from an early age to ensure sufficient savings after retirement. To further increase savings, the Government encourages youth to undertake long-term investment through the Private Retirement Scheme (PRS). (Tejvan Pettinger, 2008). Towards this, the Government proposes a one-off incentive of RM500.00 to contributors who participate in the PRS scheme with a minimum cumulative investment of RM1,000.00 within a year. The incentive, which is available for individuals aged between 20 and 30 years, is expected to attract 420,000 youth contributors nationwide. The incentive will be implemented from 1 January 2014, for a period of 5 years, involving an allocation of RM210 million (Treasury Department, 2013).
The introduction of the PRS framework was a result of recommendations made by the Securities Commission Malaysia (SC) to the Government to accelerate development of the private pension industry in Malaysia. PRS which are an integral feature of the private pension industry, seek to enhance choices available for all Malaysians, whether employed or self-employed, to supplement their retirement savings under a well-structured and regulated environment (Securities Commission, 2012). The Capital Markets and Services Act 2007 (CMSA) is the main Act which regulates and provides provisions related to the PRS in Malaysia. The robust amendment to the Act in 2012 focuses on the insertion of the new provision of PRS and other matters (Capital Markets and Services Act, 2007). This is in line with the objective of the Malaysian Capital Markets Master Plan II (CMMP II) after the great achievement of the CMMP I 1998-2010 (Securities Commission, 2011). The objective of this paper is to discuss the perception of PRS providers on the legal framework of the PRS under CMSA 2007. After five years been introduced to the public, it is significant to evaluate the perception of PRS providers in relation to the existing scheme.
Hindrances of Private Retirement Scheme
The governance of private pension plans and funds involves the managerial control of the organizations and how they are regulated, including the accountability of management and how they supervised. According to Steward and Juan, the basic goal of pension fund governance regulation is to minimize the potential agency problems, or conflicts of interest that can arise between the fund members and those responsible for the fund’s management and which can arise between the fund members and those responsible for fund management and which can adversely affect the security of pensions savings and promises (Steward & Yermo, 2008). Ambachtsheer et al. (2006) identify the main governance weaknesses as poor selection processes for members of the governing board, a lack of self-evaluation of board effectiveness and weak oversight by the board.
Other specific problems include lack of delegation clarity between board and management responsibilities, board micro-management and non-competitive compensation policies in pension funds. In Malaysia, even though under the CMSA, has prescribed the general principles of law in relation to PRS and the SC also published the Guidelines on PRS 2012, but in terms of the process and procedures, specification of terms of contract between providers and contributors is different amongst providers of PRS and determination of the investment objective and its achievement is the discretion of the providers.
In the United States and United Kingdom show that consequences of voluntary pensions aggregate coverage is only around 50% and coverage being focused on men, unionist, high income workers, white collar workers etc. Coverage of low income workers may have a more powerful effect on national saving than voluntary coverage which leaves them out (Philip, 1995). Meaning that the mandatory pensions scheme is more favourable as given the beliefs that individual may not voluntarily save for old age, and in order to durably reduce future government liabilities, mandatory schemes are often favoured (Vittas, 1994).
Like any other investments in the market, the gains of PRS are not guaranteed.. So, despite the best efforts of PRS providers and regulators to safeguard investor interest, one should always consider the possibility of not reaping any returns from his hard-earned cash and what those implications are.
Not only the returns of PRS are not guaranteed but the capitals or contributions made to the PRS plan are not protected too. There is always that chance to lose the money contributed all those years in the event of adverse market conditions. In order to mitigate these risks, a person needs to educate himself and keep track of his PRS plans carefully (Ching, 2012).
