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The Prime Minister recently said in Parliament that the proposed new retirement scheme for civil servants is still being studied and fine-tuned, some 3 years after it was first announced in July 2023. Discussions about civil service pension reform have resurfaced recently as Putrajaya’s public pension obligation is projected at RM42.8 billion this year. On this episode of #ConsiderThis Melisa Idris speaks with Chai Sen Tyng, Senior Research Officer at UPM’s Malaysian Research Institute on Ageing (MyAgeing).
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00:10Hello and good evening. I'm Melissa Idris. Welcome to Consider This. This is the show
00:14where we want you to consider and reconsider what you know of the news of the day. The
00:19Prime Minister recently said in Parliament that the proposed new retirement scheme for
00:23civil servants is still being studied and fine-tuned. This is some three years after it
00:30was first announced in July 2023. Now discussions about civil service pension reform has recently
00:36resurfaced after Putrajaya's public pension obligation is projected to hit RM42.8 billion
00:45this year. So today on the show to help us unpack this topic, I have Chai Sinting who is the
00:51Senior
00:51Research Officer at UPM's Malaysian Research Institute on Aging or better known as My Aging.
00:58Chai, it's good to have you in the studio here with me. This is an issue that we've long been
01:03talking about, one that you have long been researching. But let's set the context. Let's
01:07talk about why it's important that we look at reform of the public pension system and also
01:14talk to me about what's driving the rising pension bill. Why is it now projected to be
01:20RM42 billion? I think it's very useful for us to just go back a little bit in time and understand
01:29where all these reforms are coming from. I think in the late 1980s or 1990s, we have parliamentary
01:38records of these debates where they were trying to set up the Co-op. Today we know them as the
01:45retirement incorporated fund. But at that time they were saying that if we don't set up a fund
01:53for the government to undertake its future pension liabilities, the government might run out of money
02:00to pay the civil servants. And at that time, believe it or not, they said that if we don't do
02:07anything,
02:07the civil service charges, pension charges will reach RM9 billion in 2020.
02:15And as you and I know, as you and I know, 2020 has come and gone and actually we spent
02:22over,
02:22I think, easily between RM15 to RM16 billion in that year on retirement charges.
02:28So I have some numbers if you will allow me. 35.9 billion in 2024, 40 billion in 2025, 42
02:37.8 billion estimated
02:39for this year. So the jump is also astronomical. It's not a small increment every year.
02:46So I think the basis of the consideration here is that we tend to look at the absolute number from
02:53how many billion to how many billion increments. But the real factor that we need to investigate
02:59and understand is what is the percentage of that expenditure as total government expenditure
03:06and as percentage of GDP, which is the global measurement and indicator.
03:12So one of the reasons why the country did not really go bankrupt in 2020, although the retirement
03:19charges was way above and beyond projections was the government's income has also grown
03:26in tandem accordingly. So the real question here for us is actually back to what is the percentage
03:34of civil service retirement charges as a ratio or a percentage of total government expenditure.
03:42That is the real figure that we have to look into. And if you notice from our analysis of the
03:49trends
03:49data is that as a percentage of GDP in recent years is climbing slightly, but as a percentage
03:57of total government expenditure, that has gone up quite a bit.
04:00Okay. Do you have rough figures first? What is the percentage of GDP?
04:04The percentage is about 3%.
04:053% to 4%.
04:06And of government expenditure?
04:08Oh, it has gone up from, I think, close to about over 10%, 11% now because you must bear
04:13in mind. Amelumen charges, which is the salaries of civil servants has also been growing. So it jives
04:20very nicely with the fact that if you heard about earlier economists' comments that Malaysia is not
04:27collecting enough in taxes. So maybe enough in direct taxes, but not enough in indirect taxes.
04:33So that's the real cause of why we are seeing a lot of constraints in terms of growing the civil
04:41service or right-sizing the civil service.
04:45Okay. So you started out saying we should probably look at it historically. So you went back to the
04:51inception of Coop. Can you tell me how we got here? So was there a pivotal point in the country's
04:59public pension
05:00strategy where it may have been a tipping point? If we could go back, where would you pinpoint it to?
