Almost half of the 78 private retirement scheme (PRS) funds launched in Malaysia in 2023 are Shariah compliant, demonstrating that Shariah PRS funds have grown considerably, although experts note that there is still room for expansion.
Underscoring the potential and demand for Muslim-friendly retirement schemes, the country’s Employees Provident Fund (EPF) fully segregated its conventional and Shariah saving assets at the start of this year (Shariah savings was introduced in 2017), with each portfolio having its independent strategic asset allocation.
With the separation, it enables EPF to make investment decisions that are fully aligned with Shariah principles, resolving earlier concerns about ethical investments and potential differences in returns.
“While they may not be as widespread as conventional PRS funds, there’s growing awareness and interest in Shariah compliant investment options for their retirement savings. The total net asset value of funds in PRS stood at US$1.15 billion in 2023, with more than a third in Shariah compliant funds, compared to just 26% 10 years ago,” Siew Suet Ming, the chief rating officer of RAM Rating Services, shared with IFN Investor.
Awareness issue
According to EPF calculations, almost 40% of Malaysians do not have a retirement plan with the situation likely to worsen if nothing is done.
“We believe there is still much groundwork to cover in terms of driving awareness about the importance of financial planning, particularly concerning retirement-readiness. This is especially pertinent following the economic shock of COVID-19, which has significantly depleted the retirement savings of many Malaysians. The Ministry of Finance reports that over US$30.7 billion was withdrawn by EPF members under four different withdrawal programs during the pandemic,” Chan Ai Mei, the chief officer of intermediary distribution and PRS at AHAM Capital, told IFN Investor.
PRS schemes are still widely viewed as tax relief tools as opposed to its core purpose which is to serve as a voluntary long-term savings and investment scheme for one’s retirement. Over time, it is expected that as PRS providers continue to build up their track record for their respective PRS funds, it would help instill confidence of the scheme’s ability to deliver consistent returns to investors.
Performance gap
In general, conventional PRS funds are largely still outperforming Islamic ones (see Table 1).
Table 1: Comparative returns of PRS funds (%)
| Fund | Year-to-date (as at the 17th April 2024) | One-year | ||
| Islamic | Conventional | Islamic | Conventional | |
| Public Mutual PRS Growth | 10.4 | 6.1 | 28.4 | 10 |
| AHAM PRS Growth | 6.2 | 6 | 10.3 | 7.6 |
| Manulife PRS – Growth A | 4.3 | 6.6 | 12.1 | 14.6 |
| Principal PRS Plus Moderate A | 7.6 | 11.4 | 0.9 | 3.2 |
| Public Mutual Moderate A | 5.3 | 6.8 | 10.2 | 14.7 |
| AHAM PRS Moderate | 4.3 | 5.4 | 8.1 | 7 |
| Manulife PRS-Moderate A | 3.6 | 2.2 | 9.5 | 5.2 |
| Public Mutual PRS Conservative | 2.9 | 1.5 | 8.2 | 5.7 |
| Principal PRS Plus Conservative A | 0.7 | 0.7 | 2.9 | 3.1 |
| AHAM PRS Conservative | 1.8 | 2.6 | 2.2 | 5.3 |
| Manulife PRS- Conservative A | 2.2 | 2.4 | 5.2 | 6.2 |
Source: Morningstar Direct
“By its nature, Shariah funds would have a smaller investment universe due to its screening criteria compared to conventional. As such, it may not be able to always participate tactically in certain opportunities which may explain the lag in performance compared to conventional offerings in [a] more ebullient market,” explains Chan.
Chan, however, believes that given the right timing and market conditions, Islamic funds can outperform their conventional counterparts.
“Shariah compliant funds typically consist of a concentrated portfolio of stocks with sustainable dividend yields. The weightage in the Shariah index is often skewed toward the telco and utilities sector that are often considered defensive.”
While the overall composition and risk profile adopted by PRS managers matter but ultimately, the choice lies with the individuals (whether Muslims or not) who should do their own due diligence before making their investment decisions, according to Siew.
This will be based on individual preferences, risk appetite and awareness about Islamic finance principles and Shariah compliant options.
Compared with EPF, which only offers a single Shariah compliant option to contributors, PRS offers more flexibility allowing for customization to suit different risk profiles and investor objectives. They span from conservative, moderate and aggressive, encompassing both conventional and Shariah compliant funds. This versatility allows investors to tailor their portfolios according to their specific preferences, financial objectives and life stages.
Another key feature of PRS funds is the default option, which provides investors with an automatic glide path toward retirement. It simplifies risk management for investors, ensuring that their portfolios are adjusted appropriately over time.
Experts believe the industry needs to invest more effort to sustain the momentum through investor education modules and constant engagement programs about the need to plan for retirement.
