The performance of private retirement scheme (PRS) in Malaysia and its determinants

• Main Author: Tai, Teh Lian, Dr.
• Format: text::Thesis
• Language: English
• Published: 2023

The world is ageing. The elderly population will be more than 1.5 billion by 2050, equivalent to 20% of the world’s population. Malaysia too is facing the same phenomenon. Meanwhile, the statistics of the poor elderly in Malaysia showed an increasing trend, whereby several studies established a positive relationship between age and poverty (Vaghefi, 2016). Numerous findings showed that the Malaysian Employees Provident Fund alone is not enough to ensure a sustainable retirement. Pensioners are having inadequate funds, unprepared to face retirement, and at risk of decreased standards of living during retirement age. Private Retirement Scheme (PRS) is identified as a complementary retirement saving to the Employees Provident Fund (EPF). Ideally, private retirement savings such as PRS, will support retirement sufficiently and sustainably in Malaysia. However, the current situation showed indications of uncertainty and low returns from the PRS investment, whereby 40% of PRS funds reported returns of below 3% (Morningstar, 2017). Therefore, this research aims to investigate the performance of the Islamic and conventional PRS funds in Malaysia since their inception from 2012 to 2018. This research also aims to evaluate the determinants of PRS performance in terms of short and long-run (co-integration) relationships. Last but not least, this research aims to compare the performance of Islamic funds with conventional PRS funds. The data collected were from all PRS providers in Malaysia involving 64 funds. This study employed the Capital Asset Pricing Model (CAPM) by using the Sharpe and Treynor Ratio to calculate the performance of the PRS. Meanwhile, the macro and microeconomics data were applied for PRS determinants estimations by using the dynamic model, General Method of Moments Analysis (GMM) methodology. Analysis methodsinclude the CAPM, Sharpe Ratio Model, Treynor Ratio Model, Static Model of Ordinary Least Squares (OLS), Random Effect (RE) and Fixed-Effect (FE), and Dynamic GMM with and without time dummy analysis. The study discovered the PRS performance in Malaysia since its inception until 2018 was weak, below expectation, and unsatisfactory. The influence of determinants, such as past performance, Kuala Lumpur Composite Index (KLCI), and EPF dividend were positively correlated with PRS performance. However, the determinants of the Treasury Bill Interest Rate, PRS dividend paid, Age of funds, and Islamic funds had a negative impact on the PRS performance. The findings of this study provided important input to policy planning and policy implementation, especially on the government tax exemption, incentive and subsidisation on the PRS investment and contribution.