Comparison between the Dutch & Malaysian pension scheme

Compensation & Benefits ManagementBSMH5143

Kartini Binti Tajul Urus 814244Annuar Aswan B. Mohd Noor 815713Itsanne Fokkema 814853

Compensation & Benefits Model

Retirement Benefits• 2 types of retirement plans :Defined benefit plan: promises to pay a fixed dollar amount of

retirement income based on a formula that takes into account the average of the employee’s last three to five years’ earnings before retirement and the length of employment.

Employer assumes all the risk of providing the promised income to the retiree and is likely to make all of the financial contributions to the plan

Defined contribution plan: the employer promises to contribute a specific amount of funds into the plan for each participant.

The Netherlands• Average Dutch worker, when they retire, can expect to receive

about 70 percent of their income, every year, for the rest of their lives

• 90% of Dutch workers will get these pensions• Pension system : a combination of a pay-as-you-go system and

an individual system in which people save for their pension individually.

• The Dutch pension scheme may be characterized in terms of three main pillars:

- 1st pillar: basic state old-age pension under a statutory insurance scheme

- 2nd pillar: supplementary pension schemes by virtue of the employer

- 3rd pillar: private savings for retirement

The Dutch pension scheme

Character Regulation What

1st pillar Public Regulated by law Basic state pension: AOW

2nd pillar Private Regulated by law Supplementary pension (collective schemes)

3rd pillar Private Individual action Supplementary pension (annuities, endowment)

Table 1: The Dutch pension system with the three main pillars Note. From European Actuarial & Consultancy Services (EURACS), the Netherlands pension summary 2013.

First pillar• Dutch General Old Age Pensions Act (AOW)• Everyone who has lived or worked in the Netherlands

between the age of 15 and 65 has a state pension and a right to earn a state pension benefit from the age of 65 (irrespective of nationality).

• Entitlement to AOW pension is accumulated at a rate of 2% for each year of insurance leads to a 100% entitlement to the relevant pension benefit upon reaching the age of 65, provided there are no gaps in the period of insurance.

• AOW is financed by contributions levied on earnings at a rate that is statutorily limited to a maximum of: 18.25 percent

First pillar cont’d• Pension rates for singles is 70 percent of the statutory

minimum wage per month.• Both partners in a couple (either married or living together

officially) are each entitled to a pension benefit amounting to 50 percent of the statutory minimum wage.

• A person aged 65 with a partner under 65 may be entitled to a supplementary allowance if the partner’s income is limited.

• Single parents will receive 90 percent of the net minimum wage.

Second pillar• Mandatory participation, collective risk sharing and the system

of transfer of pension value.• Collective pension schemes and is financed by capital funding

and serves to supplement the first pillar administered by a pension fund or by an insurance company.

• No statutory obligation for employers to offer such a pension scheme to their employees, however, more than 95% of employees are covered quasi-mandatory.

• Employer has to deduct pension contributions from the salary and transfer these contributions to a pension provider.

• Majority of Dutch employees are in a (DB) plan in which the financial risks are for the employer

Second pillar cont’d• In 2012, Collective Defined Contribution (CDC) plans were

introduced which are plans that combine some of the advantages of a DB plan with the advantages of a DC plan.

• Dutch government has proposed a new contract, the defined ambitions (DA) contract employer contributions will become fixed but pension rights, benefits and targeted retirement age will become automatically adjusted in line with life expectancy

• Article by Erik Schouten & Thurstan Robinson (2012): Defined ambition pensions: Have the Dutch found the golden mean for retirement savings?

Third pillar

• Individual pension provisions, either through annuity insurance or endowment insurance (providing a lump sum)

Self-employed employees need to reassure to finance their living after retiring.

Legal Framework• Pension Act 2007 : safeguard the financial security of pension

entitlements, individual security and protection of participants and security in the pension institution’s operational management.

• Once an employer has made a pension commitment to his employees, this commitment must be implemented in the way prescribed in the Pensions Act.

• The employer, employee and pension provider are in a triangular relationship.

• Under the Dutch Pensions Act, the accrual of old age pension rights under a pension agreement begins no later than the date on which an employee reaches the age of 21.

Malaysian Pension Scheme• Public sector employees in Malaysia are covered by the

Government pension scheme.

