Final Report FYP

UNIVERSITI TEKNOLOGI MARA
A STUDY TO MAINTAIN PURCHASING POWER FOR

MIDDLE INCOME MALE RETIREES IN MALAYSIAN
PRIVATE SECTOR
BACHELOR OF SCIENCE (Hons.) ACTUARIAL SCIENCE

FACULTY OF COMPUTER AND MATHEMATICAL
SCIENCES
January 2015
MUHAMMAD BIN ALIZAN
2012357375
SUMAIYYAH BINTI ROSHIDI
2012995507
MOHD AMIR ASYRAF B ABD MALIK
2012321191
MOHD HAZIM BIN SAARI
2012532905
UNIVERSITI TEKNOLOGI MARA
A STUDY TO MAINTAIN PURCHASING POWER FOR

MIDDLE INCOME MALE RETIREES IN MALAYSIAN
PRIVATE SECTOR
January 2015
MUHAMMAD BIN ALIZAN
2012357375
SUMAIYYAH BINTI ROSHIDI
2012995507
MOHD AMIR ASYRAF B ABD MALIK
2012321191
MOHD HAZIM BIN SAARI
2012532905
Project submitted in fulfillment of the requirements

For the degree of
Bachelor of Science (Hons.) Actuarial Science
Faculty of Computer and Mathematical Sciences
Approved by
..
Supervisor
Zahrul Azmir ABSL Kamarul Adzhar
Universiti Teknologi MARA, Shah Alam, Malaysia.
CANDIDATES DECLARATION
I hereby declare that this project was carried out in accordance with regulations of
Universiti Teknologi MARA. It is original and is the result of my own work, unless
otherwise indicated or acknowledged as referenced work. This topic has not been
submitted to any other academic institution or non-academic institution for any other
degree or qualification.
In event that my project be found to violate the conditions mention above, I
voluntarily waive the right of conferment of my degree and agree be subjected to the
disciplinary rules and regulations of Universiti Teknologi MARA.
Name of candidate
Muhammad Bin Alizan
Student ID
2012357375
Programme
Faculty
Project Title
A Study to Maintain Purchasing Power for Middle

Income Male Retirees in Malaysian Private Sector
Signature of Candidate
Date
26 January 2015
Name of candidate
Sumaiyyah Binti Roshidi
Student ID
2012995507
Programme
Faculty
Project Title

Date
26 January 2015
Name of candidate
Mohd Amir Asyraf B Abd Malik
Student ID
2012321191
Programme
Faculty
Project Title

Date
26 January 2015
Name of candidate
Mohd Hazim Bin Saari
Student ID
2012532905
Programme
Faculty
Project Title

Date
26 January 2015
ABSTRACT
Inflationary risk is the risk that the inflation will undermine the performance of an
investment. In other words it is the uncertainty over the future real value of an
investment. Inflation is on the rise now and the future value of a pensioners pension
fund is at stake. If no action is taken, retirees could be forced to lower their standard
of living. This could be problematic to both the retirees and governments. There are
two main objectives of this study; to investigate the inflation trend in Malaysia and to
investigate the sufficiency of the pension fund throughout the future lifetime of the
retirees. The study begins with a brief description on the problems arising due to the
increase in inflation every year. Next it explains the data and methods being used in
the study. The collected data is categorized in secondary data concerning a group of
private workers in Malaysia from 2009 to 2012. The methods used to achieve our
studys objectives are the Mixed Autoregressive Integrated Moving Average
(ARIMA) Model and Hypothetical simulation model. The findings are highlighted
based on these methods and it can be concluded that the inflation will continue to rise
in the future and the annuity that has been converted from a lump sum will suffice
throughout the future lifetime of retirees.
ACKNOWLEDGEMENT
In the name of Allah S.W.T the most Gracious, the most Grateful
We, Sumaiyyah binti Roshidi, Muhammad bin Alizan, Mohd Amir Asyraf bin Abd
Malik and Mohd Hazim bin Saari would like to thank our supervisor, Encik Zahrul
Azmir ABSL Kamarul Adzhar for his patience and endless support and supervision
in guiding us as well as providing us with some ideas and advices for our final year
project. Other than that we would like to express our upmost gratitude to our parents
for supporting us.
ii
TABLE OF CONTENT
ABSTRACT
ACKNOWLEDGEMENT
ii
TABLE OF CONTENT
iii
LIST OF TABLES
LIST OF FIGURES
ix
CHAPTER 1
1.1
Background of The Study
1.2
Problem Statement
1.3
Research Objectives
1.4
Research Questions
1.5
Significance of The Study
1.6
Scope and Limitations of Study
2.1
Introduction
2.2
Issues or Problem
10
2.3
Data and Methodology
11
CHAPTER 2
2.3.1
The Mixed Autoregressive Integrated Moving Average

(ARIMA) model
2.4
Assumptions and Limitation
11
14
iii
CHAPTER 3
3.1
Introduction
16
3.2
Data Description
16
3.3
Methodology
17
3.3.1
17
3.4
3.5
ARIMA Model
Calculation of the Accumulated Value of the Individuals

Contribution under Employee Provident Fund (EPF)
20
The Simulation of the Future Income for Retirees
21
3.5.1
Assumptions used in the Hypothetical Life Course

Simulation
3.5.2
27
Compare the results by scenarios with different

assumptions
30
CHAPTER 4
4.1
Introduction
31
4.2
Research Data
31
4.3
Inflation Forecasting
32
4.3.1 Analyzing and Fitting the Malaysias Inflation Data Series 32

4.3.2
4.4
Results of the Inflation Rate Forecast Values
41
Findings on Hypothetical Simulation Model
44
5.1
Conclusion
53
5.2
Limitations and Recommendations
55
CHAPTER 5
REFERENCES
56
APPENDICES
60
iv
LIST OF TABLES
Table
2.1
3.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.1
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
Title
Mean and Volatilities of CPI Inflation from Various Countries
Age of Second Pre-Retirement Withdrawal
The Result of Mean Square Error (MSE) output for each model
Inflation Forecast from December 2014 until December 2019
Annual Average Inflation Rate from 2014 until 2019
Highest and Lowest Inflation Rate for Monthly and Annually
Result for Scenario A
Result for Scenario B
Result for Scenario C
Result for Scenario D
Result for Scenario E
Result for Scenario F
Result for Scenario G
Result for Scenario H
Malaysia Inflation Rate from January 1995 to November 2014.
Data source: National Institute of Statistics Malaysia
CPI according to Market Basket in Malaysia
CPI according to Market Basket in Malaysia
Unemployment and Employment Rate in Malaysia
Male Employment Rate in Malaysia
Occupation Class
Variable in HIS data
Calculation on average initial salary grade
Salary Age 24
Salary Age 25
Salary Age 26
Salary Age 27
Accumulated Fund EPF from age 24
Accumulated Fund EPF from age 24 with Pre-Retirement
Withdrawal
Withdrawal
Withdrawal
Withdrawal
Page
9
30
40
41
42
42
45
46
47
48
49
50
51
52
69
70
71
72
73
74
75
78
79
79
80
80
81
82
83
84
85
86
87
88
LIST OF FIGURES
Figure
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
Title
Three Stages of ARIMA
Process of Hypothetical Simulation Model
Time Series Plot of Malaysias Monthly Inflation
Trend Analysis Plot of Malaysias Monthly Inflation
Autocorrelation Function Plot of Malaysias Inflation
Partial Autocorrelation Function Plot of Malaysias Inflation
Time Series Plot in Seasonal Difference
The Autocorrelation Function of Zt
The Partial Autocorrelation Function of Zt
Time Series Plot of Wt
The Autocorrelation Function of Wt
The Partial Autocorrelation Function of Wt
Time Series Plot for Inflation with Forecast
Functions of Stat in Minitab
ARIMA
ARIMA (Forecast)
Types of Time Series Plot
The Dependent Variable on Y-Axis
The Time/Scale on the X-Axis
Trend Analysis
Autocorrelation Function Plot
Partial Autocorrelation Function Plot
The Minitab Output
Page
17
25
32
33
33
34
35
36
36
37
38
38
43
60
61
62
63
63
64
64
65
65
66
vi
CHAPTER 1
INTRODUCTION
1.1 Background of The Study

This paper tackles the problem that retirees face when they retire. During
retirement, there is a significant decrease of income compared to the time of
employment. Due to the effect of inflation on the price of necessities, the price of goods
will increase substantially. Hence the purchasing power will decrease and the standard
of living for people who rely solely on their pension will decline. This study focuses
mainly on how to cope with the problems associated with inflation and purchasing
power. Such problem can be solved by fully utilizing the power of compounded interest
matched with a long period of investment.
William H.Aitken (April, 1996) stated that the prospect of no money generated
every month is not attractive at all. Being able to maintain the same standard of living
after retirement is important to most people. In order to achieve this, a thorough
planning, funding and continuous monitoring are required. Pension scheme is one of the
ways to achieve this goal. Pension fund can be defined as a form of institutional investor
that functions by collecting; pooling and investing the funds contributed by sponsors and
beneficiaries to provide an annuity to the beneficiaries in the future (Davis 1995a).
This is a way designed to save money and accumulate interest in order to fund
the consumptions in retirement (E Philip Davis). There are two major types of pension
schemes, namely defined benefit and defined contribution. In a defined benefit plan, the
benefit has been defined earlier. In order to ensure this, certain calculations will take
place in order to determine how much contribution would be needed. The main
advantage of a defined benefit plan is that the income offered is stable and is
subsequently indexed to inflation. The major weaknesses include the lack of benefit
portability when changing jobs and the complex valuation of plan liabilities. In a defined
benefit plan, when a worker moves jobs, he can end up with a much lower pension in
retirement.
A defined contribution plan has a defined amount of contribution payable by

both employee and employer, often as a fixed percentage of salary. The employees
retirement benefit is determined by the size of the accumulation at retirement. Retirees
who are under the Defined Contribution Pension Plan are exposed more to risk
compared to those who are under Defined Benefit Pension Plan (Bodie et al., 1988). At
retirement, the beneficiaries can usually take the money as a life annuity, a phased
withdrawal plan, a lump sum payment, or some combination of these. As the value of
the pension benefits is simply determined as the market value of the backing assets, the
pension benefits are easily transferable between jobs. While the employer or sponsor is
only obliged to make regular contributions, the employees bear a range of risks. In
particular, they bear asset price risk (the risk of losses in the value of their pension fund
due to falls in asset values) at retirement and inflation risk (the risk of losses in the real
value of pensions due to unanticipated inflation). The real payoff during the retirement
could be severely damaged by the accumulation of inflation in a long period of time
(Nan-wei Hana). During the calculation of retirement income, the inflation rate needs to
be taken into consideration because it affects directly the real rate of return as well as the
purchasing power of the income stream produced. Inflation is crucial in the investment
decision making process and low inflation is the key towards a better standard of living
through savings and investments (Megginson, 2008).
Risk can be defined as the probability of an occurrence of an unfavorable event

which may lead to a loss. Inflation can be defined as a general increase in prices and fall
in the purchasing value of money. . Inflation risk can be defined as the chance that the
cash flows from an investment will be of lesser value in the future because of changes in
purchasing power caused by inflation. Inflation is an important economic indicator that
needs considering because it affects the economic growth directly. For example, if the
price is expected to rise rapidly in the future, people will react by purchasing goods now.
This will eventually lead to further increases in price for these services and goods.
Another way to describe inflation is that the amount of money supplied is too much.
This can be explained by the demand and supply theory. People will have more money
to offer for goods when the supply of money is increased. This will increase the demand
for goods but not the supply. If the demand is more than the supply, this will result in an
increase in the price of goods. This happens not because goods are scarcer than before,
but because money is more abundant.
In Malaysia, the life expectancy is expected to increase. Most retirement income

systems in Asia are not well prepared for the growing ageing population that is
forecasted to increase in numbers over the next two decades (OECD, 2009). According
to the statistics department, this year the consumer price index rose from 2.9 per cent to
3.3 per cent which is the highest level since November 2011. Inflation is going to be on
the rise in 2014, especially in second half of the year (Nor Zahidi). Even though inflation
risk is on the rise, there are ways to control it. Monetary policy which works by reducing
the aggregate demand can be used to control inflation. Other policies such as Fiscal
policy, Wage control, Monetarism and Supply side policy can be used control inflation.
1.2 Problem Statement

