Public pension reform a must
Lee Heng Guie 
With increasing life expectancy, the government has to budget for higher retirement payments and also healthcare costs for pensioners

Reforming the public sector pension system has become an increasingly important policy consideration as the government balances the need to provide steady retirement income for public service retirees with fiscal sustainability.

It is acknowledged that the defined benefit pension scheme poses several challenges, including higher retirement charges, demographic change, increasing life expectancy and fiscal stability. Moreover, persistent high rates of inflation can reduce the total value of pension benefits, raising the question of whether the retirement funds will be sufficient. 

At present, there are 1.6 million public servants, or 11.6% of total employment, and 765,420 retirees. The number of public sector retirees increased by 3.7% per annum to 765,420 at end-2016 from 660,907 at end-2012. Each year, some 20,000 to 25,000 civil servants retire.

The costs associated with retirement charges have been increasing. The expenditure on pensions increased from 7.6% of total operating expenditure and 7.2% of total revenue in 2010 to 10.8% of total operating expenditure and 10.5% of total revenue this year.

The amount of retirement charges has grown from RM11.5 bil in 2000 to RM23.6 bil this year. A sum of RM19.5 bil is budgeted for next year.

As the public sector grows and the wage bill increases, the committed expenditure on pensions will continue to rise. For the period 2000-2017, emoluments increased by 7.8% per annum while retirement charges grew by 12.5%.

From 2013, the government implemented an annual pension increment of 2%, without having to wait for any review of the remuneration system or salary adjustments.

It is fiscally unsustainable for the government to continue on this path, given that other committed expenses such as debt service charges take the lion’s share of operating expenditure.

Debt servicing had increased at a rapid rate of 9.2% per annum to RM28.9 bil or 13.1% of total operating expenditure or 12.8% of total revenue in 2017 (2010: RM15.6 bil or 9.7% of total operating expenditure or 9.8% of total revenue).

It is challenging to come up with fair and sustainable pension reform. The reform must take into consideration the fiscal deficit, demographic profile of the public sector, and the contractual agreement between the government and its employees.


Higher life expectancy

Ageing population and life expectancy have to be considered when reviewing the best possible options of pension reform. Malaysians’ life expectancy is increasing, thanks to advances in medicine and public health, as well as rising standards of living, better education, improved nutrition and changes in lifestyles. Malaysians are now expected to live up to 74.8 years of age, or 72.7 years for males and 77.4 years for females.

Increasing life expectancy not only means higher budget commitments on retirement payments but also on healthcare needs as retirees are entitled for medical benefits post retirement.

The option of extending the retirement age of civil servants must be carefully managed as it can be a double-edge sword. Since 2001, the retirement age of civil servants has been raised three times – from 55 to 56 in 2001; 56 to 58 in 2008; and from 58 to 60 in 2012.

While raising the retirement age for public servants would lengthen the time of making pension payments, it can result in higher pension expenditure to pay for the extended employment services.

As such, the fundamental reform of the civil service requires a number of initiatives aimed at keeping it lean and efficient, backed by the implementation of e-government as a means of reducing costs, improving services, saving time and increasing the effectiveness and efficiency in the public sector. The implementation of a competency assessment performance management must be further enhanced to reduce redundant work, cut down overlapping and rationalise job functions. The reward structure (bonus and increments) must be linked to specific performance of staff and not awarded centrally to all staff, including the non-performers.

The ever-growing pension liabilities are a fiscal burden. The current scheme parks some RM300 bil in liabilities with the government.


Ensuring solvency and sustainability

While the government continues its fiscal consolidation effort, factors such as emoluments and pension costs, ageing population and increasing healthcare costs add to budgetary pressures. Malaysians are demanding that government be made more accountable for what it spends with taxpayers’ money. 

The government must show the political will to revamp the public sector pension scheme to ensure its long-term solvency and ability to self-sustain its liabilities. Such a move would wean the government from shouldering the burden of ever-growing pension liabilities.

A radical reform of the public sector pension scheme is the first step towards ensuring a viable self-funded system to meet the benefits promised to current or future retirees. The question arises: Should the reform focus only on new workers or should it also include existing workers?

There are two options to provide adequate retirement security and maintain productivity: i) move all employees to a defined-contribution plan. This option would give employees the opportunity to leave the service but retain some of the benefits after servicing a minimum number of years. Currently, they are trapped in public sector employment by the vesting rules. They would lose benefits that accrue with longer tenure if they leave the service before the optional retirement age; and ii) move new employees to a defined-contribution plan, much like the Employees Provident Fund model.

Lee Heng Guie is executive director of Socio-Economic Research Centre, an independent research organisation

This article first appeared in Focus Malaysia Issue 260.