By Associate Professor Dr Tanaraj Krishna,
Head of School, School of Accounting and Finance.
Quest International University.
The Malaysian government’s recent proposal to transition new civil servants from the pension scheme to the Employees Provident Fund (KWSP) has sparked widespread discussion.
While the pension scheme has traditionally been the cornerstone of retirement security for civil servants, the escalating cost burden on the government makes the KWSP a more fiscally sustainable alternative.
Let us explore the key differences between the two schemes, with detailed figures and projections, to understand their impact on civil servants and the nation’s financial health.
Current Pension Scheme: Generous but Unsustainable
Under the current pension scheme, civil servants receive a monthly pension equivalent to 60% of their last drawn salary for life.
As per Circular of Human Resource Services (Pekeliling Perkhidmatan Sumber Manusia) the calcuation for the monthly pension is 1/600 multiplied by the duration in service in completed months multiplied by last drawn salary, the maximum amount kept at 3/5 or 60% of the last drawn salary.
This is accompanied by a gratuity payment, calculated as 7.5% multiplied by the duration in service in completed months multiplied by the last drawn salary upon retirement. Additionally, the civil servants are entitled for cash reward for unspent leaves (Ganti Cuti Rehat-GCR; Golden Hand Shake) on the date of retirement.
GCR is calculated based on Number of leaves in days x 1/30 x Last drawn salary with allowances. The maximum number of claimable leaves is kept to 180 days.
Let us consider three examples of civil servants retiring at age 60:
- Lower-level officer (Grade 19):
Final monthly salary: RM4,034
Monthly pension: RM2420
Gratuity: RM148,854
GCR: RM24,204
Years of Service: 40 years
- Mid-level officer (Grade 41):
Final monthly salary: RM9,637
Monthly pension: RM5,782
Gratuity: RM303,565
GCR: RM57,822
Years of Service: 35 years
- Senior officer (Grade 54):
Final monthly salary: RM13,253
Monthly pension: RM6,627
Gratuity: RM298,215
GCR: RM79,524
Years of Service: 25 years
For ease of explanations the final monthly salary taken for this calculation excludes the allowances. The GCR is calculated with the assumption that the civil servant is entitled for 180 days.
KWSP: A Defined Contribution Model
The KWSP model, a defined contribution scheme, requires both employees and the government to contribute to individual retirement accounts. Civil servants contribute 11% of their salary, while the government matches this with a 13% contribution. The accumulated savings are invested and grow over time, providing retirees with a lump sum upon retirement.
Let us estimate the savings for the same three levels of civil servants under KWSP:
- Lower-level officer (Grade 19):
Monthly salary: RM2,000
Combined monthly contribution (24%): RM480
Total savings after 40 years (assuming 5% annual return): ~ RM399,484Years of Service: 40 years
- Mid-level officer (Grade 41):
Monthly salary: RM5,000
Combined monthly contribution (24%): RM1,200
Total savings after 35 years (assuming 5% annual return): ~ RM1,363,311Years of Service: 35 years S
- Senior officer (Grade 54):
Monthly salary: RM10,000
Combined monthly contribution (24%): RM2,600
Total savings after 25 years (assuming 5% annual return): ~ RM1,429,223
Years of Service: 25 years
Under KWSP, civil servants would not receive a lifetime pension but would have significant retirement savings. This shift alleviates the government’s long-term financial obligations.
Comparing End-of-Service Benefits
A direct comparison highlights the differences in end-of-service benefits:
Pension Scheme:
Lower-level officer (Grade 19): RM173,058 (gratuity & GCR) + RM2,420/month for life
Mid-level officer (Grade 41): RM361,378 (gratuity & GCR) + RM5,782/month for life
Senior officer (Grade 54): RM577,739 (gratuity & GCR) + RM6,627/month for life
KWSP:
Lower-level officer (Grade 19): RM399,484 (lump sum)
Mid-level officer (Grade 41): RM1,363,311 (lump sum)
Senior officer (Grade 54): RM1,429,223 (lump sum)
The comparison between the pension scheme and KWSP highlights distinct differences in retirement benefits. Under the pension scheme, civil servants receive a gratuity, GCR (Golden Handshake), and a steady monthly income for life, providing financial security and inflation protection.