Inflation risk can be defined as the chance that the cash flows from an investment
will be of lesser value in the future because of changes in purchasing power caused by
inflation. For example, the price of a house this year is RM500k but next year the price
might rise above RM500k due to inflation. There are several factors of inflation. The
first factor of inflation is because the aggregate demand is rising faster than the
aggregate supply. This will pull up the prices and known as the demand-pull inflation.
The second factor is known as the cost-push inflation. The wage increases forced upon
the economy by labor unions under threat of strike, or costs may be raised by business
monopolies.
The ministry of finance stated that the Consumer Price Index, CPI will increase
from 4% to 5% in 2015, compared to an average of 3.3% in 2014. Malaysia has
embarked on a series of fiscal consolidation moves following global ratings agency
Fitch which revised Malaysias sovereign debt outlook from Stable to Negative in
July. Inflation in Malaysia is also expected to remain manageable despite trending above
the long-term average. This is because Bank Negara Malaysia, BNM is expected to
increase interest rates in order to help contain the inflation.
According to Malaysian Chief executive of Private Pension Administrator, Datuk

Steve Ong, Malaysians are at risk of a lower standard of living during retirement if they
rely solely on the employee provident fund, EPF. He said that Malaysias current
income replacement levels for retirement were only 30 per cent while the average for
OECD countries was 57 per cent. Pensioners who do not plan for their retirement risked
having to work longer or cut back on their standard of living during retirement.
Inflation risk is faced by all pensioners. Even the largest fund in Malaysia, the
employee provident fund, EPF is facing a very high risk trying to keep returns high by
investing in more overseas property and domestic stocks while fending off concerns that
these are too risky. The purchasing power could be reduced and the standard of living
could be reduced by inflation. Since the Defined Benefit plan is adjusted to inflation, we
will be focusing mainly on pensioners with the Defined Contribution plan. Most of the
pensioners in DC plan are not aware of the rise in inflation that will affect their pension
later on when they retire. Even though the inflation forecast in the future may seem
modest, market conditions can change quickly. Without proper inflation protection, the
pensioners could risk the loss of asset value and purchasing power. A few studies found
out that those who are making minimum or no contributions towards their Defined
Contribution Pension Plan will have a hard time maintaining their standard of living
when they retire due to the fact that their funds are inadequate (Samwick and Skinner,
2001; Choi et al., 2002; Thaler and Benartzi, 2004).
There are 3 stages of workers: young workers, middle aged workers and old
workers. Young workers should not worry about direct inflation protection. This is
because they are still young and there is room for growth. As long as their wages could
keep up with the inflation, there should be no problem. For middle aged workers, their
short run inflation risk is gradually growing. They should gradually shift to direct
inflation hedging strategies. They should not focus on growth anymore but protection
instead. For the old workers, now is all about protecting themselves from the loss of
purchasing power. The 2 main risks they face now are the unexpected inflation and a
drop in asset values relative to steady and predictable inflation.
There are several ways to manage inflation. According to Gottfried Haberler,

inflation can be controlled using Fiscal policy. Fiscal policy is where the government
controls the expenditure and the revenue by injecting or retracting money. This method
is a bit slow because it has to go through parliamentary procedures. The other way is
through the monetary policy. It is a measure that can be initiated swiftly and changes can
be implemented quickly.
1.3 Research Objectives

The research objectives of this study are:
i.
To investigate the inflation trend in Malaysia.
ii.
To convert the accumulated fund in EPF account into an annuity.
iii.
To investigate the sufficiency of the pension fund throughout the future

lifetime of the retirees.
1.4 Research Questions

The research questions of this study are:
i.
What is the inflation pattern in Malaysia?
ii.
Will the pension fund last throughout the future lifetime for the retirees?
1.5 Significance of the Study

This research may benefit the Malaysian government and the pensioners. Our
research provides the inflation pattern in Malaysia and the inflation risk pattern among a
group of private workers in Malaysia from year 1995 until year 2014 ranging from age
24 to age 60. The obtained result could prove to be beneficial to assist other researchers
in the future by having a thorough and simple explanation. Other than that it aims to
study the role of two different parameters that is, retirement age and contribution rates.
In order to ensure that the pensioners could continue living the way they used to
live, certain measurements should be imposed. The amount of contributions the
pensioners contribute during their active working life should be adjusted to match the
anticipated rate of inflation in the future. By having the contributions adjusted, the
pensioners could have their purchasing power in the future just as strong as now. This
6
will aid the pensioners greatly. Hence, this project paper will benefit the pensioners that
wish to maintain their same standard of living.
1.6 Scope and Limitations

Study for this topic has the following scope due to the inability the collect the
large amount of data needed:
1. The average salary calculated is being based on people working in the
private sector.
2. The number of researches that can aid this study is very minimal.
3. Very hard to find suitable and relevant articles related to the research.
CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
This chapter will discuss about the issues or problems concerning the state of
purchasing power when inflation hits for pensioners with defined contribution plans.
Other than that this chapter will also discuss how to forecast the future inflation by using
the data and methodology related to those problems, the findings, conclusions, the
significance, and the assumptions as well as the limitations that are being used by those
who had been doing researches related to this topic.
Inflation management is one of the hardest tasks an economic policymaker has to

undertake. Inflation is, at the same time, one of the most dreaded and one of the most
misunderstood of economic phenomena. We know from experience, combined with
cogitation, that the prices of commodities will, over time, rise and fall, responding to the
pulls and pushes of demand and supply. Except for 1949, 1955, and 2009, the prices of
goods and services have, on average, risen each year since 1945. Inflation rose in the
1960s, peaked in the 1970s and early 1980s, and has been generally low but positive
since then.
Inflation in Malaysia has been below the global average for the whole sample
period and it followed the global trend up to 2003. From this date onward, the recent
upward inflation trend in Malaysia and in its trading partners has forced a faster
conversion towards the world average inflation at approximately 3.5 percent. How do
Malaysian Inflation rates compare to those of similar economies in the region? To
answer this question we select Singapore, Thailand, Korea, Indonesia and Philippines as
the base countries for a cross-country study.
Table 2.1 Mean and Volatilities of CPI Inflation from Various Countries
Countries
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
Industrial Countries
Non-Oil Develop.Ctys
Malaysian Trade
Partners
91-96
8.77
6.01
3.89
9.91
2.37
4.98
2.89
45.63
2.56
MEANS
97-99 00-05
29.32
8.40
4.26
3.16
3.56
1.71
7.44
4.46
0.59
0.77
4.67
2.15
1.63
2.04
10.31
5.55
3.50
1.96
All Period
12.73
4.52
2.95
7.24
1.37
3.79
2.30
22.53
91-96
1.42
1.82
0.66
4.21
0.82
1.21
0.86
18.31
1.57
1.20
VOLATILITIES
97-99 00-05 All Period
28.88
4.04
15.25
2.96
0.82
2.20
1.40
0.68
1.33
2.25
2.87
4.14
1.26
0.82
1.22
3.77
1.44
2.42
0.34
0.44
0.80
1.59
0.83
22.28
0.64
0.78
0.57
Malaysia is only second to Singapore in terms of lowest average inflation in the

region during the distinct sub periods. Both countries display inflation rates comparable
to those of Industrial countries and far from other non-oil developing economies. In
terms of volatility, Malaysian inflation has experienced the lowest volatility among its
regional counterparts in the last decade and a half. For the first five years of the sample
period Malaysian inflation volatility was even lower than that in Industrial economies.
Many different factors and policies have been held responsible for inflation. It is
a widely held view that inflation is always and everywhere a monetary phenomenon
resulting from and accompanied by a rise in the quantity of money relative to output.
One of the factors is that a more rapid rate of money growth plays an active role in
inflation and results either from mistaken policies of the Federal Reserve or because the
Federal Reserve subordinates itself to the fiscal requirements of the federal government
and finances budget deficits through money creation. For example, Federal Reserve
policies that are likely to produce inflation are those that fix rates of interest too low or
that support unrealistic foreign exchange values of the dollar.
Due to the steady increment of inflation in Malaysia, a projection of future

inflation is important in order to forecast the inflation. It is best for the government to
have a projection of inflation so that they can aid the pensioners in making decisions
related to their retirement. There are significant methods that have been used to forecast
the inflation. The flexibility of these approaches can be used in determining the
important factors that can affect inflation.
2.2 Issues or Problem

One of our objectives of this study is to investigate the sufficiency of the pension
fund throughout the future lifetime of the retirees. By having these studies, the
pensioners will have a clearer view on how to maintain their purchasing power and their
standard of living too. One reason measuring inflation is so important is because if and
when it returns, it will affect the purchasing power of our dollars. Our objective is
backed by an annual report of EPF in 2013 where it shows that the average savings for
active members by the time they hit the age of 54 stood at RM166, 650 and the average
savings for inactive members in their EPF accounts is RM26, 250. Since the average
expenditure for a household is RM5000, this amount of saving is definitely will not be
enough.
Older people aged 60 and over are expected to increase in number from 1,398.5
million in 2000 to 3,439.6 million in 2020 in Malaysia (DOS, 2000b). This eventually
led to an increased interest in regards of income in later life. It can be expected that a
retiree will at least live for another 20 years after they start to retire (Leoi, 2008). Other
than that, the increase in life expectancy will affect the amount of pension that is needed
in order to provide an acceptable standard of living for the retirees. The sustainability
from fiscal perspective of the current pension system has emerged as a major concern
for policy makers. However, less interest has been shown regarding whether the system
10
itself will manage to provide a pension of sufficient value to ensure a decent standard of
living post retirement. Post marriage, it is not an unusual thing for women to stop
working in order to focus on taking care of their family. This puts responsibility on the
men as the sole bread winner. If the amount in the accumulated fund is small, later on it
will not suffice to fund the expenses during retirement. Furthermore, the current global
economic downturn has affected the economy of many developing countries such as
Malaysia in a way that may change the pension scheme in an unfavorable manner.
With the unstable economic conditions, a growing ageing population and increasing life
expectancy, there is a probability that it may affect retirement savings and income
during retirement. Some speculate that by increasing the number of working years will
result in happiness, higher morale, better adjustment, greater longevity, larger social
networks and better perceived health among the elderly (Mohamed, 2000).
Theoretically, by having longer working careers and increasing the retirement age would
make the pension scheme more sustainable and the standard of living could be
maintained (McGillivray, 2005).
2.3 Data and Methodology

