Challenges of developing a takāful retirement annuity plan in Malaysia

Purpose – This paper aims to explore the challenges facing the development of a takāful retirement annuity plan in Malaysia. It also aims at exploring a new platform to re-launch the same product after being withdrawn from theMalaysian annuity market a few years ago. Design/methodology/approach – The research adopts a qualitative approach to address the possible challenges hindering the development of a takāful retirement annuity plan in Malaysia. The research will not discuss the Sharīʿah issues deemed settled in previous researches but will only focus on technical challenges related to the instruments of investment and prudential measures. Findings – The research found that various challenges face the development of a takāful annuity plan in Malaysia. Some of those challenges are the downsizing of the sukūkmarket, the shortage of long-term sukūk, longevity risk and risk-based capitalization. The research found that there is a need for a diversified portfolio of securities instead of solely using sukūk as an investment instrument in this product. Originality/value – Re-launching the takāful annuity plan in Malaysia requires the identification of actual challenges facing the development of such a product. The product purported to be re-launched would benefit a large segment of retirees who do not have enough savings during the retirement age. The introduction of such a product will also expand the takāfulmarket in annuities, which remains untapped.


Introduction
Annuities have long been perceived as back-up financial plans during retirement age and a means to reduce longevity risk when an individual outlives his/her assets.The annuitant seeks to secure steady payouts during retirement age by trading liquid lump sums in return for a series of payments until he/she passes away.The product can also include riders such as death benefits or a combination between fixed and variable annuities to protect against the shortfall of investing the annuity fund.The product, which is sold by life insurance and investment companies, passes through two phases: an accumulation phase followed by an annuitization phase.During the accumulation phase, the contributions of the annuitants are accumulated, and the annuity fund is invested in long-term bonds with variant exposure to market risk.During the annuitization phase, the stream of payments during retirement is made.The different types of annuitiessuch as fixed, variant, guaranteed and jointhave helped the market to cater for the needs of annuitants and their heirs before and after retirement age (Alhabshi et al., 2012).
takāful markets such as Malaysia's have sought to develop a Sharīʿah-compliant annuity product serving the same objective sought by a conventional annuity, i.e. guaranteeing a stream of payments during retirement age with available riders to secure death benefits.In 1999, Malaysia launched the first Sharīʿah-compliant annuity plan dubbed Employment Provident Fund (EPF) takāful Annuity Scheme (SATK) (Yusof et al., 2011).Although the product was widely received by the industry and employees, it was withdrawn in 2002 due to pricing and risk-based capital (RBC) requirements, among other reasons (Ismail, 2017).Some institutions such as Amanah Raya offered a Sharīʿah-compliant Public Mutual Private Retirement Scheme (PRS) that invested the contributions in both Á sukūk and stocks as a strategy to diversify returns in view of the volatility of the stock market.HSBC Amanah offered a non-guaranteed annuity up to the age of 75 years (Ismail, 2017).By and large, this product was offered under the PRS, which insurance companies, takāful operators, banks and unit trusts are permitted to offer.
The International Sharīʿah Research Academy for Islamic Finance in collaboration with Prudential BSN takāful came up with the conceptual framework and structure for a Sharīʿah-compliant model of a retirement annuity plan (Ali et al., 2014).The paper discussed the potential Sharīʿah issues arising in the proposed model and highlighted some challenges of introducing the takāful annuity plan in Malaysia.
The current paper explores the possibility of relaunching the annuity retirement plan in Malaysia.It particularly seeks to address the key operational challenges in view of previous practices and input from industry players as well as research findings on annuities in Malaysia.
Proposed Sharīʿah-compliant model for retirement annuity plan Ali et al. (2014) proposed wakālah (agency) and hibah muʿallaqah (conditional gift) as the underlying concepts for offering a Sharīʿah-compliant retirement annuity plan.The wakālah concept is used to manage and invest the annuity fund until the retirement age (i.e. during the accumulation period).This will be followed by hibah muʿallaqah whereby the contributions and the profits arising from the investment of the annuity fund will be donated to the tabarruʿ (donation) fund to start the annuitization stage.The tabarruʿ fund is used to make the stream of payments during retirement (i.e.retirement payout) and to pay the death benefits (i.e.death payout).Figure 1 depicts the mechanics of the proposed product.
After establishing the Sharīʿah compliance of the model, Ali et al. (2014) identified Á sukūk as a potential investment instrument during the accumulation period.Citing longevity risk and lack of investment instruments as potential challenges, the paper recommends issuance of more long-term or perpetual government Á sukūk.