05:09You know, as a researcher, as a student of all these pension reforms, I was pretty amazed that
05:16in the 1990s, we actually took the step to set up Coop. It was really a, I would consider it
05:23to be the
05:24official first step to convert the civil service pension from a defined benefit scheme to a defined
05:31contribution scheme. But what happened in the next two or three decades was while Coop is continuing to
05:38grow and all that, there wasn't really a decisive moment where we said, okay, Coop will start to
05:45undertake the liabilities or the retirement charges of the government. It has never happened until 2018.
05:53And in 2018, with the change of the new government and also the financial situation of the government,
06:01the government decided that I'm going to take $5 billion out of the fund to try and help pay for
06:08retirement charges or any other expenditure of the federal government. So that means up to 2018,
06:14all the civil service retirees and pension recipients have been getting their pay through direct taxes,
06:22right, from the consolidated taxes of the government. So it has not, we have not drawn any sum from KWAP
06:30before 2018. But we have almost every year since then. I think that was an exception of one year,
06:37but the total drawdown from KWAP, from the federal government is now just under 30 billion ringgit. That's
06:45three zero, zero billion. From a fund size of roughly 200 billion, more or less. All right. So, so the
06:53real
06:53question for us now is we examine these numbers and figures. So we accept that, yes, the pension, the civil
07:00service pension scheme and its payment is still being sustained through taxation. So it's still a pay
07:08as you go scheme, we call it. But we already have an effort to set up a fund, a funded
07:13structure where
07:15it comes out from the salaries of civil servants today. So for statutory bodies like myself, the university
07:21or any other agencies is actually 17.5% of our total wages. Okay. Maybe let's, let's clarify some, some
07:32terms. So you talked about defined benefit and defined contribution. So talk to, explain a little bit
07:38about the differences moving from one to the other and the pay as you go model. Yeah. Now defined benefit
07:44simply means that you get a pension amount based on some formula that was derived by your salary. In
07:51our case, it's last strong salary. Uh, it could vary of course, but, um, the contribution patterns are
07:56not clear. They might, it might be non-contributory at all. Okay. You just know the benefits. You do not
08:02know how much. Yeah. You just know how much you will get, but we do not know, we don't know
08:05how we'll get
08:05that. But for defined contribution schemes, you might not know how much you'll be getting, but you know how much
08:11you are paying to that plan, you know? And, um, usually when we talk about DB and DC, they are
08:18really pure models. Okay. So it's
08:21always a mix usually. Hybrid. Okay. Yeah. Usually. But in Malaysia, we have very, very clear and clean,
08:26pure models. We don't have a single mix scenario here. You like it black and white. Yeah. I think
08:31we have never moved beyond it. So, uh, EPF is a very classic example of a defined contribution scheme,
08:38but it doesn't say anything about the payout structure, right? I mean, it's just a defined
08:42contribution scheme. So when we talk about pay as you go and funded pensions, pay as you go simply means
08:48that I'm going to take from workers today, you know, part of their salary or wages to pay the
08:54pension of older persons today. Okay. So that's called a pay as you go structure. And that's exactly
09:00what's happening with the civil service pension. If you look, think about it, because I'm taking money
09:05from the taxpayers, which are people who are working and then I pay the retirees and their pension
09:12recipients, a pension sum. So that is called a pay as you go structure. Now a funded structure
09:18is a little bit like, uh, EPF, but I take a portion of your salary today. And when you retire
09:25tomorrow,
09:26I'll put the money back to you and say, here's your pension. And in our case with EPF, it's a
09:31lump sum
09:31amount. So technically I'm not too sure we can call it a pension. That is why EPF is called a
09:37retirement
09:37savings plan. We never call it a pension. So it's almost like a savings account. You just put your
09:42money in there. It is in that sense. So because the replacement rate is not exactly possible to
09:47calculate because you don't have a regular fixed payment every month. Right. So in social protection
09:54circles, we call the replacement rate as a percentage of your earnings. So usually the ideal replacement