2.3.1 The Mixed Autoregressive Integrated Moving Average (ARIMA) Model
ARIMA methods for forecasting time series are essentially agnostic. Unlike
other methods they do not assume knowledge of any underlying economic model or
structural relationships. When using ARIMA model for the purpose of forecasting, it is
assumed that past values of the series plus previous error terms contain information
needed in order to forecast the value of the data.
11
Several methods for identifying ARIMA models have been suggested by BoxJenkins and others. Makridakis et al. (1982), and Meese and Geweke (1982) in their
writings have discussed the methods of identifying univariate models. For forecasting
Irish inflation using ARIMA models Aidan Meyler, Geoff Kenny and Terry Quinn
(1998) used two different approaches.One of the approach is the Box Jenkins approach
and another one is objective penalty function methods for identifying appropriate
ARIMA models. The emphasis is on forecast performance, which suggests that ARIMA
forecast has outperformed. Toshitaka Sekine (2001) estimated an inflation function and
forecasted inflation one-year ahead for Japan and he found that there are a mark-up
relationship, excess money supply and the output gap are important in determining long
run equilibrium correlation model of inflation. He emphasized the importance of
adjustment to a pure model-based forecast by utilizing information of alternative
models.
George E.P. Box and Gwilym M. Jenkins (1970) integrated the existing
knowledge on time series and they introduced univariate models for time series which
simply made systematic use of the information included in the observed values of time
series. This offered an easy way to predict the future development of the variable.
Moreover, these authors developed the three-stage iterative cycle for time series which
are identification, estimation, and verification. Their book had an enormous impact on
the theory and practice of modern time series analysis and forecasting. With the advent
of the computer, it popularized the use of autoregressive integrated moving average
12
(ARIMA) models and their extensions in various areas of science. Since then, the
development of new statistical procedures and more sophisticated computers as well as
the availability of larger data sets has advanced the application of time series methods.
After the introduction by Yule (1921), the autoregressive and moving average models
have been greatly favored in time series analysis.
According to Aidan Meyler, Geoff Kenny and Terry Quinn (1998) the main
advantage of ARIMA forecasting is that it requires data on the time series. Firstly,
forecasting a large number of time series are more favorable. Secondly, a problem that
occurs at certain times with multivariate models can be prevented. For example,
consider a model including wages, prices and money. It is possible that a consistent
money series is only available for a shorter period of time than the other two series,
restricting the time period over which the model can be estimated. Third, there is a
problem with timeliness of data when using the multivariate models. If one constructs a
large structural model containing variables which are only published with a long lag,
such as wage data, then forecasts using this model are conditional forecasts based on
forecasts of the unavailable observations, adding an additional source of forecast
uncertainty
There are also some drawbacks when forecasting using ARIMA model. Aidan
Meyler, Geoff Kenny and Terry Quinn (1998) stated that to identify the model
13
formulation can be very subjective and need an expert like forecasters whom have skills
and experiences in identifying the model. Other than that, it is not embedded within any
underlying theoretical model or structural relationships. Hence, the economic
significance of the chosen model is not clear. Therefore, it is impossible to run policy
simulations with ARIMA models, unlike with structural models. The third disadvantage
of ARIMA models is poor at predicting turning points because of its backward looking
characteristic and can be improve if the turning point represents a return to a long-run
equilibrium.
However, ARIMA models have proven themselves to be effectively working and

outperform more sophisticated structural models when forecasting for a short period of
time.
2.4 Assumptions and Limitation

From the journals that we have read, each research has their own limitation on
their study. According to Antolin(2007), this research has lack of data to estimate and
forecast mortality rates and life expectancy for the very old (those aged 85 or more).
Data at very old ages are not very accurate because of small sample problems. Only a
few countries have certified population statistic which are sufficiently accurate to
produce consistent estimates of death rates at higher ages. It is commonly accepted that
between ages 30 and 85, age-specific death rates tend to rise approximately at fixed rate
of increase. This rate of increase tend to fall for ages 85, and even possibly, at the more
14
extreme ages to become zero or negative, although one cannot be certain of the latter
because of the sparseness of the data above age 100.
Aidan Meyler (1998) stated in his research project has considered autoregressive
integrated moving average (ARIMA) forecasting. ARIMA models are theoretically
justified and can be surprisingly robust with respect to alternative (multivariate)
modelling approaches. Indeed, Stockton and Glassman (1987) upon finding similar
results for the United States commented that a simple ARIMA model of inflation can
turn in such a respectable forecast performance relative to the theoretically based
specification.
Although the forecasting results for the sample period 1993Q1-1998Q4 compare
quite favorably with those from BVAR analysis, that does not mean that univariate
modelling can supplant multivariate techniques. The period in question was one of
relatively stable inflation. ARIMA models may not perform as well with more volatile
series. Furthermore, ARIMA models are backward looking and are generally poor at
forecasting turning points. Also well-specified multivariate models generally perform
better than ARIMA models over longer time horizon.
Andreja Pufnik (2006) also used ARIMA models to forecast the consumer price
index in Croatia and forecasting future values of variables from the past behavior of the
series, and attempt to examine whether separate modelling and aggregating of the subindices improves the final forecast of the total index. His research considered the main
problems associated with the characteristics of the consumer price index (CPI) series in
Croatia because it lacks of length of series, changes in the methodology and structural
breaks.
15
CHAPTER 3
METHODOLOGY
3.1 Introduction
There are three objective of this study which is to investigate the inflation trend
in Malaysia, the relationship between inflation risk and purchasing power among
pensioners and the relationship between inflation risk and the amount of contribution
and also to calculate the adjusted contribution for Malaysian public workers.
Methodology for finding expected life expectancy and consumer price index in Malaysia
are both different. These because each objective is related to different variable and each
variable are suitable for different methods.
3.2 Data Description

In this project paper, the types of data that are being used are secondary data
collected from the Malaysias Department of Statistic. We decided to use consumer
price index (CPI) data, labour force survey time series data and life expectancy data to
look the effect of inflation on purchasing power on pensioners.
Regarding with consumer price index (CPI) data in Malaysia, we manage to get
from the January 1995 until November 2014 in form of monthly data and time series
data. We also manage to get principal statistics of the labour force by sex in Malaysia
from year 1982 to year 2012.
16
3.3 Methodology
3.3.1 ARIMA MODELS
The integrated component of an ARIMA model represents the number of times a
time series must be differenced to induce stationarity. A general notation for ARIMA
models is ARIMA (p,d,q)(P,D,Q), where p denotes the number of autoregressive terms,
q denotes the number of moving average terms and d denotes the number of times a
series must be differenced to induce stationarity. P denotes the number of seasonal
autoregressive components, Q denotes the number of seasonal moving average terms
and D denotes the number of seasonal differences required to induce stationarity.
Figure 3.1 Three Stages of ARIMA
Find the orders of

ARIMA(p,d,q) model
Having identified the
values of ARIMA model
Stage 1 :
Model
Identification
Stage 2 :Model Estimation

and Diagnostic Testing
To ensure the best fitted model
: 1)test the residuals estimated
of the model. 2) Check if the
white noise is present
If residuals tunred out to be
white noise (model is fit)
Otherwise,restart the process
Estimation of parameter of
selected AR and MA forms
included in the model
Forecasting the series
based on ARIMA model
Check the accuracy of the
forecast
statistical measures will be
used
Stage 3 : Model
Application
The objective of analyzing economic data is to predict or forecast the future

values of economic variables. The proposed Box-Jenkin methodology for this research
involves iterative three-stage cycles. Before start the first stage, after collecting the data,
to forecast a time series, the stationary of the series must be maintained. A time series is
said to a stationary if mean and the variance are constant over time. Through the
stationary test we will also examine the properties of the time series variable, in order to
17
have a reliable regression tests to make sure that the CPI inflation forecasting model
could not be subjected to Spurious Regression.
At the last stage, to compare the accuracy of various model, a statistical measures
of Mean Squared Error (MSE) will be used.
In practical term, to make the series stationary requires performing three

processes: removing the trend, having a constant variance and finally, removing the
seasonality.
Non-seasonal
A simple case of the model as represented by ARIMA(1,1,1) is written as ,

(1) = +
Where wt =yt yt-1 represents the first difference of the series and is assumed stationary.
In this case, the values of p = d= q = 1
Equation (1) can also be written as,
=
(2)
Assuming mean, =

= +
and substituting wt = ( 1 B) yt then equation (2) becomes,

=
18
Expanding both sides we have,
+ =
Now moving all the lag variables to the right, the equation can now be written as,
ARIMA with Seasonal Component
For series with seasonal component , then additional differencing is necessary to

performed in order to eliminate the seasonality effect ( seasonal differencing).Let letter
S denotes the seasonality component
For general equation can be represented as:
I.
For monthly data series

SARIMA (p,d,q)(P,D,Q)12
Let zt be the seasonally differenced series such that zt = yt yt-12
II.
For quarterly data series

SARIMA (p,d,q)(P,D,Q)4
Let zt be the differenced series such that zt = yt yt-4
19
3.4 Calculation of the accumulated value of the individuals contribution under

Employee Provident Fund (EPF)
According to Stephen G. Kellison (2009), rates of interest are positively correlated with
rates of inflation.
+
+
+ =
Where;
= is the current interest rates,
= is the current inflation rates, and;

= is the real rates of interest.
Therefore, to calculate the future value of the participants at retirement age if the
individuals make a contribution the EPF, we will use this model;
= .
=
Where;
[(
+ ]
= Accumulated value of the fund in the individual account in EPF;
= The percentage of the employees contribution under EPF;
= The percentage of the employers contribution under EPF;
= The actual monthly salary of the individual;
r = retirement age; and

e = entry age.
20
= real rates of interest at time k

3.5 The simulation of future income for retirees.
Simulation is a unique type of modeling that simplifies a system or structure.
When run, it will generate outputs and the aim is to predict any future trends and gaining
a better understanding of some features in the social world (Gilbert and Troitzsch,
1999b).
It is best to conduct simulation models using a computer in order to allow the

simulation of complex calculations. Different types of model serve different purposes or
answer different research questions. For example, certain simulation methods are used to
project future social and economic outcomes based on a set of parameters and the impact
of social policy. The main aim of a micro simulation model is to analyze the possible
impact of policy change upon household regardless of what type of simulation used
(Harding and Gupta, 2007).
A model that produces a simulation based on individuals and their different

characteristics could be categorized as a hypothetical simulation model. Hypothetical
models are normally used to examine and explore the output of certain characteristics for
different individuals. According to Joshi et al. (1996), if the inquiry is about what will
happen to someone over their lifetime, some artificial time needs to be created in order
to simulate the hypothetical lifetime. In certain situations where the data is incomplete,
this type of simulation model is considered an advantage because it does not require a
complete life history data to obtain outcomes for each individual.
21
Based on the objective for each model, the characteristics are set for each
hypothetical model individually. In order to calculate the outcome required, each
hypothetical individual can have any characteristic set as the parameter (Evans and
Falkingham, 1997). However, hypothetical model has its own weaknesses too. Even
though the characteristics are set to represent an individuals life characteristics, they
may not show the individuals real life background and outcome in the real world (Joshi
et al., 1996; Evans and Falkingham, 1997).
In 1997, Evans and Falkingham conducted a study using a hypothetical

simulation model named PHYLIS (Pensions and Hypothetical Lifetime Income
Simulation) to examine the consistency of the pension outcome for six different
countries, i.e. the United Kingdom, Italy, Sweden, Poland, Chile and Australia. The
results of the countries which use Defined Contribution Pension Plan paired with a nonexisting fully funded system showed that the replacement rate levels were the highest
among low-paid workers compared to those who had no breaks during employment. A
study conducted by Rake et al. (1999) used a more up-to-date version of the PHYLIS
model in order to investigate
low-income individuals and their partners pension
outcomes by changing certain assumptions in the model. The same thing is applied to
the simulation method used in this research. From the second stage onwards, the
simulation model was developed by considering flexible assumptions in the parameters.
Rake et al. (2000) stated that a hypothetical simulation model will allow a
simulation to be carried out more thoroughly and able to explore in more detail on the
impact of the policy towards individual outcomes.
22
One of the weaknesses for using this model is that the results and findings
derived from such a model do not represent the exact pension outcomes. They only
illustrate the outcomes that may emerge from Malaysias current pension schemes for
hypothetical individuals with the same characteristics. Another way of saying is that the
result from the simulation model will show the level of an individuals retirement
savings and monthly retirement income they might expect to have based on different
characteristics. Some of the characteristics are different education levels, different
employment history, and different retirement account activities. Retirement account
activities consist of contribution rates and pre-retirement withdrawals. It is no possible to
generalize from the results because they are highly sensitive to the choice of
hypothetical parameters (An, 2004). Due to a lack of longitudinal data, this research
used a hypothetical simulation model to predict and examine the effectiveness of
Malaysias pension system and to explore the outcomes for different individuals at
retirement
By choosing this type of model, it enabled a more sophisticated and complicated

analysis of hypothetical individual life histories; that is a study on the impacts of
different types of employment histories on retirement income and an investigation of the
impacts of factors such as retirement age, contribution rates and pre-retirement
withdrawals on estimated retirement income. Other than that, in order to run a
hypothetical simulation model, it did not require a complete set of data compared to
other simulation models like static or dynamic model.
It is a norm that employees will choose to receive a lump sum upon reaching
retirement age even though a survey has shown that 70% of retirees use up all of their
EPF money within the first three years of retirement (EPF, 2008). This study estimated
an actuarial value for an annuity plan. The total savings upon retirement are converted
into an annuity plan, similar to previous research conducted by Samad and Kari (2007).
23
Narayanan (2002) conducted a study on the adequacy of the EPF fund upon
reaching retirement. One of the reasons in his study for not having an adequate income
during retirement was the high number and amount of pre-retirement withdrawals that
were made during employment or known also as the retirement preparation phase.
However both Naraynan (2002) and Samad and Kari (2007) used a completely different
way to study the adequacy of Employees Provident Fund (EPF) balances at retirement.
Narayanan (2002) calculated the adequacy of retirement income using the total
contributions and the balances based on the contribution sizes as reported in the EPFs
Annual Report. Samad and Kari (2007) used the salary range of the members to
calculate it into a monthly annuity. However, it did not reflect the characteristic of each
individuals salary or the contributions made because the method was based on the
overall salary and contribution ranges instead of individuals.
Hence, the simulation model used is relevant to the purpose of this study which
is to answer the research question, whose objective is to analyze the relationship
between inflation and the amount of contribution and to calculate the adjusted
contribution for Malaysian private workers.
24
Figure 3.2 Process of Hypothetical Simulation Model