For example, a Grade 19 officer gets RM173,058 plus RM2,420 monthly for life. In contrast, KWSP offers a lump sum—substantially higher in most cases—like RM399,484 for the same officer. However, while KWSP provides greater immediate wealth, it demands prudent financial management, as retirees risk depleting savings prematurely without guaranteed income.
This underscores the need for financial literacy in managing KWSP payouts effectively.
Fiscal Impact on the Government
Transitioning civil servants from the pension scheme to the KWSP would significantly reduce the government’s financial burden, which has been growing at an unsustainable pace. In 2023, pension expenditures accounted for RM32 billion, or approximately 10% of the federal budget.
This spending is projected to rise sharply to RM46.4 billion by 2030 and a staggering RM173.4 billion by 2050, representing a compound increase that places immense pressure on public finances.
The primary driver of this ballooning cost is Malaysia’s aging population. As life expectancy increases, the government is required to pay pensions for longer periods. The current pension model also involves cost-of-living adjustments, further compounding the financial strain.
On average, pension payments are expected to grow by RM2 billion annually, figure that rivals major national expenditures. For instance, this increase is nearly equivalent to the RM2.6 billion allocated in Budget 2024 for subsidies and incentives to paddy farmers and fishermen.
These comparisons highlight the opportunity cost of maintaining the pension scheme: funds spent on pensions could instead be directed toward critical infrastructure, education, or healthcare.
By transitioning to KWSP, the government shifts from an open-ended liability to a defined contribution model. This provides fiscal predictability, as contributions to civil servants’ KWSP accounts are fixed at 13% of their salaries.
Unlike the pension scheme, which requires perpetual funding for retirees, the KWSP model eliminates long-term liabilities. Once the contributions are made, the government has no further obligations, allowing it to better manage public finances.
Moreover, the transition could free up resources for other priorities, such as addressing the nation’s debt levels or funding social welfare programs. It also aligns with global trends, as many countries have moved away from defined benefit pension schemes to reduce fiscal risk. While there will be upfront costs associated with the transition, such as managing existing pension liabilities for current retirees, the long-term savings are expected to outweigh these initial expenses.
Balancing Priorities: Fairness and Sustainability
While the KWSP model ensures fiscal sustainability, it raises concerns about adequacy for lower-income civil servants. The government could address this by implementing additional contributions or targeted subsidies for lower-grade workers to ensure their retirement security.
Additionally, the government must manage the transition carefully to ensure fairness between current pension recipients and new KWSP contributors. Clear communication and transparent policies are essential to gain public trust.
The shift from a pension scheme to KWSP for civil servants is a pragmatic move to address Malaysia’s growing fiscal challenges. While the pension scheme provides unparalleled security, its cost threatens to overshadow other critical expenditures, such as subsidies for paddy farmers and fishermen.
KWSP offers a sustainable alternative that empowers civil servants with greater control over their retirement savings. Balancing fairness and sustainability will be key to the success of this transition, ensuring both civil servants and the nation’s finances are safeguarded for the future.
Financial Literacy and Planning Challenges in the Transition
One of the critical issues in transitioning from the pension scheme to the KWSP model is the financial literacy and planning gap among civil servants. Under the pension scheme, retirees receive a steady, predictable monthly income for life, ensuring financial stability without requiring active management of funds.
This model provides a safety net, particularly for individuals with limited financial knowledge or poor money management skills.
In contrast, the KWSP model provides a lump sum upon retirement, placing the responsibility of managing those funds squarely on retirees. Without proper financial literacy, retirees risk depleting their savings prematurely through poor investment choices, excessive spending, or underestimating their lifespan and future expenses.
Cases of retirees exhausting their EPF (KWSP) savings within a few years of retirement highlight this concern.
Additionally, the lump sum model exposes retirees to inflation risk. Without effective financial planning, the value of their savings could erode over time, compromising their ability to sustain their lifestyle during their later years. The absence of a guaranteed monthly income also poses challenges for retirees who struggle to budget effectively or lack access to affordable financial advisory services.
Addressing these challenges requires proactive measures, such as financial literacy programs tailored for civil servants and mandatory financial counselling as part of the retirement process.
Encouraging retirees to adopt structured withdrawal plans or invest in annuity products could also help mimic the steady income provided by the pension scheme, ensuring long-term financial security. Ultimately, empowering retirees with the knowledge and tools to manage their lump sum savings responsibly is crucial for a successful transition to the KWSP model.
