Employer Action Code: Monitor
Implementation of a new voluntary retirement plan started this month. In July 2012, Malaysia introduced the Private Retirement Scheme (PRS), a new defined contribution (DC) retirement savings program open to all Malaysians and foreigners working in Malaysia. The PRS supplements the mandatory government retirement system — Employees Provident Fund (EPF) — and provides an additional avenue to save for retirement, as well as offering more investment options for retirement savings than were previously available to individuals.
Employees and employers (on behalf of their employees) can opt to contribute to the PRS. The PRS will be centrally administered by the Private Pension Administrator (PPA) and regulated by Malaysia's Securities Commission, which offers employees easy access to fund information and ease of transfers. The funds will be invested by approved providers that are established Malaysian and foreign-owned financial institutions.
A range of licensed investment funds with varying degrees of risk are available to meet an individual's retirement goals and investment profiles (currently, 23 funds are offered by four providers). Individuals may contribute to more than one fund managed by a single provider or to multiple funds offered by several providers. They also may switch funds within a provider at any time or change providers once a year. Individuals who choose a PRS provider but do not make a fund selection are assigned to one of the three default funds based on their age group. The amount and timing of the voluntary contributions to the PRS are flexible.
Government tax incentives to encourage PRS participation include:
- An annual tax deduction for employee contributions of up to MR3,000 (about US$965 or €745)
- Tax deductions for employer contributions of up to 19% of employees' pay (inclusive of employer contributions to the EPF), and the employer contributions are not taxable to employees (same treatment as contributions to the EPF)
- Investment income earned by the funds under the PRS is tax-free
- Retirement benefits paid from a PRS are not taxable income for employees
Implications for Employers
The new PRS offers an opportunity for employees to make their own investment choices to meet their retirement goals. The PPA and some of the providers started operations in December 2012. Employers should closely monitor the development of the PRS market.