Create Hypothetical Life Course
Pre-Retirement
Withdrawal
Age starts working
Code Excel formulas in the Excel

Spreadsheets
Contributions and Retirement Income

Accumulated from EPF
Converts into Monthly Annuity Based on

Replacement Ratio
Calculate Total Years of Annuity Term
Compare with Retirees Future Lifetime

Is it sufficient?
25
Objectives of the simulation model:

For this paper, a hypothetical life-course simulation model approach was
employed. The seven main objectives designed to be achieved for this model are:
i)
To calculate the monthly annuity from the accumulated fund in the EPF and the
monthly pension for the Pension Scheme; either with full employment or with
disruptions in employment years
ii)
To generate the estimated accumulated retirement income at different retirement

ages
iii)
To generate the estimated accumulated retirement income by increasing the

contribution rates
iv)
To generate the estimated accumulated retirement income by making

preretirement withdrawals from Account 2; by making single and two-phase
withdrawals
v)
To generate outcomes (ii-iv) through interactions between retirement age and

pre-retirement withdrawals, between contribution rates and retirement age, and
between pre-retirement withdrawals and contribution rates
vi)
To calculate the Replacement Rate Level (RR) for the different factors used
(iiv) and to determine the Poverty Level (PL)
vii)
To generate the estimated accumulated retirement income with receiving credit

pension credit contribution from the Government for unemployed women or
women with disruptions due to care-taking responsibilities (this includes taking
care of their children and elderly family members).
26
In order for this simulation to be successful, there were a few important

parameters that needed to be factored in. These parameters, which have been developed
earlier during the early stage of the model development, were:
i)
retirement age
ii)
contribution rates
iii)
pre-retirement withdrawals amount
iv)
EPF real rate of return
v)
annuity return
vi)
last drawn salary
vii)
total number of years of employment
viii)
salary grade
3.5.1
Assumptions used in the Hypothetical Life Course Simulation

1. EPF interest rate is 6.35% yearly
Based on statistic report from Employee Provident Fund (EPF) 2014, the
interest rate reported in the financial statement in 6.35% annually. This
indicated that the accumulated fund of contribution gain from employee and
employer had been invested to another financial institution and raised their
accumulated fund by 6.35% annually.
2. Starting age from 24 until 27

The period of the contribution for Employee Provident Fund (EPF) was
influenced by the starting age when the worker started to employ by
company. In this simulation model, the starting age of worker had been set
from 24 years old to 27 years to make sure the fund in is sufficient to support
their post-retirement life.
27
3. Fresh graduate or first degree holder

The level of education was used in determination of starting salary when
employee starts to work. It is important in order to calculate the total
contribution in their fund. The starting salary that been used in this simulation
is between RM2500 to RM2800.
4. Male full employed until retirement age which is 60

Statutory retirement age used in this simulation model was based on the
current retirement age in Malaysia which is 60 years old. This helps to
calculate the total contribution in term of determine the period of full time
worker from their starting age until reach full retirement term.
5. Salary grade is based on HIS data 2012

Household Income Survey (HIS) 2012 was used to calculate average
monthly salary and average yearly salary in each workers age in order to
determine the total contribution in EPF at the retirement age.
6. Annuity interest rate is 3% based on past research paper

Annuity interest rate is important to calculate the annuity that the
employee can get after the retirement. 3% interest rate been used to determine
the number of years that the total fund can support the employee postretirement life expenditure based on the annuity value that influenced by the
replacement ratio
28
7. Replacement ratio is 50% based on maintaining current expenditure

Replacement ratio was calculated from monthly income after retirement
divide with monthly last drawn salary. The percentage is determining the
sufficiency value of income after retirement that can maintain with the current
expenditure during works.
8. Using 3% and 3.5% rate for salary increment

Salary grade was used in the hypothetical simulation in order to calculate
the total contribution of the employee and employer in funding the EPF. The
percentage of the salary increment which is 3% and 3.5% had been suggested
by the previous research paper because of the limitation of the data that been
used.
9. Male mortality for Malaysian is at age 79 years based on Global Age Watch
Index 2014 from Department of Statistic Malaysia and Social Security
Administration USA 2014
When the male worker reach their retirement age which is 60 years, based
on Global Age Watch Index they can survive up to age 79 years old means
that they can survive approximately 19 years after proceed their retirement.
10. Pre-retirement Withdrawal

If the individual used the account 2 from EPF, the assumptions used in
hypothetical simulation are based on past research, Mazlynda(2012), which is
30% of the amount in EPF account will be withdraw after 5 years they start
employed, and based on table 3.1 below they pre-retirement withdrawal for
the purpose of financing ones childrens education, at the age of 18, because
29
children graduate from high school at 17 and are expected to further their
undergraduate studies at the age of 18.
Table 3.1: Age of Second Pre-Retirement Withdrawal
3.5.2
Assumptions for age starts

working
Assumptions for age at

second withdrawal
Age 24 years old and below
38 years old
Between age 25 to 29 years

old
43 years old
Compare the results by scenarios with different assumptions
There are eight scenarios involved with different assumptions and parameters which is
age start working (24 to 27) and either they do pre-retirement withdrawal or not;
i.
Scenario A: Age starts working 24, without doing any withdrawal from
account 2 EPF.
ii.
Scenario B: Age starts working 24, with pre-retirement withdrawal.
iii.
Scenario C: Age starts working 25, without doing any withdrawal from
account 2 EPF.
iv.
Scenario D: Age starts working 25, with pre-retirement withdrawal.
v.
Scenario E: Age starts working 26, without doing any withdrawal from
account 2 EPF.
vi.
Scenario F: Age starts working 26, with pre-retirement withdrawal.
vii.
Scenario G: Age starts working 27, without doing any withdrawal from
account 2 EPF.
viii.
Scenario H: Age starts working 27, with pre-retirement withdrawal.
30
CHAPTER 4
RESULTS AND FINDINGS
4.0
Introduction
In this chapter, SARIMA regression model and Hypothetical simulation model as
explain in chapter 3 will be used to measure the inflation trend and sufficiency of the
total contribution in Employee Provident Fund (EPF). The simulation model is been
supported with knowledge of actuarial study regarding to calculate the salary increment,
total contribution in the fund, rate of return of investment and monthly annuity payment
after retirement.
4.1
Research Data
This study conducted by using secondary data of Consumer Price Index (CPI)
and Household Income Survey (HIS) 2012. The data is obtainable from Malaysian
Statistic Department.
31
4.3
Inflation Forecasting
4.3.1
Analysing and Fitting the Malaysias Inflation Data series
Step 1: Initial Data Investigation

Table 4.13 which can be retrieve at Appendix, shows the data of Malaysias
monthly rates from January 1995 to November 2014, totalling two hundred and thirty
nine (239) monthly observations. The data were obtained from National Institute of
Statistics Malaysia. Figure 4.1 and Figure 4.2 show the plot of Malaysias monthly
inflation and the trend analysis plot respectively. Figure 4.3 and Figure 4.4 also describe
the features of the data that is the autocorrelation (ACF) plot and the partial
autocorrelation plot respectively.
Figure 4.1 Time Series Plot Of Malaysias Monthly Inflation
TIME SERIES PLOT OF THE ORIGINAL INFLATION DATA
10
Inflation
-2
1
24
48
72
96
120
144
168
192
216
Index
32
Figure 4.2 Trend Analysis Plot of Malaysias Monthly Inflation
Figure 4.3 Autocorrelation Plot of Malaysias Inflation

AUTOCORRELATION PLOT OF MALAYSIA'S INFLATION
1.0
0.8
Autocorrelation
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1
10
15
20
25
30
35
40
45
50
55
60
Lag
33
Figure 4.4 Partial Autocorrelation Plot of Malaysias Inflation

PARTIAL AUTOCORRELATION PLOT OF MALAYSIA'S INFLATION
1.0
Partial Autocorrelation
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1
10
15
20
25
30
35
40
45
50
55
60
Lag
At the initial stage, a simple data investigation was conducted to understand the
basic pattern of the series and hence to identify any unusual observation or characteristic
existing. This is done by constructing a simple time plot and fitting a linear trend line. A
look at time series plot of the original data in Figure 4.1 implies that the series is nonstationary. Other than that, the trend analysis as shown in Figure 4.2 shows a decreasing
trend but there was a sudden increase around the mid-year of 2008 and a sudden
decrease of inflation rate around the mid-year of 2009. However, the ACF plot as shown
in Figure 4.3 shows the wave like pattern and to a slightly lesser extent in Figure 4.4 and
also tails off at lag 2.
34
Step 2: Perform the Seasonal Differencing

Since this is a monthly series, the seasonal difference is given as zt = yt yt-12. By
observing Figure 4.6 and 4.7, it can be concluded that the series in seasonal difference,
zt, is not yet stationary. Note the ACF and PACF which depict the decaying and
undulating characteristics.
Figure 4.5 Time series Plot in Seasonal Difference

TIME SERIES PLOT IN SEASONAL DIFFERENCE
SeasonDiff
-5
-10
24
48
72
96
120
144
168
192
216
Index
35
Figure 4.6 The Autocorrelation Function of zt

Autocorrelation Function for Season Diff.
1.0
0.8
Autocorrelation
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1
12
24
36
48
Lag
Figure 4.7 The Partial Autocorrelation Function of zt

Partial Autocorrelation Function for Seasonal Diff.
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1
12
24
36
48
Lag
36
Step 3: Perform Non-seasonal Differencing

During this step the non-seasonal differencing, wt = zt zt-1 was performed and the time
plot was obtained. The time plot in Figure 4.8 does not show the presence of trend and
there is stationarity in mean whilst the ACF indicates significant spikes at certain lags. In
fact, Figure 4.9 and Figure 4.10 confirmed that the series is now stationary.
Figure 4.8 Time Series Plot of Wt

TIME SERIES PLOT FOR NON-SEASONAL DIFF
5.0
NonSeasonalDiff
2.5
0.0
-2.5
-5.0
-7.5
1
24
48
72
96
120
144
168
192
216
Index
37
Figure 4.9 The ACF of Wt

ACF FOR NON-SEASONAL DIFF. OF THE ORIGINAL INFLATION DATA
1.0
0.8
Autocorrelation
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
0
12
24
36
48
Lag
Figure 4.10 The PACF of Wt

PACF FOR NON-SEASONAL DIFF. OF THE ORIGINAL INFLATION DATA
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
0
12
24
36
48
Lag
38
In order to determine the best model formulations to be fitted to the data series,
any significant spike(s) in Figure 4.9 and Figure 4.10 will be observed. Since, the series
contains the seasonal component then the general formulation is written as SARIMA
(p,d,q)(P,D,Q)12.
To identify for non-seasonal part, the significant spikes at lag other than 12, 24,
36 etc. is observed.
On the other hand, for the seasonal part, the ACF and PACF will be observed for
any spikes at lag 12 or 24 or 36, though lags 36 and more are not common for most
series.
As stated earlier, it is not easy to identify the exact and correct model for
formulation due to the nature of the economic/business data series. Hence, several
models that could be best possible formulations are identified and estimated.
Step 4: Models Identified