Research objectives
The current research aims to achieve the following objectives: to unveil the potential market of takāful retirement plan in Malaysia; to identify the main challenges facing the development and the launching of takāful annuity plan in Malaysia; to explore the possible synergy between the takāful industry and the Á sukūk market in Malaysia; to compare the proposed takāful annuity product with similar retirement plans in Malaysia such as Government Pension Scheme, EPF and PRS; and to explore the possibility of relaunching the annuity retirement plan in Malaysia in view of the identified challenges.

Methodology
The research is qualitative in nature and uses three methodological instruments: literature review: review the main literature on annuities to identify the main challenges of takāful retirement plans; content analysis: analysis of the literature from Sharīʿah, legal and operational perspectives; and semi-structured interviews: identify the main challenges facing the development of a viable takāful annuity retirement plan in Malaysia and the way forward.

Challenges of introducing takāful annuity plan in Malaysia
From the practices of takāful annuity in Malaysia as well as some research outputs conducted on the feasibility of the proposed product, there is a need to assess the cited challenges of the proposed product and zoom in on the real challenges hindering the development of takāful annuities in Malaysia.The present research focuses on operational Insufficient Á sukūk instruments that can be used in the accumulation stage of the annuity product.This is based on statistics that showed that the number of long-term Á sukūk (20 to 30 years' maturity) and perpetual Á sukūk are dwindling, which makes it difficult to develop an annuity product that guarantees a stream of payments from retirement till death of the annuitant.Downsizing of the Á sukūk market as a result of Á sukūk under-rating and possible default events.The majority of Á sukūk are redeemed long before maturity, a factor that would affect the expected returns on Á sukūk, jeopardizing the long-term payouts during retirement.The challenge of longevity risk as people are living longer due to improved living conditions and health care programmes.This would mean that the regular payouts of the annuities would have to undergo a harmonization of assets and liabilities to avoid paying more annuities for longer lives (asset-liability mismatch).The deficit of the annuity fund and the operational aspect of qar Á d (loan) injection and its repayment.As depicted in Figure 1, in the event of deficit, the takāful operator provides qar Á d to the tabarruʿ fund.This may be seen as a capital guarantee on its part, as it is merely a wakīl (trustee) not a guarantor during the accumulation period.If the qar Á d is injected into the tabarruʿ fund, then it would be difficult to justify the occurrence of the deficit if the payout is based on an "upon claim basis".RBC requirement makes takāful annuity products less affordable as the uncertainty featuring the longevity risk would require more allocation of capital with prices soaring beyond the affordability of annuitants.EPF is unlikely to accept any withdrawals by employees to contribute to the annuity scheme.Annuitants would have to find other sources to buy the product, which is practically very challenging in view of the scarcity of sources and strict regulations on pension schemes.The applicability of the Islamic Financial Services Act 2013 on the proposed takāful annuity plan has yet to be put to the test.The definition of a defined risk in a typical takāful arrangement versus a known event in an annuity may pose a Sharīʿah and legal issue as far as this product is concerned.Governance issues may arise as well.

Conclusion
The present study capitalizes on previous practices of takāful retirement plans and research conducted on takāful annuities in Malaysia.The research aims to identify the main challenges facing the development of such a product and the possibility of relaunching it by takāful operators in Malaysia.The preliminary findings of the research have unveiled a number of challenges that will be put to the test via content analysis and semi-structured interviews.Preliminary conclusions suggest that the takāful annuity product should have diversified investment portfolios both in terms of maturity and asset quality.Capitalization of annuities should be better regulated to reduce cost and price.Besides, outsourcing the contributions from funds such as EPF is not recommended in view of a Á sukūk market marred by uncertainty and scarcity of long-term Á sukūk instruments.
Figure 1.Proposed model for takāful annuity plan