IntroductionRetirement plan is the plan in which the employeragreed a specified pension payment on retirement that ispredetermined by the plan that have promised to employees based on theirearnings history, tenure of service and age; Retirement plan also as a financialschedule that designed to replace employment income upon retirement. Theretirement plans may offer by employers, insurance companies, tradeunions, the government, or other institutions. In general, retirement planningis the plan that prepared for life after retire, and the benefits will not justfinancially but in all aspects of life. The financial benefits for applyingretirement plan are the retirement plan is a long-term savings and investmentplan for employees that prepared for the days after they have retired thereforethe employees can receive a specific amount of payment or profit from theinvestment and saving that they have joined in the retirement plan when theyretire.
For thenon-financial benefits, there are include of the employee lifestyle when theyhave been retired like how the employee spend their time and the condition ofhealth of the employee. There are different stages of retirement planningchanges according to different life stages of the employee. The first stage isthe early of an individual’s working life which the employee just begins theircareer, the retirement planning has to begin and plan for their retirement inthe future. For the second life stage in retirement planning of the employee isduring the middle employee career, it includes setting a specific amount ortargets and put into the retirement plan such as putting more amount of moneyor salary into the Employees Provident Fund (EPF) account so can help inachieve the target that fix for the retirement in future. The last life stagein the retirement planning is during the employee reach for their retirementage. In this stage, the contribution and the benefit will provide to theemployee and if the employee dies before the retirement age as stated in theplan then the contribution and benefit will be given to the heirs orbeneficiary. Therefore, in this stage the planner will call as the distributionphase.There is some authority that will provide theretirement plan to employees so that this the right for the employees can beprotected and guarantee the life after the employees have been retired.
For thegovernment officer in Malaysia there are Government pension plan that given tothe public servant which provide by the Jabatan Perkhidmatan Awam (JPA)Malaysia. For other employees which work for private sector, there are EmployeeProvident Fund (EPF) Malaysia which provided to the employee. Based on the EmployeesProvident Fund Act 1991, EPF is the national compulsory saving scheme for employeesor individual employed in the Malaysia private sector. The retirement programis fully funded and provides defined contribution type benefits to members andthe scheme will be discussed on the type of retirement plan later. MinimumCoverage RequirementAn efficient retirement plan must can benefit theemployees such as high compensated employees. Therefore, there are some minimumcoverage requirement that been set up to protect the employees. Besides this,there are some test that need to carried out to minimize the discriminations infavor of the highly compensated employees in the organization. The test isincluding ratio percentages test and average benefits test.
a) Ratio Percentage TestThe ratio percentage test must benefit a non-highlycompensated employees with at least 70% of the highly compensated employeesthat covered in the plan. In other word, if the plan covers 100% of the highlycompensated employees in the organization, it must cover 70% of the non-highlycompensated employees in company. For example, if the plan covers only 50% ofthe highly compensated employees, so it must cover at least 35% (50% x 70%) ofthe non-highly compensated employees.b) Average Benefits TestFor average benefit test, the retirement plan mustbenefit a reasonable classification of employees in the organization and thetest must not discriminate of the highly compensated employees only. Next, theaverage benefit in the average benefits test for the non-highly compensatedemployees in the organization must be at least 70% of the average benefit that providedto all highly compensated employees.MinimumAge RequirementThere is a minimum age for the employee to enter theretirement plan that offer by the government, insurance company or other firmsthat offering the retirement plan such as all employees who have want to joininto the retirement plan must have reach the age of 18 years such as EPF. However,the minimum age and service requirement is based on the rules or policy thatset by the company or authority that offering the retirement plan to theemployee in the organization.
Retirement AgesThere are 3 retirement age in typical pension plan· Normal retirementage· Early retirementage· Deferredretirement agei. Normal Retirement AgeThenormal retirement age is the normal retirement age of employees and theemployees can receive pension benefit without any deduction. According to theMinimum Retirement Age Act 2012 Malaysia, the minimum retirement age ofemployees is at 60 years old and this act has been enforced in 1 July 2013. Theemployees cannot be forced to retire.
ii. Early Retirement AgeTheearly retirement age is the age before the normal retirement age of employeescan retire. The employees who retire in the early retirement age, theretirement benefit will be reduced. For example, in defined benefit plan, theemployees who are retirement early will reduce the retirement benefit of theemployees. This is because, the employee’s full benefit cannot be accrued byearly retirement date, the retirement benefit is paid over a longer term, andthe early retirement benefits are paid to the employee who have died before thenormal retirement age.iii. Deferred Retirement AgeThe deferredretirement age is the age after the normal retirement age of employees canretire. There are some older employees remain the work although they have reachthe normal retirement age at 60 years old.