10:00rate should be at least 30% and beyond, you know, and that's, that's the ideal rate. But with EPF,
10:05we have no such assessment. We can take some of these average earnings, but how will it be replaced
10:14over 20 years or 15 years? We do not know that. The mathematics of it is mind boggling. I mean,
10:19somebody really smart has to sit down and calculate all of this because you've got the savings of the
10:25country in your hands. Well, let's talk about, um, the contributory permanent appointment because,
10:32so what we know is that part of the efforts to reform the civil service pension system is by
10:39creating this contributory permanent appointment scheme. But what we've heard from the prime minister
10:44recently in parliament is that, well, actually we don't have the details of this scheme yet,
10:50even though it was announced in 2023. What, what is it that you know so far about the scheme? Talk
10:55to us
10:55about it as a whole and what it was meant to fix. I think it was part of the broader,
11:01uh, JPA or civil
11:03service, uh, public service department's, uh, research on reforming the scheme, the, uh, civil service
11:09sector scheme. And it was announced initially that there's going to be new hires on a scheme where
11:16they will be put on the EPF and they will retire on the EPF some. So that means there will
11:22be no longer
11:23any, uh, monthly paid pension payout, you know, as of today. But, um, I think from one of the recent
11:30news coverages, it was mentioned that, uh, the new class of, uh, civil servants will still be under the
11:40EPF, but they will be getting a monthly payout, uh, in terms of their pension. So that has not been
11:46finalized. You know, we have no idea how the scheme will look like, what, how does it exist under the
11:51EPF structure, but, uh, just to take away that, um, uh, the misunderstanding of whether it's a DB or a
12:00DC,
12:01um, like I said, statutory body contributes 17.5%. There's no individual accounts, by the way,
12:08it's just deducted from the employer. So there's no individual accounts, but for federal workers
12:16under the ministries, federal ministries, the deduction amount is far less, maybe less than 5%.
12:23And that is the reason why, uh, we do not really see a clear plan with KWAP taking over pension
12:32liabilities. As you said, the figures that you were sharing with me earlier, you will go to 40 billion,
12:3750 billion, 60 billion. That can be projected because we have the total number of civil servants
12:42today. They are already on the payroll. So we can do projections to estimate what the pension burden
12:48will be. But what we do not know is what is the government's income by then? What is their tax
12:55collection like? That's one. And secondly, will KWAP be able to take over the pension liabilities,
13:02provided that they're growing fast enough or big enough to undertake the pension liabilities.
13:07So this is the actuarial part that we are missing because there's currently no plans for this,
13:13or at least we do not know. So, so statutory bodies contribute 17.5%, but federal government,
13:215%, 5%. Why is that that huge disparity? Because private sector contributes, was it 23% to UDPF, right?
13:28Correct. But they allow you to withdraw 20%, 25% or whatsoever, 30% actually.
13:3330%, okay. So it adds up just nicely around 17 to 18% as well. But I can say that
13:39one of the,
13:41I would say more interesting things when I was studying these pension developments was that
13:46there are two specific instances where we did not fix was the government's, we could have over the past 20
13:54to 30 years, slowly increase the federal government's commitment to co-op by increasing to from 5% slowly
14:01to 8%. Okay. So like a staggered. It could have, but it did not happen. So that was the real
14:07question
14:08that probably, you know, the senior management officials could go back. Why, why this was not done?
14:14And the second thing that struck me was that, you know, publicly they are saying that, oh, we want to
14:20make
14:20the civil servants contributory, right? That was how it was packaged and the message was sent out. But for many
14:28of us
14:29in the field, it is technically already contributory, at least for statutory body workers. It's just that
14:36we don't have an individual account, so we don't feel it. But the question is, where is the plan for
14:42QAP to slowly undertake the pension liabilities existing and down to the future? We are not seeing
14:49that pathway. So I suppose that's the interesting missing links. Is that feasible for the federal
14:57government to increase slowly? I don't know how slowly, what timeline you have in your mind at the
15:04moment. But from 5% to, I'm guessing 17 and a half percent would be the benchmark.