• Benefits provided by the scheme include:Retirement benefitsSurvivor benefitsDisability benefits

• The Government pension scheme covers employees in the public sector who are on pensionable status.

Malaysian Pension Scheme• On the other hand, employees in the private sector are not included in this

scheme. They and their employers are instead required to contribute to the employees’ provident fund (EPF) or the social security organization (SOCSO).

• According to Law of Malaysia, Pension Act 1980, “public service” was defined those who worked for:

1. The Judicial and Legal service2. The General Public Service of the Federal Government3. The Police Force4. The Railway Service5. The Education Service6. The Joint Public Services common to the Federal Government and of one

or more of the States7. The Public Service of each State8. The Parliamentary Service or9. Such other service as the Yang di-Pertuan Agong may determine to be

public service

Types of Pension schemesRETIREMENT BENEFITS

• Is a monthly pension and gratuity as well as cash reward for accumulated leave.

• Considered as the most important benefits provided by the Government pension scheme

• Furthermore, to have some form of equity in retirement benefits, the computation of retirement benefits is based on formulae which vary the amount of benefit received with the length of pensionable service credited to the retiring employee and his last drawn salary

Types of Pension schemesDEPENDENT’S PENSION SCHEME:Dependent’s Pension is an additional pension benefit given to dependents or a pensioner or officer who dies from injury obtained during the course of performing his official duty or contracting a disease or travel accident on condition:

a) The officer died in any one of the above conditions; and b) The death of the pensioner or officer occurs within seven

years of sustaining the injury or contracting the disease.

Types of Pension schemesDISABILITY PENSION SCHEME:Disability Pension is and additional benefit given to a Government officer who is required to retire because of health reasons due to:

a) In the course of performing his official duty;b) Contracting a disease to which he is exposed by the nature

of his duty; or sustaining an injury due to a travel accident.

Compulsory retirement

The Malaysian Government has several times changed the policies regarding retirement:

• First, employees must reach the age of 55 for male employees and 45 years old for female employees (Pension Act, 1980) in order to receive pension benefits.

• Chee (1997) stated, at least ten years of service in the public sector is compulsory for the individual’s including a probationary period of three years before qualifying for a pension.

Changes of the retirement age

1st October 2001, 55 to 56 years old

1st July 2008, 56 to 58 year old

1st January 2012, 58 years to 60 years old

Suggestions for improvement Provide a preparative pension training program: • Most employees are not well prepared for their lives when they

retire. • During the training program they will be explained what kind of

preparations they need to do before they retire and how they can wisely spend their retirement benefits.

Social security should not be a function of the Government alone :

• The future is unknown and Malaysian citizens should be encouraged to participate in the determination of their future retirement needs, such as through private saving and asset ownership.

• Important for the retirees to have their own private saving because they cannot rely on pension alone.

Comparison

NO CRITERIA NETHERLANDS MALAYSIA

1. Pension Scheme i. Dutch General Old Age Pensions (AOW) – basis state pension (Public)

ii. Supplementary pension (Private)a. Collective schemesb. Annuities, endowment

i. Government pension scheme – applicable to public sector employee who choose pension scheme when they retired (Public)

ii. Employees’ Provident Fund (KWSP) and Social Security Organization (SOCSO) (Private)

2. Types of pension scheme

i. 1st pillar - basic state old-age pension under a statutory insurance scheme (Public)

ii. 2nd pillar - supplementary pension schemes by virtue of the employer (private)

iii. 3rd pillar - private savings for retirement (private)

i. Retirement benefits - monthly pension and gratuity as well as cash reward for accumulated leave

ii. Dependent’s pension scheme – additional benefit given to dependents or pensioner who dies from injury obtained during his official duty or contracting a disease or travel conditions

iii. Disability Pension scheme – additional benefit given to government officer who is required to retire due to health reason in the course of performing his official duty

3. Retirement Age

65 years old 60 years old

4. Law Dutch General Old Age Pension Act (AOW) 1957 –State Old Age Pension Dutch Pensions Act 2007

Law of Malaysia Pension Act 1980

5. Suggestions for improvement

Improvement suggestion by the Dutch government. The provision of defined ambitions contracts in order to replace the costly, time-consuming defined benefits plans.

1. Provide a preparative pension training program: financial planning, what steps to undertake before and during retirement. Emotional support. 2. Encourage retirees having personal savings plans so that they did not depend solely on the pensions funds.