Malaysians will have more room to allocate part of their retirement contributions to Islamic investments under sweeping government reforms to the pension system.
At present, the Employees Provident Fund (EPF) receives public pension contributions and invests the money. Some of that investment is in sharia-compliant areas such as sukuk and halal stocks, but contributors have limited scope to ensure the money is being used that way. A maximum 20 percent of savings can be placed through the EPF into a single mutual fund.
Under the new, voluntary Private Retirement Scheme (PRS), which will not replace the EPF but supplement it, contributors will be able to allocate money to a wide range of products offered by private-sector fund management firms. This will allow them, if they choose, to target sharia-compliant investment - potentially increasing the amount of money going into Islamic instruments.
The scheme's governing body which will oversee how the fund managers operate, the Private Pension Administrator (PPA), was officially launched last week.
"PRS will contribute towards the growth of Islamic fund products," Zakie Ahmad Shariff, board member of the PPA and chief executive of the Federation of Investment Managers Malaysia, told Reuters.
The initial rollout of 30 PRS products will include six Islamic funds, he added.
"Early adopters will have much to gain - especially for the Islamic players," said Mahadzir Ahmad, a wealth management consultant and an instructor at the Financial Planning Association of Malaysia.
As of March 31 the EPF managed assets worth 488.5 billion ringgit ($154 billion), according to company data. That is larger than the 435.36 billion ringgit of assets under management in Malaysia's entire fund management industry, according to securities commission data.
At least partly because of PRS, Malaysia's private pension industry is expected to grow to 73 billion ringgit by 2020 from effectively zero now, according to a report by the government's Economic Transformation Programme. The securities commission has a more modest but still sizeable estimate; in April last year, it said: "Over the next ten years, it is projected that assets under management in the private retirement scheme industry will grow to 30.9 billion ringgit."
Sharia-compliant funds have on average held 10.6 percent of total assets under management in Malaysian retail products over the last two years, according to Reuters calculations based on securities commission data.
If this ratio is maintained under the PRS scheme, Islamic funds could theoretically see inflows of 3.3 billion to 7.7 billion ringgit.
All eight of the approved PRS fund managers already have sharia-compliant retail products. They include some of the country's most established firms such as CIMB-Principal, AmInvestment and Public Mutual.
Firms will begin offering conventional products first but sharia-compliant products will soon follow, said Nancy Chow, director of marketing and strategic product development at AmIslamic Funds Management. AmInvestment plans to have an Islamic PRS, she said.
Hwang Investment Management will include sharia-compliant products in its PRS range, Steve Lim, chief product officer at Hwang Investment Management, said in a statement. "We foresee our investment in PRS to break even after three years."
Under PRS, fund managers will be required to offer a minimum of three "core" products catering to different investor risk profiles. A maximum of seven products can be launched under the scheme by a single PRS provider, but if it intends to offer both conventional and sharia-compliant options, it can offer up to 10, according to securities commission guidelines.
This could encourage fund managers to launch Islamic products to maximise their access to PRS money. The initial products will be available from September, the securities commission said.
Guidelines also allow for the outsourcing of the fund management function, which could open the door for boutique firms to tap into the sector without the need for established sales channels.
In order to encourage take-up in the PRS scheme, the government is offering incentives such as personal tax relief, tax deductions for employers on their contributions to the scheme, and tax exemption on income received by PRS fund management firms.
Some details of how the PRS scheme will work, and whether it will impact Malaysia's current retirement age of 55 years, are not clear, Ahmad said. "These details are not forthcoming yet."
The personal tax relief of up to 3,000 ringgit may need to be increased to make it enticing to higher income earners, he added. Without a significant tax benefit, "the take-up might not be as great."