15:10Yeah. Okay. Internationally, anything above 20% is not really necessary.
15:14Necessary. Okay. So if from 5 to 17 plus…
15:17Okay. Let's put the scenario, flip it backwards. And the government is saying that,
15:22I'm going to put the new civil servants on EPF. Okay. So they're already committing to at least 23%,
15:30aren't they? So regardless of whether you pick this EPF route or improving QAP's capacity to take
15:40over the pension liabilities route, you are going to see a short-term increase in emuluments.
15:46Yes. How much? You can't be asking the new civil servants to take a pay cut so that I can
15:51pay
15:52the EPF. That's not going to happen. So I suppose that's the dilemma now that's being sorted out
15:57internally. I have no idea what their conversations are like, but knowing people in MOF and Bank of
16:02the Government, probably that's exactly the question they're asking. How are we going to make it possible?
16:06Well, it's the questions that we are also asking from the outside. Maybe you can talk to me a little
16:11bit about what, based on your research, what do you think should happen? So we know what,
16:18we don't know what they're discussing. We don't know what's on the table. But in terms of your research
16:24and what you would like to see happen, talk to me about that. If we could help design.
16:32We have written about this. I think Dr. Emma, the Tengkua, we have written about this,
16:37and we were actually a bit perplexed by the narrative surrounding the issue.
16:42Oh, what's the narrative?
16:43Because, you see, when we look at the press and we say, oh, it's a fiscal burden. True.
16:48Malaysian government's only fiscal burden for population aging probably comes from
16:54civil service pension and social assistance. I mean, the Bantuan Wagamah and all that. But
17:00the real question is that the government is also an employer. So if you say that private sector
17:07employers have an obligation to set aside part of your current salary for your retirement readiness
17:14or preparedness, then wouldn't the government as an employer have exactly the same obligation?
17:21Probably like 17.5%, you know, and all that. Because maybe they give us pretty good health benefits or
17:27whatsoever. So I think the math is the one that the public gets a bit tied up because we always
17:34see
17:35private sector workers arguing about employer share and employee share. And very early on,
17:43we decided that that's a false dichotomy because I can tell you today, let's say that, oh, you don't
17:49have to contribute any more of your share to your EPF. Everything will be paid by your employer.
17:54You'll still be the same 23%. You're not going to get an extra 9% or 11% back to
18:00your wages,
18:01if that's what you're thinking, because it's all paid out as part of your compensation.
18:05Right.
18:06So I know the general public's understanding is still stuck there, that false dichotomy.
18:11So it's the same argument now being applied on the civil servants, as if the civil servants will have
18:17to, oh, you need to take out 9% of your wages or 11% of your wages to go
18:23into this fund to contribute.
18:25But it's not going to work because 17.5% of my wages, at least, has already been deducted as
18:33a group
18:34through UPM contributed to CoAP. So every time an EPF contributor says that that's my money,
18:42I would be wondering that, you know, my money is in CoAP too. It's just that it was never specifically
18:47said that it was my money.
18:49No individual accounts.
18:50Yeah, exactly.
18:50As you said, yes, no individual accounts.
18:52So I suppose that's the first narrative we found very interesting because we said, you know,
18:56this is affecting our behaviour and discussion around pension reforms. But this is never really
19:04highlighted and never openly discussed. But it affects everyone's contention about what kind
19:10of reforms are possible because they keep saying it's my money. But if you could set aside 23% or
19:1520% of your money of your own, then we don't need EPF. You can just shut it down and
19:20you can handle
19:21it yourself. So the real problem here is that first narrative skewed all the subsequent discussions
19:28on the matter. And when we proposed reforms, we encountered a lot of resistance because there's
19:35a lot of misunderstanding. So the idea now, I would say the popular idea now seems to be,
19:40let everyone have no pension. That seems like the conclusion to me because they are all saying,
19:46oh, let's all move to EPF. The government doesn't have to pay anyone any pension and you'll be on your
19:50own. You know, how much you contribute is how much you're going to get and not in a monthly pension
19:55format. That seems to be what it feels like to me.
