Malaysia’s Public Service Pensions: Will to Reform, Without A Roadmap

The Malaysian government’s declared reform of its public services pension shows some zeal to take up prickly causes, but the haste of the disclosure and dearth of details have raised concerns.

Deputy Prime Minister Zahid Hamidi announced on January 24 that future recruits into government will no longer be offered the pension scheme – which pays a portion of last drawn salary for life. Instead, they will be placed on the Employees Provident Fund (EPF) — with 11 per cent of their salary deducted monthly, matched by 12 per cent from the government — and draw on accumulated EPF savings and dividends for retirement income. Currently, confirmed public servants choose between pension and EPF – with the vast majority opting for the former, which guarantees a stream of income instead of relying on a finite EPF account.

Although the political fallout of this reform could be mitigated by the promise that all government employees on the pension scheme will retain the entitlement, such a heavy and complex undertaking demands more due diligence than has been presented. Anwar Ibrahim’s administration should address four questions.

First, what exactly is the fiscal outlook and what are the financial implications of the reform?

The principal justification is that Malaysia cannot afford public service pensions for future generations. Past growth in public service employment compounded by ageing demographics will overburden the system.

The problem is apparent, but its magnitude has not been rigorously quantified. The number of pensioners stands at 936,000 and is projected to grow due to the retirement of government employees hired during high-growth phases. Ministry of Finance records show that total public service employees increased from 877,100 in 1999 to 1.30 million in 2011 (3.3 per cent annually), and reached 1.39 million in 2023. The growth rate slowed to 0.6 per cent per year between 2011 and 2023. The implications of these recruitment patterns have not been worked out.

Pension expenditures have been increasing, but the overall financial burden of current and future public service retirement remains fuzzy. Malaysia spent RM11 billion on public service pensions in 2010 and RM32 billion in 2023. More specifically, these expenditures also increased as a proportion of total government operations, from 6.2 per cent to 10.7 per cent, underscoring the fact that more government spending is going to a non-working section of the population.

The net effects on the Budget from the savings of future phased-out pension payments and the additional costs of EPF contributions by the government also have not been reliably estimated. Indeed, the gradual approach being adopted — to apply the new rules only to new recruits — means the public pension bill will not be reduced for a few decades, while the EPF payments will introduce new government expenses.

The Anwar administration must offer credible scenarios that EPF savings will be adequate for retirement — and that the 11 per cent reduction in take-home pay (due to EPF contributions) will suffice for basic needs and livelihood choices, including healthcare and home ownership.

Second, what are the attendant reforms to salary, retirement age, and universal pension?

As noted by Cuepacs, the public services employees union, generations of low-wage retirees are especially dependent on the pension. Malaysia seemingly aspires to shift from a public service that pays managerial and professional staff reasonably well but less so for support staff, to a generally high-remunerating scheme from which all can retire on EPF savings.

Some of this reconfiguration has progressed, as reflected in the higher growth in management and professional hires in recent decades (Table 1), and a decline in the absolute number of support staff (significantly driven by the professional upgrading of Ministry of Education staff). The government has not explained the extent to which this trend toward a leaner and more skilled public service corresponds with technological adoption to replace mass staffing in routine jobs — and thus translates into higher salaries and savings.

Slow down in Public Service Employment

Table 1. There has been a slowdown in overall growth, expansion in management and professional positions, most importantly in education and health

	Number of employees			CAGR (%)
	1999	2011	2023	1999-2011	2011-2023
Total public service (all ministries and departments)
Top management	748	2,264	3,014	9.7	2.4
Management & pro	123,443	386,432	604,848	10.0	3.8
Support	752,958	907,493	787,427	1.6	-1.2
All occupations	877,149	1,296,189	1,395,289	3.3	0.6
Ministry of Education (largest by staff)
Management & pro	81,831	288,806	468,309	11.1	4.1
Support	279,745	266,197	90,649	-0.4	-8.6
Ministry of Health (second largest by staff)
Management & pro	12,022	42,858	65,520	11.2	3.6
Support	99,506	174,593	222,129	4.8	2.0

The shift to EPF also raises vital questions on retirement age and social protection. Extending the threshold from the current 60 years to 65 is a paramount consideration because this will allow employees five more years to accumulate savings. The prospect of a universal pension, beyond the existing pension schemes of modest cash payments to low-income senior citizens, has circulated in policy discourses and merits serious deliberation. KWAP, the Retirement Fund (Incorporated), known by its Malay acronym, could perhaps be reconfigured as a source of supplementary retirement income.

Third, will the new public servants accumulate sufficient retirement income?

This follows on the questions surrounding salary levels and retirement age, but warrants a special analysis. The Anwar administration should offer credible scenarios that EPF savings will be adequate for retirement — and that the 11 per cent reduction in take-home pay (due to EPF contributions) will suffice for basic needs and livelihood choices, including healthcare and home ownership.

Fourth, how will public administration attract and retain talent?

The pension scheme has been important for attracting people into public service. On the upside, the government enjoys loyalty and long-serving officers acquire experience; on the downside, staff get lethargic and the service becomes insular.

Does Malaysia harbour ambitions for government employees to be more dynamic and invested — remaining in the service because of the nature of the work and not drifting toward a comfortable pension — and perhaps even mobile between public and private sectors?

Security will persist as a selling point, with government jobs less exposed to market vagaries. But removing the pension while retaining talent arguably rides on administrative reforms enhancing the quality of work. Public service employment must be more vocationally meaningful and fulfilling, especially in the key education and health professions.

Malaysia’s public service pension reform, never an easy undertaking, has made it to the policy table. However, the rather blank slate needs to be filled with thoroughly researched and fully disclosed plans.

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