This paper adopts a qualitative research method by conducting interviews with the providers of PRS. In analysing the data, thematic data analysis was employed to deduce findings from the respondents’ views. The thematic analysis is sorted out according to the legal framework of PRS in the CMSA 2007 which relates to sources of PRS law, jurisdiction of providers, efficiency of registration and approval process, criminal sanction, responsibilities of SC, ground of refusal of approval, fees, violation of provisions, and disclosure of information. The interview was conducted with five PRS providers ; AmFunds Management Berhad, Manulife Asset Management Services Berhad, AIA Pension and Asset Management Sdn. Bhd., Affin Hwang Asset Management Berhad and Kenanga Investors Berhad. Interviewees (respondents) are officers who are in charge of PRS in their organization. Their age is range between 26 to 56 years old. They are 6 male respondents and 1 female. The respondents’ designation is
The Legal Framework of PRS
Section 139A of CMSA, PRS is defined as a retirement scheme governed by a trust, offered or provided to the public for the sole purpose, or having the effect, of building up long term savings for retirement for members where the amount of the benefits is to be determined solely by reference to the contributions made to the scheme and any declared income, gains and losses in respect of such contributions but does not include any pension fund approved under section 150 of the Income Tax Act 1967; or any retirement scheme or retirement fund established or provided by the Federal Government, State Government or any statutory body established by an Act of Parliament or a State law (Capital Markets and Services Act, 2007).
The main legal framework of PRS is based on three sources i.e. the Capital Markets and Services Act 2007 (CMSA 2007), Capital Markets and Services (PRS Industry) Regulations 2012 (PRS Regulations 2012) and the Securities Commission Guidelines on PRS 2012 (PRS Guidelines 2012) (Securities Commission, 2012). The main discussion of this paper will be focused on these three legal sources.
The CMSA 2007 is the main statute to regulate the PRS has been amended by Capital Markets and Services (Amendment) Act 2011 (Act A1406) where new provision pertaining to PRS Industry has been inserted under Part IIIA of the principal Act. The amendment came in force effectively on 3rd October 2011. Due to such amendment, there are 44 sections deal with the PRS (section 139A – 139ZR). Secondly, the PRS is regulated by PRS Regulations 2012 which provide the duties and responsibilities of PRS providers. This including, fiduciaries duties, management of records, management of deeds, preserving of integrity and management of annual reports and returns.
Finally, the PRS is also governed by the PRS Guidelines 2012 issued by SC Malaysia to be observed by the PRS providers effectively on 5 April 2012
Perception of providers on PRS Legal Framework
Sources of Law
All respondents agreed that the SC is the main regulator and enforcement body of PRS. The main source of law relating to PRS is under the CMSA 2007. This is said by R1(a); “
Jurisdiction of PRS provider
The jurisdiction of PRS providers is based on the law and regulation related to the PRS. This is agreed by all providers. However, a PRS Handbook is a requirement as R2 commented, “
Further R4 agreed that providers should have their own PRS handbook. As highlighted by R4; “
Efficiency of registration and approval process
For the efficiency of registration and also the approval process of PRS providers by SC, majority of providers gave a positive feedback. R5 said,
Criminal sanction (providers)
All of providers agreed with the penalty clause stipulated under the CMSA 2007 for the non-compliance of registration and approval requirements of provider’s application. According to the CMSA 2007, any person contravenes provision relating to registration and approval requirement commits an offence and shall on conviction be punished with imprisonment and liable to a fine (section 139P and section 372) (Ching, 2012). As mentioned by R2, “
Responsibilities of Securities Commission
With regards to responsibilities of SC in managing and handling PRS, R5 commented; “I found it is good. From my experience dealing with SC, I would say it is a good experience and it is not something about diplomatic. It just that…. I think because we have the chance to work with difference officer under this division that actually governing PRS. Overall I think something good for us’. R1(a) added that SC has quite a good relation with providers. Further he mentioned that “They gave feedback on most things. Every 1 or 2 months or once a month they will give feedback. Every time when they want to implement something then they will call us for a meeting”.