19:58I agree. I would have to say anecdotally, I think that is the conversation most people
20:04are having. Instead, in most countries, when they talk about pension reforms, they're trying to talk
20:10about how do we get everyone a stable, regular monthly income in old age after they work.
20:17That is the reform direction. But we are now...
20:20Why do you think that we have become almost that individualistic in terms of our pension
20:27retirement sufficiency?
20:28I'm not too sure whether it is because of our retirement sufficiency.
20:32Yeah. I'm not entirely sure is it because there is a maybe promise or misunderstanding of a social
20:38pension, which we agree that we should have. It's just that if you are someone who has worked and
20:44you have set aside a portion of your wages, you shouldn't be talking about social pension. Social
20:50pension is for people who have never worked or not sufficiently saved enough. But we are not
20:56solving the occupational pension part and we are now talking about social pensions. So that is the
21:03major narrative that doesn't sink up.
21:06In the time that we have left, so you've addressed the narrative, which is a big one. So thank you
21:10for,
21:10I guess, reframing that for us. What would you like to see in terms of the way we have designed
21:17or
21:18we're talking about it at least so that we can have future conversations and build on this one?
21:23I think the first major principle is that if you are working today and we have a good system in
21:30EPF and you are agreeable to it, a portion of your salary will go to your pensions for your retirement
21:37or what we call it will. But the key trick now is for us to make sure that that saving
21:42will last.
21:44And we need to reform this. It doesn't matter whether it's public or private. I mean,
21:49public issue is about sustainability, but the private sector workers issue is really about
21:56reliability and how long it will last, adequacy issues. So for us, we should at least try and
22:04address occupational pension reforms. That's the easiest place to start because it's very clear.
22:10And then we can talk about social pension for the rest, housewives or people with disabilities
22:16who do not have the ability to work. Informal workers, right?
22:20Yes, exactly. To me, that's a good place to start as any.
22:23Okay. And do you think that is, is that the trajectory that you're seeing either in academia or, you know,
22:31in the corridors of power in Putrajaya or in the fund managers? Are those the conversations? Is that the
22:40trajectory, the mindset and the perspective that you're looking at, that they're looking at?
22:44I'm optimistic because when the first suggestion came out for the civil service pension reform,
22:51we were pretty worried because the conversation and the narrative seems to be going south.
22:57But with the subsequent updates that we are hearing, they say, oh, don't worry,
23:01the pension payout will still be on a monthly basis. That resolved a very critical concern of ours.
23:06So the reform can happen. Call it whether it's EPF or KWAP, it's still going to be contributory.
23:11Nobody is going to argue about that. The contributory model is here to stay.
23:16The only thing we need to fix now is to convince everyone that we should have a regular payout at
23:22the end. Once we agree on these two points, then the rest are mostly mathematical.
23:28Are you concerned that we are, I think, three years in and seven months to the end of the
23:36first batch of contracts for the contributory permanent appointment scheme?
23:40Are you concerned that we're still no clear details yet?
23:44I think maybe they couldn't find a way forward because the civil service has always hired
23:50newcomers or new intakes through the KWSP scheme. It has been around. I mean, it has been tried before
23:56as well during years where the government felt that they can't take on any more permanent staff.
24:01So it goes back to the basic question, how many civil servants is really the right size? Can we afford
24:08it?
24:08Okay. So I think that's the core concern of the current civil service structure. But its pension
24:17commitment, its pension liability, that one can still be designed.
24:22Chai, is this a politically sensitive issue?
24:26Once we use the word political courage is needed or political will is needed, then you know it is a
24:32will issue rather than a mathematical issue.
24:35All right. Well, I guess we'll have to see if there is political will behind this. But thank
24:40you. I appreciate you coming and sharing some of your research with us. Thank you so much for your
24:44explanation. That's all the time we have for you on this episode of Consider This. I'm Melissa Idris
24:48signing off for the evening. Thank you so much for watching. Good night.
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