From Figure 4.9, one significant spike is observed. One at lag 1. This one spike
can be used to specify the non-seasonal MA part of the model. Another significant spike
is also observed at lag 12 to suggest the seasonal SMA part of the model.
Similarly, to identify the Autoregressive part of the model, the PACF in Figure
4.10 will be observed for any spikes. There are three significant spikes observed, one at
lag 1, one at lag 7 and the other at lag 13 to suggest the non-seasonal AR part of the
39
model. There are also significant spikes at lag 12, 24, 36 to indicate the seasonal SAR
part of the model.
However, even with these observations made we cannot be perfectly sure of the
correct values of the respective p, q, P and Q that can be assigned to the model. Several
models of formulations will be identified and estimated to ensure that a well specified
model is formulated. Consequently, by using the statistic available from the Minitab
software a final decision will be made on the best model formulation. The output from
each model can be refer at the appendix section.
SARIMA(3,1,2)(3,1,1)12
SARIMA(2,1,2)(2,1,1)12
SARIMA(3,1,1)(3,1,1)12
SARIMA(2,1,1)(3,1,1)12
Model of formulations
Mean Squared Error (MSE)
SARIMA (3,1,2)(3,1,1)12
0.1665
SARIMA (3,1,1)(3,1,1)12
0.1777
SARIMA (2,1,2)(2,1,1)12
0.2500
SARIMA (2,1,1)(3,1,1)12
0.1764
Table 4.1 The result of Mean Squared Error (MSE) output for each model
From Table 4.1, in order to choose the best model from the four models is by
looking at the model that have the lowest value of Mean Squared Error(MSE). The best
model is SARIMA (3,1,2)(3,1,1)12 have the lowest value of MSE which is 0.1665 .
40
4.3.2
Results of the Inflation Rates Forecast Values

Using the ARIMA Model, this study is able to forecast the future inflation by
referring to the inflation rates for the past 20 years (Jan 1995 Dec 2014). Below are the
forecast values from December 2014 until December 2019.
Table 4.2 Inflation Forecast from December 2014 until December 2019
Period
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
Month/Year Forecast
Dec/14
Jan/15
Feb/15
Mar/15
Apr/15
May/15
Jun/15
Jul/15
Aug/15
Sep/15
Oct/15
Nov/15
Dec/15
Jan/16
Feb/16
Mar/16
Apr/16
May/16
Jun/16
Jul/16
Aug/16
Sep/16
Oct/16
Nov/16
Dec/16
Jan/17
Feb/17
Mar/17
3.00%
3.09%
3.26%
3.36%
3.36%
3.40%
3.55%
3.67%
3.64%
3.86%
3.64%
3.41%
3.44%
3.34%
3.11%
3.08%
3.18%
3.26%
3.19%
3.05%
3.05%
3.17%
3.28%
3.25%
3.20%
3.28%
3.43%
3.52%
Period
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
Month/Year Forecast
Jul/17
Aug/17
Sep/17
Oct/17
Nov/17
Dec/17
Jan/18
Feb/18
Mar/18
Apr/18
May/18
Jun/18
Jul/18
Aug/18
Sep/18
Oct/18
Nov/18
Dec/18
Jan/19
Feb/19
Mar/19
Apr/19
May/19
Jun/19
Jul/19
Aug/19
Sep/19
Oct/19
3.62%
3.63%
3.70%
3.72%
3.78%
3.88%
3.94%
3.94%
3.96%
3.99%
3.99%
4.04%
4.01%
4.02%
3.97%
4.02%
4.05%
4.04%
4.09%
4.14%
4.20%
4.22%
4.23%
4.29%
4.33%
4.34%
4.42%
4.41%
41
268
269
270
Apr/17
May/17
Jun/17
3.50%
3.46%
3.53%
299
300
Nov/19
Dec/19
4.38%
4.41%
All the monthly inflation rates projected are adjusted into yearly rates.
Table 4.3 Annual Average Inflation Rate from 2014 until 2019
No
Year
Annual Average Inflation Rate (%)
1
2
3
4
5
6
2014
2015
2016
2017
2018
2019
3.17
3.47
3.18
3.59
3.40
4.29
Throughout the 6 years, the data only show positive result. This means that
inflation rate will continue to rise in the future. While for highest inflation rate for both
monthly and annually are shown in Table 4.4.
Table 4.4 Highest and Lowest Inflation Rate for Monthly and Annually
Highest
Inflation Rate
Lowest
Inflation Rate
Monthly
Annually
4.42%
4.29%
3.00%
3.17%
42
Figure 4.11 Time Series Plot for Inflation with Forecast
Time Series Plot for Inflation

(with forecasts and their 95% confidence limits)
10
8
Inflation
6
4
2
0
-2
-4
1
24
48
72
96
120
144
168
192
216
240
264
288
Time
As shown in Figure 4.11, the forecast values are in increasing pattern from
December 2014 until December 2019(time: 240 300). By generalizing the rule of
thumb, the inflation rates are estimated to gradually continue to increase throughout the
year.
43
4.4
Findings on Hypothetical Simulation Model

In this section, eight scenarios are analyzed, and each scenario is analyzed based
on the results presented in the tables at the beginning of each scenario. All the
assumptions in each scenario are stated in Chapter 3, section 3.5, the assumption of
hypothetical life course. The results are analyzed in order to identify what range of
working age and pre-withdrawal of accumulated fund will makes the annuity income is
sufficient to cover retirees until the term of annuity income is exceeds the future lifetime
of retirees.
Calculation on average initial salary and table of salary grade for man who starts
working at age 24, 25, 26 and 27 are provided in Appendix from Table 4.21 to Table
4.24. Besides that, each of scenarios is provided a table of accumulated fund in EPF at
different age starts working and with or without pre-retirement withdrawal in detail in
appendix.
This scenario is simulated to explore the change in parameters such as age starts
working, what inflation rate, and which salary increment will make the annuity term
with annuity monthly based on replacement ratio will sufficient to cover the retirees
until age 79 future lifetime of retirees age 60. The sufficiency test is obtained by
comparing both retirees future lifetime and total years received from annuity.
44
Table 4.5 Result for Scenario A

Result
Replacement Ratio
Last drawn salary
Monthly received after retirement
Dividend Rate Annuity
Total Amount Received from EPF at Age of Retirement (60)
Total Number of Payment Received
Total Months
Balloon Payment
0.50
8821.22
4410.61
0.03
1105448.90
390.82
32.57
434.11
Table 4.5 shows the output from the hypothetical simulation for scenario A which is
individual who age starts working at age 24 full employed until retire age of 60 and
without withdraw his account 2 EPF. Based on his Replacement Ratio on his last drawn
salary, he supposed to receive a monthly annuity income of RM4410.61 and based on
his simulation EPF, the accumulated fund in EPF account at age 60 is RM1105448.90.
Based on the monthly annuity income and his total fund from EPF at age 60, the annuity
could cover him for 32 years approximately after he retires. Since, total years in annuity
are greater than expected future lifetime for retirees, 19 years, therefore, it is sufficient.
45
Table 4.6 Result for Scenario B

Result
Replacement Ratio
Last drawn salary
Total Months Received
Total Years Received
Balloon Payment
0.50
8821.22
4410.61
0.03
913389.47
290.21
24.18
222.37
Table 4.6 shows the output from the hypothetical simulation for scenario B which is
individual who age starts working at age 24 full employed until retire age of 60 and with
pre-retirement withdrawal from his account 2 EPF. Based on his Replacement Ratio on
his last drawn salary, he supposed to receive a monthly annuity income of RM4410.61
and based on his simulation EPF, the accumulated fund in EPF account at age 60 is
RM913389.47. Based on the monthly annuity income and his total fund from EPF at
age 60, the annuity could cover him for 24 years approximately after he retires. Since,
total years in annuity are greater than expected future lifetime for retirees, 19 years,
therefore, it is sufficient.
46
Table 4.7 Result for Scenario C

Result
Replacement Ratio
Last drawn salary
Balloon Payment
0.50
8522.92
4261.46
0.03
1027051.13
366.34
30.53
410.53
Table 4.7 shows the output from the hypothetical simulation for scenario C which is
47
Table 4.8 Result for Scenario D

Result
Replacement Ratio
Last drawn salary
Balloon Payment
0.50
8522.92
4261.46
0.03
811806.12
257.61
21.47
367.69
Table 4.8 shows the output from the hypothetical simulation for scenario D which is
48
Table 4.9 Result for Scenario E

Result
Replacement Ratio
Last drawn salary
Balloon Payment
0.50
8234.71
4117.35
0.03
940664.07
336.49
28.04
47.49
Table 4.9 shows the output from the hypothetical simulation for scenario E which is
49
Table 4.10 Result for Scenario F

Result
Replacement Ratio
Last drawn salary
Balloon Payment
0.50
8234.71
4117.35
0.03
743172.42
239.14
19.93
428.37
Table 4.10 shows the output from the hypothetical simulation for scenario F which is
50
Table 4.11 Result for Scenario G

Result
Replacement Ratio
Last drawn salary
Balloon Payment
0.50
7994.86
3997.43
0.03
877800.85
316.64
26.39
307.04
Table 4.11 shows the output from the hypothetical simulation for scenario G which is
51
Table 4.12 Result for Scenario H

Result
Replacement Ratio
Last drawn salary
Balloon Payment
0.50
7994.86
3997.43
0.03
696650.73
228.07
19.01
268.09
Table 4.12 shows the output from the hypothetical simulation for scenario H which is
52
CHAPTER 5
CONCLUSION AND RECOMMENDATION
5.1
Conclusion
In chapter 4, the study has calculated the inflation trend in Malaysia using the
Mixed Autoregressive Integrated Moving Average (ARIMA) Model. It can be

concluded that generally the movement of the inflation will be in an upward or positive
position. At lag 1, one spike was observed and used to specify the non-seasonal Moving
Average part of the model. Throughout the six years of forecasted future inflation, all six
years show positive result. The highest future inflation is at 4.29% and the lowest is at
3.17%. Hence it can be concluded that the inflation rate will continue to rise in the
future.
This research study focuses mainly on maintaining purchasing power for middle
income employee when they face retirement at old age. The targeted variable in this
study is for male employee in Malaysias private sector and start their career at age
between 24 to 27 years old. By using the templates and excel sheet that have been
developed; this study is able to calculate and determine the salary increments that have
been used to stimulate the average salary for male employee. The data needed on
calculating the annuity of contribution, also known as pension are salary with increment
rate, rate of contribution in Employee Provident Fund for employee and employer,
inflation rate for past 10 years and rate of investment or dividend rate in Employee
Provident Fund. The rates that have been used in salary increment are in between 3% to
3.5% which is relevant in Malaysia scenario. In this study, the focus revolved around
male because of the fact that male is the key member in the family or the main source of
income before and after retirement. By considering the life expectancy for person age
60, the employee can survive up to 19 years until age 79 and they still need to support
53
family expenditure till age 79. Based on the hypothetical model, this study can
determine the sufficiency of the total contribution in the EPF to generate monthly
annuity regarding with their life expectancy. This scenario is simulated to explore the
change in parameters such as age starts working, what inflation rate, and which salary
increment will make the annuity term with annuity monthly based on replacement ratio
will sufficient to cover the retirees until age 79 future lifetime of retirees age 60. The
sufficiency column in Table 4.8 until 4.23 is obtained by comparing both annuity terms
with future lifetime of retirees age 60. Table 5.1 also explain briefly about the
sufficiency of annuity due to the pre-retirement withdrawal factor. If annuity term
exceeds future lifetime of retirees age 60, it indicates sufficient, and not sufficient if
vice versa. Hence, it can be concluded that in general, the amount in the fund is
sufficient throughout the retirees future lifetime.
Table 5.1 Conclusion for Hypothetical Model

Age
Starts
Working
24
25
26
27
Conclusion
Without Pre-retirement Withdrawal (Age)
92
90
88
86
With Pre-retirement
Withdrawal (Age)
84
81
79
79
54
5.2
Limitations and Recommendations for Further Study