Therefore, the employees who remainto work will continue collect the retirement benefit.Vesting ProvisionVesting mean the employee’s right to employer’scontributions or benefits attributable to the contributions if employmentterminates before the retirement. The employees have capable to theircontributions as the employment have been terminates before their retirement.However, the right to employer’s contributions is depend on the vesting thathave been agree. The basic objective of vesting in the perspective ofemployers is to decrease the labor turnover in the company. This is because theemployees who have extra incentive they will remain or stay in the companyuntil the vested status has been attained. For example, once the employeesterminate their employment before full vesting, then the forfeitures will be useto decrease the employer’s future pension contribution. While in other hand forsome retirement plan, the forfeitures can reallocate to the accounts of theparticipants or used to decrease the future employer contributions.
Advantagesof Retirement PlansEvery plan that offer by the government, employer andother insurance company have their own advantages to the participant, customeror employees. Therefore, there are some advantages of retirement plan thatoffer to the employees. First, the retirement plan can provide a better returnon employee retirement investment. This is because the investment in retirementplan is more guarantees than other personal plan that offer by the insurancecompany because some of the retirement plan such as EPF that provide inMalaysia, the employees and the employer are contribution in the account assaving for the future and there is interest that added into the account too asinvestment.
Therefore, the retirement plan such as EPF can provide a better ormore guarantee return to employee.Besides that, like the group health plans, the group retirement plans thatoffer to the employees by the employer of the organization may also provide abetter return to employees in the retirement plan than employee that might get theretirement plan individually. This is because of the size of the employee.Next, the retirement plan that offer to the employeesmay offers many options for employees to diversify their retirement accounts.In retirement plan, the insurance company may offer many option of retirementplan to employees and let employee choose.
Whether the employee can likely putsome money into options with a modest but low-risk return or invest the mutualfunds that have a higher risk but might yield a high return. Besides that, the retirement plan also can encourages savingby deducting the payment or salary of the employee automatically into the retirement plan’s account. Forexample, the Employee Provident Fund (EPF) Malaysia, the employee willautomatically deduct a specific amount from their salary and the salary willcontribute in the EPF account of the employee.
Therefore, this will encouragethe employee saving the money automatically and the money will get by theemployee once they have reached the retirement age so this can make sure orguarantee the employee daily life activity once he or she have been retiring.Disadvantages ofRetirement PlansHowever, there are some disadvantages of theretirement plans. Not all the retirement plans that provided or offered byemployer in the organization to employee can be transferable Some of theretirement plans that offer by the employer to employee such as traditionalpension plans cannot be transferable.
For example, once the employees resignthe jobs in the organizations and the employee’s retirement is offer by theemployer, the organization retirement plan and the benefit will stop and theretirement benefit will be stay with the employer. Next, employee that changing jobs often may result inhaving no or few retirement funds if we have no other retirement options. Notas EPF the benefit of the employee still available although he or she have beenresigning from the jobs, some of the benefit of the retirement plans that offerby the employer or the insurance company will not give to the employee once heor she resign from the organization unless there are specific vesting under thecontract of the retirement plan. Besidesthat, the employee may will not receive any of the contribution that have been madeby the employer if the employee resigns the jobs from the organization before aspecific number of years that have been agreed in the retirement plan.
Therefore, the employee has to choose wisely before agreed the retirement plan.Typeof Retirement Plansa) Employees Provident Fund (EPF) The Employee Provident Fund (EPF) is formed under theLaws of Malaysia, Employees Provident Fund Act 1991 (Act 452) which isproviding the retirement benefits to the employee under the scheme so that thesaving of the employee can be manage efficient, effective and in a reliablemanner so the daily life of the employees can be guarantee. Employee that beenmentioned above mean that an individual that have been employed by an employerunder a contract of service. Besides that, EPF also provides some framework orrules for employers which is EPF Act (Act 452) so that the employer can carryout their statutory and moral duty to their employee who provide service tothem and this can also ensure, protect or guarantee there are enough fund uponthe retirement of the employee. The vision of EPF is to help the members of EPFachieve a better future while the mission is to safeguard the members’ savingsand deliver excellent services. The requirement to become a member of EPF areat least 18 years old, Malaysia citizen and every employer is compulsory toregister their employee as an EPF member.
A specific amount of contribution will be credit intoemployee’ individual accounts in the EPF and the amount will be deducted orcredited based on the monthly salary of the employee. The current contributionrate for employees that will be credit is for those who receive salary RM5,000or below, the employee’s contribution is 8% to 11% of their monthly salarywhile the employer contributes will be 13%. While for the employees who receivesalary who more than RM5,000 and above the employee’s contribution of 11%remains, but the employer’s contribution will be12% only.The contributions of the employees will invest to the approvedfinancial instruments so that the income can be generated such as MalaysianGovernment Securities, Money Market Instruments, Loans & Bonds, Equity andProperty. The dividend that guarantees by EPF to the employee or the member ofEPF is minimum of 2.5 % annually. However, the dividend rate is subject to thereturns from investments that have been made in the approved instruments.There are some advantages that will be giving to theemployee under EPF.