Responsibilities of Securities Commission
According to CMSA 2007, there are nine grounds of refusal for the approval of application as a PRS providers. Based on the feedbacks from the respondents, there are different views concerning grounds of refusal for approval as PRS providers. According to the R3(b) it is too early to comment about the ground of refusal for the approval process as the PRS is still in the infant stage. R3(b);
Efficiency of registration and approval process (SC)
Regarding the efficiency of registration and approval process of PRS by SC, majority of the PRS providers do not give any responds. However, two respondents responded to the question. R5 has agreed that the process of approval and registration is efficient;
Fee payable by PRS
For the fee payable by PRS providers, two of the respondent did mentioned that the fee is too high and it was a burden to the provider. The R1(a) and R3(a) disagreed with the amount of fee charged to them. According to R1(a);
But, there is a different opinion which was voiced out by one respondent. R4 who agreed that the fee payable is okay and moderate. R4 stated that;
Penalty for Violation of provisions in the CMSA 2007
R1(a) agreed with the provisions that the PRS provider must not makes or submits to SC any statements of information that is false or misleading or wilfully omits to state any matter which is related to PRS. Therefore, any person who violates the provision on conviction will be punished with imprisonment for a term not exceeding ten years and be liable to a fine not exceeding RM3 million. As mentioned by R1(a);
Disclosure of information
Disclosure of the information is one of the essential requirements according to the law and guidelines of PRS and must be observed by the PRS providers. It was agreed by R1(a);
However other respondents suggested that the PRS guideline must be clear with the definition of disclosure. It is pointed out by R5;
Additionally, the disclosure of information is very important in increasing the financial or investment knowledge among investors. It is also give the credibility advantages to the fund house. This is voiced out by R4;
Governance Policy of PRS
In order to implement the best practices in PRS industry, the guidelines state good governance practices to be complied with where the appointment of specialized PRS office is necessary. The compliance officer has a duty to ensure all their company ‘s business activities are compliance with the law that governs PRS industry.
Further, other respondents did mentioned they are practicing a multi-tasking work in their companies. However, between them there will be a specific focus on their task. As R5 mentioned; “
Discussion, Recommendation and Conclusion
Based on the above analysis, it can be concluded that the main sources of law which referred to by all five PRS providers is CMSA 2007 and the guideline issued by SC. Three PRS providers have their own internal policy and guideline in managing PRS, but the other two providers did not have their own internal guideline or policy. Researchers are of opinion, all PRS providers should have their own internal guideline or policy as an additional written document to manage the scheme. Internal guideline and control will promote best practice in governance of an organization. This is the spirit of the Malaysian Code of Governance 2012 and it should be implemented by all companies in Malaysia.
Further, the power and jurisdiction of providers is stated in CMSA 2007, Regulations and SC guideline on PRS. However, PRS Handbook or internal guideline developed by providers is a necessity to provide detail process and procedures in managing the scheme. The law and SC Guideline on PRS is too general and provide flexibility to providers on how to manage the scheme. Therefore, it is essential for providers to have their own internal policy as a guide to their officers and as a safety net to investors from misconduct of providers’ officers or its agent.
In relation to the standard fees charge by the SC to PRS providers according to each type of PRS products, researchers are of view that the SC should introduce a new package fees and not to charge them for every single products. The discount given to the providers will motivate them to give special package deal or investment to investors/contributors. As for adequacy of penalty for breach of provision concerning disclosure of material information, all providers agreed that it is adequate and can serve as a prevention strategy against unethical behaviour among providers and their agents.
In conclusion, the PRS is an alternative pension scheme to Malaysian citizens as a safety measure and saving for their future life after retirement. It is a good effort by Malaysian government to introduce PRS which is available to all Malaysians, whether employed or self-employed and to supplement their retirement savings under a well-structured and regulated environment. However, several issues relating to the legal framework of PRS need to be addressed in order to strengthen the existing legal framework and make it more comprehensive.
This research is funded by the Fundamental Research Grant Scheme of Malaysian Ministry of Higher Education.
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