The study conducted by hypothetical simulation model was unable to gain access
to particular data, means not accessible to the public. One of the weaknesses of the
hypothetical simulation model is the inability to generalise the results as the model
stimulate hypothetical scenario which may differ from an individuals real employment
pattern. However, the fact that the assumptions for the model have been based on data
and research for Malaysia scenario which the results are still possible in context when
the hypothetical simulation modelling exercise takes place.
For the future study of the cases, another researcher should consider using
another models, subjects to the data availability since the hypothetical simulation model
used in this study enables researchers to explore different type or real life courses and
parameters that may be experienced by man in Malaysia.
55
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59
APPENDICES
1) Steps to Generate the Forecast Values and Others Statistical Methods Using
Minitab
Figure 6.1 The Functions of Stat in Minitab

Firstly, from the Figure 6.1, click Stat button and choose Time Series. Then,
ARIMA
60
Figure 6.2 ARIMA

Then, specify the model and follow through the instructions. Since data series has the
seasonal
component , select Fit seasonal model and type in period 12 for monthly data and
Include all the values for each part of the model (Autoregressive(AR),Moving
Average(MA),Seasonal Autoregressive(SAR), Seasonal Moving Average(SMA)).
61
Figure 6.3 ARIMA (Forecasts)

To generate the forecast values, the Lead time needs to be specified. In this research,
value 61 indicates 61 multi-steps-ahead forecasts will be generated. The Point of
Origin is line 239 or the last period of the series.
62
TIME SERIES PLOT
Figure 6.4 Types of Time Series Plot
Figure 6.5 The dependent variable to be plot on Y-Axis
63
Figure 6.6 The time to be plot on the X-Axis
TREND ANALYSIS PLOT
Figure 6.7 Trend Analysis
64
ACF AND PACF PLOT
Figure 6.8 Autocorrelation Function (ACF) plot
Figure 6.9 Partial Autocorrelation Function(PACF) Plot
65
In order to plot or obtain the Autocorrelation Function (ACF) and Partial

Autocorrelation Function (PACF), the Number of lags that shows how many
differences to be applied to the data needs to be determined. For this research, since the
data is a seasonal data, value 12 is selected to indicate Seasonal Difference( Z = yt yt12)
for monthly data. If the data is a non-seasonal data, default number of lags will be
selected and the data will have one difference (Zt = yt yt-1)
Figure 6.10 The Minitab Output

i. SARIMA(3,1,2)(3,1,1)12
Final Estimates of Parameters
Type
AR
1
AR
2
AR
3
SAR 12
SAR 24
SAR 36
MA
1
MA
2
SMA 12
Constant
Coef
0.8161
-1.0163
0.2666
-0.7581
-0.4643
-0.2508
0.5498
-1.0028
0.9510
0.004755
SE Coef
0.0671
0.0523
0.0672
0.0699
0.0821
0.0682
0.0153
0.0002
0.0434
0.003643
T
12.16
-19.45
3.97
-10.85
-5.66
-3.68
36.02
-4189.41
21.92
1.31
P
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.193
Differencing: 1 regular, 1 seasonal of order 12

Number of observations: Original series 239, after differencing 226
Residuals:
SS = 35.9740 (backforecasts excluded)
MS = 0.1665 DF = 216
Modified Box-Pierce (Ljung-Box) Chi-Square statistic

Lag
Chi-Square
DF
P-Value
12
7.9
2
0.019
24
15.1
14
0.368
36
29.8
26
0.275
48
37.7
38
0.483
ii. SARIMA(3,1,1)(3,1,1)12
66
Type
AR
1
AR
2
AR
3
SAR 12
SAR 24
SAR 36
MA
1
SMA 12
Constant
Coef
-0.2650
0.2019
0.0020
-0.7652
-0.4446
-0.2523
-0.5465
0.9665
0.005081
SE Coef
1.9579
0.5423
0.1332
0.0675
0.0801
0.0678
1.9567
0.0367
0.003583
T
-0.14
0.37
0.01
-11.34
-5.55
-3.72
-0.28
26.34
1.42
P
0.892
0.710
0.988
0.000
0.000
0.000
0.780
0.000
0.158

Residuals:
MS = 0.1777 DF = 217

Lag
Chi-Square
DF
P-Value
12
11.5
3
0.009
24
19.8
15
0.178
36
34.9
27
0.141
48
43.1
39
0.302
iii. SARIMA(2,1,2)(2,1,1)12
Type
AR
1
AR
2
SAR 12
SAR 24
MA
1
MA
2
SMA 12
Constant
Coef
1.1854
-0.5891
-0.2581
-0.0747
0.9838
-0.4817
0.9972
0.001462
SE Coef
0.3444
0.1926
0.0786
0.0747
0.3474
0.2041
0.0263
0.001731
T
3.44
-3.06
-3.28
-1.00
2.83
-2.36
37.85
0.84
P
0.001
0.002
0.001
0.318
0.005
0.019
0.000
0.399

Residuals:
MS = 0.2500 DF = 218

Lag
Chi-Square
DF
P-Value
12
37.7
4
0.000
24
48.1
16
0.000
36
65.4
28
0.000
48
80.5
40
0.000
67
iv. SARIMA(2,1,1)(3,1,1)12
Type
AR
1
AR
2
SAR 12
SAR 24
SAR 36
MA
1
SMA 12
Constant
Coef
-0.2029
0.1817
-0.7645
-0.4949
-0.2685
-0.4870
0.9642
0.006185
SE Coef
1.1898
0.3310
0.0666
0.0790
0.0671
1.1990
0.0332
0.003483
T
-0.17
0.55
-11.47
-6.27
-4.00
-0.41
29.07
1.78
P
0.865
0.584
0.000
0.000
0.000
0.685
0.000
0.077

Residuals:
MS = 0.1764 DF = 218

Lag
Chi-Square
DF
P-Value
12
12.3
4
0.015
24
18.8
16
0.277
36
34.0
28
0.202
48
43.2
40
0.337
68
Table 4.13 Malaysia Inflation Rate from January 1995 to November 2014. Data source:
National Institute of Statistics Malaysia
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
2014 3.40% 3.49% 3.48% 3.39% 3.19% 3.28% 3.18% 3.27% 2.59% 2.77% 3.04%
Dec
Annual
Average
Rate
2013 1.30% 1.50% 1.60% 1.70% 1.80% 1.80% 2.00% 1.90% 2.57% 2.75% 2.94% 3.22%
2.09%
2012 2.70% 2.20% 2.10% 1.90% 1.80% 1.60% 1.40% 1.40% 1.40% 1.40% 1.30% 1.20%
1.70%
2011 2.40% 2.90% 3.00% 3.20% 3.30% 3.50% 3.40% 3.30% 3.40% 3.40% 3.30% 3.00%
3.20%
2010 1.30% 1.20% 1.30% 1.50% 1.60% 1.60% 1.80% 1.90% 1.70% 1.80% 1.80% 2.00%
2009 3.90% 3.70% 3.50% 3.10% 2.40%
1.10%
1.40% 2.40% 2.40% 2.00% 1.50% 0.10%
2008 2.30% 2.70% 2.80% 3.10% 3.80% 7.70% 8.50% 8.50% 8.20% 7.60% 5.70% 4.40%
1.60%
2007 3.20% 3.10% 1.60% 1.60% 1.50% 1.40% 1.60% 1.90% 1.80% 1.90% 2.30% 2.40%
2.00%
2006 3.30% 3.20% 4.80% 4.60% 3.90% 3.90% 4.10% 3.30% 3.30% 3.10% 3.00% 3.10%
3.65%
2005 2.40% 2.40% 2.50% 2.50% 3.00% 3.10% 3.00% 3.70% 3.50% 3.10% 3.30% 3.20%
3.00%
2004 1.00% 0.90% 1.00% 1.00% 1.20% 1.30% 1.30% 1.40% 1.60% 2.10% 2.20% 2.10%
1.40%
2003 1.70% 1.60% 0.70% 1.00% 1.00% 0.80% 1.00% 1.00% 1.10% 1.30% 1.10% 1.20%
1.10%
2002 1.10% 1.20% 2.10% 1.90% 1.90% 2.10% 2.10% 2.10% 2.10% 2.10% 1.60% 1.70%
1.80%
2001 1.50% 1.60% 1.50% 1.60% 1.60% 1.50% 1.40% 1.30% 1.40% 0.90% 1.50% 1.20%
1.40%
2000 1.60% 1.50% 1.60% 1.50% 1.30% 1.40% 1.40% 1.50% 1.50% 1.90% 1.80% 1.20%
1.50%
1999 5.20% 3.80% 3.10% 2.90% 2.90% 2.20% 2.50% 2.30% 2.20% 2.10% 1.60% 2.50%
2.75%
1998 3.40% 4.40% 5.10% 5.60% 5.40% 6.20% 5.80% 5.60% 5.50% 5.20% 5.60% 5.30%
5.25%
1997 3.20% 3.10% 3.20% 2.60% 2.50% 2.20% 2.10% 2.40% 2.30% 2.70% 2.60% 2.90%
2.65%
1996 3.40% 3.40% 3.20% 3.60% 3.60% 3.80% 3.50% 3.30% 4.20% 3.40% 3.30% 3.30%
3.50%
1995 3.50% 3.10% 3.30% 3.30% 3.80% 3.90% 3.80% 3.80% 2.80% 3.40% 3.40% 3.30%
3.45%
69
0.85%
5.45%
Table 4.14 CPI according to Market Basket in Malaysia
70
Table 4.15 CPI according to Market Basket in Malaysia
71
Table 4.16 Unemployment and Employment Rate in Malaysia
72
Table 4.17 Male Employment Rate in Malaysia
73
Table 4.18 Occupation Class
74
Table 4.19 Variable in HIS data
75
76
77
Table 4.20 Calculation on average initial salary grade

No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
Age 24
34527
13652
20340
61699
64886
22662
17816
78036
44480
12000
18272
23604
12938
26596
26160
18869
21504
30845
9080
31403
19212
66528
18000
30521
8064
28800
7280
29619
20758
37500
49052
50228
17495
23430
27520
18205
11724
5400
39751
46123
52704
14579
No.
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
Average
Age 24
82538
35913
24552
64263
25999
22854
39686
20217
11656
10992
22786
66200
8016
16489
67982
26963
19578
104442
25032
22680
26360
17594
15303
57627
36631
50124
84240
10800
5400
17776
Yearly(RM) Monthly(RM)
31285.49
2789.539
78
Table 4.21 Salary Age 24

Average Salary Grade
(HIS, 2012)
Age Monthly
Yearly
24
2789.539
33474.47
25
2887.173
34646.08
26
2988.224
35858.69
27
3077.871
36934.45
28
3170.207
38042.48
29
3281.164
39373.97
30
3396.005
40752.06
31
3497.885
41974.62
32
3602.822
43233.86
33
3728.92
44747.04
34
3840.788
46089.46
35
3975.216
47702.59
36
4094.472
49133.66
37
4217.306
50607.67
38
4343.825
52125.9
39
4474.14
53689.68
40
4630.735
55568.82
41
4769.657
57235.88
42
4936.595
59239.14
43
5109.376
61312.51
44
5262.657
63151.89
45
5446.85
65362.2
46
5610.256
67323.07
47
5778.563
69342.76
48
5951.92
71423.04
49
6160.237
73922.85
50
6375.846
76510.15
51
6599
79188
52
6829.965
81959.58
53
7069.014
84828.17
54
7281.085
87373.02
55
7535.923
90431.07
56
7762
93144
57
7994.86
95938.32
58
8234.706
98816.47
59
8522.921
102275
60
8821.223
105854.7

(HIS, 2012)
Age Monthly
Yearly
25
2789.539
33474.47
26
2887.173
34646.08
27
2973.788
35685.46
28
3063.002
36756.02
29
3170.207
38042.48
30
3281.164
39373.97
31
3379.599
40555.19
32
3480.987
41771.84
33
3602.822
43233.86
34
3710.906
44530.87
35
3840.788
46089.46
36
3956.012
47472.14
37
4074.692
48896.3
38
4196.933
50363.19
39
4322.841
51874.09
40
4474.14
53689.68
41
4608.364
55300.37
42
4769.657
57235.88
43
4936.595
59239.14
44
5084.693
61016.32
45
5262.657
63151.89
46
5420.537
65046.44
47
5583.153
66997.84
48
5750.648
69007.77
49
5951.92
71423.04
50
6160.237
73922.85
51
6375.846
76510.15
52
6599
79188
53
6829.965
81959.58
54
7034.864
84418.37
55
7281.085
87373.02
56
7499.517
89994.21
57
7724.503
92694.03
58
7956.238
95474.85
59
8234.706
98816.47
60
8522.921
102275
79

