KUALA LUMPUR (Nov 7): A different type of private retirement scheme (PRS), termed as the algorithm-based PRS, will be launched in the market to encourage Malaysians, especially the younger generation to save early for retirement.

Securities Commission Malaysia (SC) chairman Datuk Seri Dr Awang Adek Hussin said the SC is expanding the PRS framework to allow existing PRS providers and digital investment managers (or robo-advisors) to offer algo-based PRS, which will offer “an alternative fund type structure”.

Algo-based PRS, also termed as ePRS/ Digital PRS, will also allow investors to make a smaller number of contributions to “pre-approved model retirement portfolios”.

“This accessibility will encourage young people to start retirement savings without feeling overwhelmed or financially stressed,” he said when delivering his speech at the Forum on Improving Long Term Retirement Planning and Savings Behaviour.

Awang Adek pointed out that digital solutions like algo-based PRS provide automated, algo-driven financial advice, making investing simpler and more accessible to the masses, especially for those with less financial knowledge.

He also singled out micro-investing, in which nvestors can invest their spare change for various purposes to help them build up some levels of financial buffer. The more notable micro-investing operator locally is Raiz.

Effective communication is key to help people appreciate the benefits of long-term savings, he added.

On top of that, enhancing access to retirement platforms and automating contributions through direct debit can raise the participation rates of people investing in PRS products.

Direct debit is a solution where investors can key in their debit card information on an online platform, and specify how much money they want to be automatically deducted from their bank account for investment in each specific period.

“The ease of saving is a key factor. Hence, the Private Pension Administrator (PPA) is piloting initiatives with PRS providers to increase contribution rates,” said Awang Adek.

Awang Adek pointed out that Malaysians, like many around the world, are facing the pressing challenge of not having enough resources to support their retirement, especially after the pandemic. They are heavily reliant on the government for aged-care needs, which puts tremendous strain on the government budget.

He said this is a national issue that requires public-private collaboration, including the capital market.

In this respect, the SC prioritises building a robust voluntary pension system to give Malaysians a private option to supplement their public mandatory retirement scheme, mainly the Employees Provident Fund (EPF) contribution, and provide them with long-term savings flexibility. The PRS was developed in 2012 under such a backdrop. 

The good news is that the PRS industry has grown steadily since 2018.

The assets under management (AUM) of PRS have risen by a compounded annual growth rate of 25% to RM5.4 billion in 2022, from RM2.7 billion in 2018.

Additionally, the PRS membership has also grown by 40% to 577,000, from 416,000 within the corresponding period. Most members are under the age of 40 years old. Awang Adek attributed the achievement to various outreach efforts and incentives, such as the PRS Youth Incentives.

Yet, he pointed out that while the PRS industry has seen continued steady growth in AUM and membership, PRS coverage compared to the labour force is still low.

He added that this is due to the evolving nature of work and the labour market structure. Hence, the PRS industry must adapt to help more Malaysians meet their retirement needs.

Other than the algo-based PRS, Awang Adek also mentioned the introduction of target date funds, which are funds offered by asset management firms that seek to grow assets over a specific period of time for a targeted goal.

“The introduction of target date funds is a significant advancement in retirement planning customisation. Global best practices now favour default funds based on lifecycle investment principles. This approach allows for a smoother transition from accumulation to decumulation, because the fund’s risk profile aligns with investor needs.

“In this respect, we note that target date funds were recently launched by one of the local PRS providers. As regulators, we support such innovations because they take into account human behaviour.

“Target date funds simplify the process through automation, following behavioural economics, which suggests that simpler choices provide better outcomes,” he said.

Awang Adek believes that behavioural interventions can help Malaysians overcome the initial inertia to start investing for the long term, and build momentum for retirement planning. Digital platforms and new solutions will play an important role in this.