The contribution that have been made can be withdrawn oncethe employees retire, this mean that the employee will get savings that beencontribute by the employee’s and employer’s plus the yearly dividends. Forexample, when the employees contribute 8% of the monthly salary to the EPF andthe employer will contribute another 12% or 13% of your salary to your EPFsavings. Therefore, once the employee retires he or she will get a big amountof saving and this will help to ensure there are enough fund for the activityonce he or she is retiring.Besides that, the dividend of Simpanan Shariah accountis approved and based on the actual performance from the shariah-compliantinvestments. Next, there are also incapacitation and death benefits that will provideby the EPF investment earning, so this can help to reduce the financial burden ofthe family when the employee is face the incapacitation or the event of death.
Furthermore, there are tax exemption when contributeunder EPF. There are tax relief of maximum amount of RM6,000.00 when contributein EPF. The employee will be excluded from paying the income tax under the EPFsavings withdrawal schemes and the returns on the EPF investment.Last but not least, there are a 2 type of withdrawalsof the contribution of the employee in EPF such as normal retirement withdrawaland pre-retirement withdrawal. There is age 50 years’ withdrawal, age 55 years’withdrawal and age 60 years’ withdrawal which is the normal retirement withdrawal; While the withdrawalto reduce or redeem or paying for housing installment or loan, incapacitation withdrawal,leaving country withdrawal, education withdrawal, pensionable employeeswithdrawal and optional retirement withdrawal, members’ investment scheme, withdrawalto buy or build house, withdrawal of savings that more than RM1 million inaccount, death withdrawal, health withdrawal, hajj withdrawal, flexible housingwithdrawal, and PR1MA housing withdrawal which are the pre-retirementwithdrawal.b) Private Retirement Scheme (PRS) Private Retirement Schemes (PRS) is a long-term investmentand savings scheme which is voluntary by theparticipant or an employee.
PRS is prepared for the individual whether he orshe is employed, self-employed or employer, Malaysiansor non-Malaysians. Besides that, this scheme is to help the individual to save andenhance the variety of the retirement planning in Malaysia. So that, they can accumulatetheir saving for they retire. PRS will offers some retirement fund to theindividual, so the individuals can choose from the option that provide by theagent or the insurance company and invest in the plan that agree or accept bythe individual based on their retirement needs, objectives and risk appetite. Theobjectives of Private Retirement Scheme (PRS) is almost same as the objectiveof the Employee Provident Funds (EPF) which is to enhance the living standardsfor the individual at retirement from the additional savings. Next, the PRS isan affordable savings for the individual, this is because the minimumcontribution of the PRS is 10% monthly salary of the individual so that the retirementsavings can be increase. There is some requirement that an individual need toachieve so that he or she can join in PRS. The individual need to reach the ageof 18 years and unlike EPF the PRS are offering to the Malaysians andnon-Malaysians as well.
Beside this, the individual need to fulfill the minimumcontribution which are RM1000 that been set or fix for the individual accordingto the plan that have agreed by the provider. The contributions to the fund under PRS will be separatedinto 2 separate sub-accounts which is Account A and Account B. There are 70% inAccount A and 30% will contribution in Account B. Account A can be withdrawnwhen reaching retirement age while Account B can be pre-retirement withdrawal but the sum of the withdrawalwill be charge for 8% of tax penalty. Under PRS the individual can join tocontribute more than one PRS fund or scheme with different providers.
In addition, under the Private Retirement Scheme(PRS), an individual will be having the tax relief on the contribution in thefund or scheme. According to Budget 2012, an individual can enjoy a tax reliefup to RM3,000 per year and the individual tax relief that can be having applicableon gross contribution. While for the Malaysians who aged between 20-30 yearsold, they will get RM1,000 incentives into their PRS account, however thisincentive will only give one time and for each individual only. There are also19% of tax deduction on the participant’s remuneration will be having by anindividual when he or she join in PRS.Next, under PRS, the individual can change or transfertheir funds to another provider.
This is because the fund or scheme that joinby the individual is to ensure their objectivesfor retirement and investment can be aligned and realized. Therefore, toprotect the benefits of the individual the fund under PRS can be changes ortransferable. However, the fund that want to change or transfer to must underthe PRS fund with the same provider and align with the rules and regulationunder the plan. There is various way that the fund that invested by anindividual can be withdrawal. The investment can be withdrawal when anindividual has arrived for his or her retirement age which have been stated inthe policy or document of the fund, the death of the participant, theparticipant that suffered from permanent total disablement, serious disease ormental disability, or other situation that have been stated in the policy thatoffered by provider of the fund to the participant.Last but not least, there are only 8 company which approvedby the Securities Commission Malaysia as the Provider of the Private RetirementScheme. The 8 company include, Affin Hwang Asset Management Berhad, AIA Pensionand Asset Management Sdn. Bhd.
, AmFunds Management Berhad, Kenanga InvestorsBerhad, Manulife Asset Management Services Berhad, Public Mutual Berhad, RHBAsset Management Sdn. Bhd., and CIMB-Principal. Therefore, the individual whowant to join the Private Retirement Scheme must be choose the company that approvedby the Securities Commission Malaysia as the Provider of the Private RetirementScheme, so that, the benefit of the participant can be protected because theSecurities Commission Malaysia permitted the company to offered the fund to theparticipant.