(HIS, 2012)
Age Monthly
Yearly
26
2789.539
33474.47
27
2873.225
34478.7
28
2973.788
35685.46
29
3077.871
36934.45
30
3170.207
38042.48
31
3265.313
39183.76
32
3379.599
40555.19
33
3480.987
41771.84
34
3602.822
43233.86
35
3710.906
44530.87
36
3822.233
45866.8
37
3936.9
47242.81
38
4055.007
48660.09
39
4196.933
50363.19
40
4322.841
51874.09
41
4474.14
53689.68
42
4630.735
55568.82
43
4769.657
57235.88
44
4936.595
59239.14
45
5084.693
61016.32
46
5237.234
62846.8
47
5394.351
64732.21
48
5583.153
66997.84
49
5778.563
69342.76
50
5980.813
71769.76
51
6190.142
74281.7
52
6406.796
76881.56
53
6599
79188
54
6829.965
81959.58
55
7034.864
84418.37
56
7245.91
86950.92
57
7463.288
89559.45
58
7724.503
92694.03
59
7994.86
95938.32
60
8234.706
98816.47

(HIS, 2012)
Age Monthly
Yearly
27
2789.539
33474.47
28
2873.225
34478.7
29
2973.788
35685.46
30
3077.871
36934.45
31
3170.207
38042.48
32
3265.313
39183.76
33
3379.599
40555.19
34
3480.987
41771.84
35
3602.822
43233.86
36
3710.906
44530.87
37
3822.233
45866.8
38
3936.9
47242.81
39
4055.007
48660.09
40
4196.933
50363.19
41
4322.841
51874.09
42
4474.14
53689.68
43
4630.735
55568.82
44
4769.657
57235.88
45
4936.595
59239.14
46
5084.693
61016.32
47
5237.234
62846.8
48
5394.351
64732.21
49
5583.153
66997.84
50
5778.563
69342.76
51
5980.813
71769.76
52
6190.142
74281.7
53
6406.796
76881.56
54
6599
79188
55
6829.965
81959.58
56
7034.864
84418.37
57
7245.91
86950.92
58
7463.288
89559.45
59
7724.503
92694.03
60
7994.86
95938.32
80
Table 4.25 Accumulated Fund EPF from age 24

Age
24.00
25.00
26.00
27.00
28.00
29.00
30.00
31.00
32.00
33.00
34.00
35.00
36.00
37.00
38.00
39.00
40.00
41.00
42.00
43.00
44.00
45.00
46.00
47.00
48.00
49.00
50.00
51.00
52.00
53.00
54.00
55.00
56.00
57.00
58.00
59.00
60.00
Inflation
rate
Real rate
of return
0.02
0.03
0.02
0.02
0.02
0.01
0.02
0.03
0.01
0.02
0.02
0.02
0.02
0.02
0.03
0.03
0.02
0.01
0.02
0.03
0.03
0.02
0.02
0.03
0.01
0.02
0.02
0.03
0.03
0.01
0.02
0.03
0.02
0.03
0.02
0.01
0.02
1.05
1.03
1.05
1.04
1.05
1.05
1.05
1.03
1.05
1.05
1.05
1.04
1.04
1.05
1.03
1.03
1.05
1.05
1.05
1.03
1.03
1.04
1.05
1.03
1.05
1.05
1.04
1.03
1.03
1.05
1.05
1.03
1.05
1.03
1.04
1.05
1.04
Employees
Contribution
(11%)
3682.19
3811.07
3944.46
4062.79
4184.67
4331.14
4482.73
4617.21
4755.72
4922.17
5069.84
5247.28
5404.70
5566.84
5733.85
5905.86
6112.57
6295.95
6516.31
6744.38
6946.71
7189.84
7405.54
7627.70
7856.53
8131.51
8416.12
8710.68
9015.55
9331.10
9611.03
9947.42
10245.84
10553.22
10869.81
11250.26
11644.01
Employers
contribution
Total Fund
(12% or 13 %)
4351.68
8033.87
4503.99
16724.53
4661.63
25841.10
4801.48
35913.49
4945.52
46542.28
5118.62
58167.98
5297.77
71120.75
5456.70
84519.69
5620.40
97475.63
5817.12 113530.90
5991.63 129783.31
6201.34 147299.56
6387.38 165238.13
6579.00 184279.01
6776.37 205214.97
6979.66 224425.81
7223.95 244612.54
7440.67 269533.50
7701.09 298450.29
7970.63 327118.43
8209.75 352259.60
8497.09 378698.64
8752.00 410658.47
9014.56 446499.83
9285.00 477269.99
9609.97 521040.08
9946.32 563762.16
10294.44 606291.89
10654.75 644468.19
11027.66 684691.34
11358.49 743001.49
11756.04 799441.73
12108.72 846437.41
12471.98 908164.02
12846.14 959600.10
13295.76 1024188.20
13761.11 1105448.90
81
Table 4.26 Accumulated Fund EPF from age 24 with Pre-Retirement Withdrawal
Inflation
Age
rate
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
0.02
0.03
0.02
0.02
0.02
0.01
0.02
0.03
0.01
0.02
0.02
0.02
0.02
0.02
0.03
0.03
0.02
0.01
0.02
0.03
0.03
0.02
0.02
0.03
0.01
0.02
0.02
0.03
0.03
0.01
0.02
0.03
0.02
0.03
0.02
0.01
0.02
Real rate
of return
1.05
1.03
1.05
1.04
1.05
1.05
1.05
1.03
1.05
1.05
1.05
1.04
1.04
1.05
1.03
1.03
1.05
1.05
1.05
1.03
1.03
1.04
1.05
1.03
1.05
1.05
1.04
1.03
1.03
1.05
1.05
1.03
1.05
1.03
1.04
1.05
1.04
Employees
Contribution
(11%)
3682.19
3811.07
3944.46
4062.79
4184.67
4331.14
4482.73
4617.21
4755.72
4922.17
5069.84
5247.28
5404.70
5566.84
5733.85
5905.86
6112.57
6295.95
6516.31
6744.38
6946.71
7189.84
7405.54
7627.70
7856.53
8131.51
8416.12
8710.68
9015.55
9331.10
9611.03
9947.42
10245.84
10553.22
10869.81
11250.26
11644.01
Employers
contribution
(12% or 13 %)
4351.68
4503.99
4661.63
4801.48
4945.52
5118.62
5297.77
5456.70
5620.40
5817.12
5991.63
6201.34
6387.38
6579.00
6776.37
6979.66
7223.95
7440.67
7701.09
7970.63
8209.75
8497.09
8752.00
9014.56
9285.00
9609.97
9946.32
10294.44
10654.75
11027.66
11358.49
11756.04
12108.72
12471.98
12846.14
13295.76
13761.11
Total Fund
8033.87
16724.53
25841.10
35913.49
46542.28
40717.59
52718.67
65257.28
77625.27
92597.97
107893.27
124386.11
141368.56
159413.42
179212.45
142200.93
159877.88
180924.55
205008.92
229308.49
251464.19
274826.62
302452.09
333234.59
360547.52
397951.98
434919.46
472072.85
506152.35
542112.20
592646.59
642057.45
684202.09
738510.86
784768.57
842061.32
913389.47
82

Age
Inflation
rate
Real rate
of return
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
0.0209
0.032
0.016
0.0317
0.032
0.017
0.032
0.0209
0.016
0.032
0.0085
0.016
0.016
0.0209
0.016
0.0209
0.017
0.017
0.0317
0.0317
0.0085
0.0085
0.0209
0.032
0.032
0.032
0.0085
0.0209
0.016
0.0317
0.032
0.032
0.0085
0.017
0.016
0.0085
104.2%
103.1%
104.7%
103.1%
103.1%
104.6%
103.1%
104.2%
104.7%
103.1%
105.5%
104.7%
104.7%
104.2%
104.7%
104.2%
104.6%
104.6%
103.1%
103.1%
105.5%
105.5%
104.2%
103.1%
103.1%
103.1%
105.5%
104.2%
104.7%
103.1%
103.1%
103.1%
105.5%
104.6%
104.7%
105.5%
Employees
Contribution
(11%)
3682.19
3811.07
3925.40
4043.16
4184.67
4331.14
4461.07
4594.90
4755.72
4898.40
5069.84
5221.94
5378.59
5539.95
5706.15
5905.86
6083.04
6295.95
6516.31
6711.79
6946.71
7155.11
7369.76
7590.85
7856.53
8131.51
8416.12
8710.68
9015.55
9286.02
9611.03
9899.36
10196.34
10502.23
10869.81
11250.26
Employers
contribution
(12% or 13 %)
4351.68
4503.99
4639.11
4778.28
4945.52
5118.62
5272.17
5430.34
5620.40
5789.01
5991.63
6171.38
6356.52
6547.22
6743.63
6979.66
7189.05
7440.67
7701.09
7932.12
8209.75
8456.04
8709.72
8971.01
9285.00
9609.97
9946.32
10294.44
10654.75
10974.39
11358.49
11699.25
12050.22
12411.73
12846.14
13295.76
Total Fund
8033.87
16684.17
25757.93
35783.61
46016.76
56871.10
69204.64
81342.24
95112.60
110246.71
124673.27
142865.82
161280.19
180907.53
200906.20
223184.48
245769.59
270743.45
297339.97
321148.77
346203.96
380695.84
417537.12
451521.93
482445.37
514912.66
548991.91
597937.09
642558.05
692859.31
735184.78
779223.62
825254.63
893175.04
957729.38
1027051.13
83
Age
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Employees
Employers
Inflation Real rate Contribution contribution
rate
of return (11%)
(12% or 13 %)
0.0209
1.04
3,682.19
4,351.68
0.032
1.03
3,811.07
4,503.99
0.016
1.05
3,925.40
4,639.11
0.0317
1.03
4,043.16
4,778.28
0.032
1.03
4,184.67
4,945.52
0.017
1.05
4,331.14
5,118.62
0.032
1.03
4,461.07
5,272.17
0.0209
1.04
4,594.90
5,430.34
0.016
1.05
4,755.72
5,620.40
0.032
1.03
4,898.40
5,789.01
0.0085
1.05
5,069.84
5,991.63
0.016
1.05
5,221.94
6,171.38
0.016
1.05
5,378.59
6,356.52
0.0209
1.04
5,539.95
6,547.22
0.016
1.05
5,706.15
6,743.63
0.0209
1.04
5,905.86
6,979.66
0.017
1.05
6,083.04
7,189.05
0.017
1.05
6,295.95
7,440.67
0.0317
1.03
6,516.31
7,701.09
0.0317
1.03
6,711.79
7,932.12
0.0085
1.05
6,946.71
8,209.75
0.0085
1.05
7,155.11
8,456.04
0.0209
1.04
7,369.76
8,709.72
0.032
1.03
7,590.85
8,971.01
0.032
1.03
7,856.53
9,285.00
0.032
1.03
8,131.51
9,609.97
0.0085
1.05
8,416.12
9,946.32
0.0209
1.04
8,710.68
10,294.44
0.016
1.05
9,015.55
10,654.75
0.0317
1.03
9,286.02
10,974.39
0.032
1.03
9,611.03
11,358.49
0.032
1.03
9,899.36
11,699.25
0.0085
1.05
10,196.34
12,050.22
0.017
1.05
10,502.23
12,411.73
0.016
1.05
10,869.81
12,846.14
0.0085
1.05
11,250.26
13,295.76
Total Fund
8,033.87
16,684.17
25,757.93
35,783.61
46,016.76
39,809.77
51,363.22
62,956.24
75,959.40
90,198.06
104,012.67
121,078.46
138,474.23
157,035.34
176,037.87
197,153.51
218,652.40
242,386.39
187,380.45
207,799.97
229,361.43
257,481.13
287,602.71
316,165.63
342,957.57
371,167.23
400,858.90
441,725.44
479,828.01
522,521.32
559,596.48
598,275.79
638,783.68
696,534.64
752,098.04
811,806.12
84
Age
Inflation
rate
Real rate
of return
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
0.0209
0.032
0.016
0.0317
0.032
0.017
0.032
0.0209
0.016
0.032
0.0085
0.016
0.016
0.0209
0.016
0.0209
0.017
0.017
0.0317
0.0317
0.0085
0.0085
0.0209
0.032
0.032
0.032
0.0085
0.0209
0.016
0.0317
0.032
0.032
0.0085
0.017
0.016
104.2%
103.1%
104.7%
103.1%
103.1%
104.6%
103.1%
104.2%
104.7%
103.1%
105.5%
104.7%
104.7%
104.2%
104.7%
104.2%
104.6%
104.6%
103.1%
103.1%
105.5%
105.5%
104.2%
103.1%
103.1%
103.1%
105.5%
104.2%
104.7%
103.1%
103.1%
103.1%
105.5%
104.6%
104.7%
Employees
Contribution
(11%)
3682.19
3792.66
3925.40
4062.79
4184.67
4310.21
4461.07
4594.90
4755.72
4898.40
5045.35
5196.71
5352.61
5539.95
5706.15
5905.86
6112.57
6295.95
6516.31
6711.79
6913.15
7120.54
7369.76
7627.70
7894.67
8170.99
8456.97
8710.68
9015.55
9286.02
9564.60
9851.54
10196.34
10553.22
10869.81
Employers
contribution
(12% or 13 %)
4351.68
4482.23
4639.11
4801.48
4945.52
5093.89
5272.17
5430.34
5620.40
5789.01
5962.68
6141.56
6325.81
6547.22
6743.63
6979.66
7223.95
7440.67
7701.09
7321.96
7541.62
7767.87
8039.74
8321.13
8612.37
8913.80
9225.79
9502.56
9835.15
10130.20
10434.11
10747.13
11123.28
11512.60
11857.98
Total Fund
8033.87
16644.00
25716.54
35783.10
46016.24
56824.91
69156.34
81292.46
95060.75
110192.44
124563.90
142695.45
161045.16
180661.50
200649.91
222916.21
245554.55
270518.58
297104.82
320296.21
344623.44
378306.38
414347.36
447586.04
477754.87
509422.29
542654.28
590461.95
633951.38
683006.08
724057.03
766756.29
811479.81
877800.85
940664.07
85
Age
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Inflation
rate
0.0209
0.032
0.016
0.0317
0.032
0.017
0.032
0.0209
0.016
0.032
0.0085
0.016
0.016
0.0209
0.016
0.0209
0.017
0.017
0.0317
0.0317
0.0085
0.0085
0.0209
0.032
0.032
0.032
0.0085
0.0209
0.016
0.0317
0.032
0.032
0.0085
0.017
0.016
Real rate
of return
104.2%
103.1%
104.7%
103.1%
103.1%
104.6%
103.1%
104.2%
104.7%
103.1%
105.5%
104.7%
104.7%
104.2%
104.7%
104.2%
104.6%
104.6%
103.1%
103.1%
105.5%
105.5%
104.2%
103.1%
103.1%
103.1%
105.5%
104.2%
104.7%
103.1%
103.1%
103.1%
105.5%
104.6%
104.7%
Employees
Contribution
(11%)
Employers
contribution
(12% or 13 %)
3682.19
3792.66
3925.40
4062.79
4184.67
4310.21
4461.07
4594.90
4755.72
4898.40
5045.35
5196.71
5352.61
5539.95
5706.15
5905.86
6112.57
6295.95
6516.31
6711.79
6913.15
7120.54
7369.76
7627.70
7894.67
8170.99
8456.97
8710.68
9015.55
9286.02
9564.60
9851.54
10196.34
10553.22
10869.81
4351.68
4482.23
4639.11
4801.48
4945.52
5093.89
5272.17
5430.34
5620.40
5789.01
5962.68
6141.56
6325.81
6547.22
6743.63
6979.66
7223.95
7440.67
7701.09
7321.96
7541.62
7767.87
8039.74
8321.13
8612.37
8913.80
9225.79
9502.56
9835.15
10130.20
10434.11
10747.13
11123.28
11512.60
11857.98
Total
Fund
8033.87
16644.00
25716.54
35783.10
46016.24
56824.91
51329.41
62921.40
75923.10
90160.06
103920.07
120925.78
138257.72
156808.70
175801.78
196906.38
218459.39
242184.56
191497.92
211434.19
232405.98
259968.98
289556.27
317587.67
343788.53
371366.86
400384.94
440433.76
477662.83
519410.73
555419.20
592971.07
632390.11
688944.23
743172.42
86
Age
Inflation
rate
Real rate of
return
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
0.0209
0.032
0.016
0.0317
0.032
0.017
0.032
0.0209
0.016
0.032
0.0085
0.016
0.016
0.0209
0.016
0.0209
0.017
0.017
0.0317
0.0317
0.0085
0.0085
0.0209
0.032
0.032
0.032
0.0085
0.0209
0.016
0.0317
0.032
0.032
0.0085
0.017
104.2%
103.1%
104.7%
103.1%
103.1%
104.6%
103.1%
104.2%
104.7%
103.1%
105.5%
104.7%
104.7%
104.2%
104.7%
104.2%
104.6%
104.6%
103.1%
103.1%
105.5%
105.5%
104.2%
103.1%
103.1%
103.1%
105.5%
104.2%
104.7%
103.1%
103.1%
103.1%
105.5%
104.6%
Employees
Contribution
(11%)
3682.19
3792.66
3925.40
4062.79
4184.67
4310.21
4461.07
4594.90
4755.72
4898.40
5045.35
5196.71
5352.61
5539.95
5706.15
5905.86
6112.57
6295.95
6516.31
6711.79
6913.15
7120.54
7369.76
7627.70
7894.67
8170.99
8456.97
8710.68
9015.55
9286.02
9564.60
9851.54
10196.34
10553.22
Employers
contribution
(12% or 13 %)
4351.68
4482.23
4639.11
4801.48
4945.52
5093.89
5272.17
5430.34
5620.40
5789.01
5962.68
6141.56
6325.81
6547.22
6743.63
6979.66
7223.95
7440.67
7701.09
7321.96
7541.62
7767.87
8039.74
8321.13
8612.37
8913.80
9225.79
9502.56
9835.15
10130.20
10434.11
10747.13
11123.28
11512.60
Total Fund
8033.87
16644.00
25716.54
35783.10
46016.24
56824.91
69156.34
81292.46
95060.75
110192.44
124563.90
142695.45
161045.16
180661.50
200649.91
222916.21
245554.55
270518.58
297104.82
320296.21
344623.44
378306.38
414347.36
447586.04
477754.87
509422.29
542654.28
590461.95
633951.38
683006.08
724057.03
766756.29
811479.81
877800.85
87
Age
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Inflation
rate
0.0209
0.032
0.016
0.0317
0.032
0.017
0.032
0.0209
0.016
0.032
0.0085
0.016
0.016
0.0209
0.016
0.0209
0.017
0.017
0.0317
0.0317
0.0085
0.0085
0.0209
0.032
0.032
0.032
0.0085
0.0209
0.016
0.0317
0.032
0.032
0.0085
0.017
Real rate
of return
104.2%
103.1%
104.7%
103.1%
103.1%
104.6%
103.1%
104.2%
104.7%
103.1%
105.5%
104.7%
104.7%
104.2%
104.7%
104.2%
104.6%
104.6%
103.1%
103.1%
105.5%
105.5%
104.2%
103.1%
103.1%
103.1%
105.5%
104.2%
104.7%
103.1%
103.1%
103.1%
105.5%
104.6%
Employees
Contribution
(11%)
3682.19
3792.66
3925.40
4062.79
4184.67
4310.21
4461.07
4594.90
4755.72
4898.40
5045.35
5196.71
5352.61
5539.95
5706.15
5905.86
6112.57
6295.95
6516.31
6711.79
6913.15
7120.54
7369.76
7627.70
7894.67
8170.99
8456.97
8710.68
9015.55
9286.02
9564.60
9851.54
10196.34
10553.22
Employers
contribution Total Fund
(12% or 13 %)
4351.68
8033.87
4482.23
16644.00
4639.11
25716.54
4801.48
35783.10
4945.52
46016.24
5093.89
56824.91
5272.17
51329.41
5430.34
62921.40
5620.40
75923.10
5789.01
90160.06
5962.68 103920.07
6141.56 120925.78
6325.81 138257.72
6547.22 156808.70
6743.63 175801.78
6979.66 196906.38
7223.95 218459.39
7440.67 173650.17
7701.09 195807.32
7321.96 215876.43
7541.62 236985.14
7767.87 264797.87
8039.74 294648.50
8321.13 322892.40
8612.37 349255.17
8913.80 377000.37
9225.79 406190.40
9502.56 446555.82
9835.15 484040.36
10130.20 526086.42
10434.11 562300.65
10747.13 600062.57
11123.28 639698.06
11512.60 696650.73
88

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UNIVERSITI TEKNOLOGI MARA

A STUDY TO MAINTAIN PURCHASING POWER FOR

BACHELOR OF SCIENCE (Hons.) ACTUARIAL SCIENCE

MUHAMMAD BIN ALIZAN

SUMAIYYAH BINTI ROSHIDI

MOHD AMIR ASYRAF B ABD MALIK

MOHD HAZIM BIN SAARI

UNIVERSITI TEKNOLOGI MARA

A STUDY TO MAINTAIN PURCHASING POWER FOR

MUHAMMAD BIN ALIZAN

SUMAIYYAH BINTI ROSHIDI

MOHD AMIR ASYRAF B ABD MALIK

MOHD HAZIM BIN SAARI

Project submitted in fulfillment of the requirements

Muhammad Bin Alizan

Bachelor of Science (Hons.) Actuarial Science

Faculty of Computer and Mathematical Sciences

A Study to Maintain Purchasing Power for Middle

Sumaiyyah Binti Roshidi

Bachelor of Science (Hons.) Actuarial Science

Faculty of Computer and Mathematical Sciences

A Study to Maintain Purchasing Power for Middle

Mohd Amir Asyraf B Abd Malik

Bachelor of Science (Hons.) Actuarial Science

Faculty of Computer and Mathematical Sciences

A Study to Maintain Purchasing Power for Middle

Mohd Hazim Bin Saari

Bachelor of Science (Hons.) Actuarial Science

Faculty of Computer and Mathematical Sciences

A Study to Maintain Purchasing Power for Middle

Background of The Study

Significance of The Study

Scope and Limitations of Study

Data and Methodology

The Mixed Autoregressive Integrated Moving Average

Assumptions and Limitation

Calculation of the Accumulated Value of the Individuals

The Simulation of the Future Income for Retirees

Assumptions used in the Hypothetical Life Course

Compare the results by scenarios with different

4.3.1 Analyzing and Fitting the Malaysias Inflation Data Series 32

Results of the Inflation Rate Forecast Values

Findings on Hypothetical Simulation Model

Limitations and Recommendations

1.1 Background of The Study

A defined contribution plan has a defined amount of contribution payable by

Risk can be defined as the probability of an occurrence of an unfavorable event

In Malaysia, the life expectancy is expected to increase. Most retirement income

1.2 Problem Statement

According to Malaysian Chief executive of Private Pension Administrator, Datuk

There are several ways to manage inflation. According to Gottfried Haberler,

1.3 Research Objectives

To investigate the inflation trend in Malaysia.

To convert the accumulated fund in EPF account into an annuity.

To investigate the sufficiency of the pension fund throughout the future

1.4 Research Questions

What is the inflation pattern in Malaysia?

1.5 Significance of the Study

1.6 Scope and Limitations

Inflation management is one of the hardest tasks an economic policymaker has to

Malaysia is only second to Singapore in terms of lowest average inflation in the

Due to the steady increment of inflation in Malaysia, a projection of future

2.2 Issues or Problem