IPS Forum on CPF and Retirement Adequacy 2014

Private pension plans an option: Tharman
He says options for those who can bear higher risks should be studied
By Tham Yuen-C, The Straits Times, 23 Jul 2014

AS THE Government explores ways to improve the Central Provident Fund (CPF) scheme, private pension plans for those who can shoulder higher risks and want higher returns remain an option for the future, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.

"I agree that we should study how to provide better options for members who are able to take higher risks, so that they can try and earn higher returns - better options than currently provided for under the CPF Investment Scheme," he said at an Institute of Policy Studies forum on CPF and retirement adequacy.

His remarks come ahead of the National Day Rally next month, in which Prime Minister Lee Hsien Loong is expected to announce plans to enhance the CPF scheme.

Yesterday, Mr Tharman said the Government has plans to provide greater security in retirement, especially for lower-income Singaporeans, help retirees meet their basic needs even as costs go up over time, and help the current generation of older folk to unlock the value in their homes. And the broad outlines of the improvements it thinks possible will be made known soon, he added.

On CPF returns, he said the CPF scheme has to be kept sustainable for the long term, and that it should give a fair return to members without exposing them to financial risks that they cannot afford.

These were points that he also made last month in Parliament, in response to questions from Members of Parliament.

The risk that ordinary working people face is a key consideration for any social security system, he said yesterday, in an hour-long dialogue with 260 forum participants, including academics, unionists and financial consultants.

He explained that the Government had looked into allowing CPF members to invest in private pension funds in 2007, but had decided not to go ahead with the plan as most CPF members then had low balances and would not be able to absorb the investment risks.

He also noted that few state pension systems offer the kind of guaranteed floors on interest rates that the CPF does. The CPF in effect pays 3.5 per cent interest on savings in the Ordinary Account and 5 per cent on funds in the Special, Medisave and Retirement accounts for the majority, and up to 1 per cent less for those with large balances, he noted.

Mr Tharman also warned that "private pension plans will not be a walk in the park", and that it is important for people to understand the risks involved in such investments.

While people could, in principle, expect to earn higher returns on riskier plans over the long term, in practice, they could go through long periods of up to 15 years without seeing these higher returns, he said.

Citing the experience of Hong Kong's Mandatory Provident Fund (MPF), which allows members to choose a pension plan according to their risk appetite, he said that it had achieved a rate of return of 4 per cent in nominal Hong Kong dollars - lower than what CPF monies in the Special, Medisave and Retirement accounts have earned in Singapore dollars, he said.

And even the most aggressive fund in the Hong Kong MPF system had achieved returns of 4.5 per cent since inception, he said.

With low bond yields and weaker growth prospects in the major economies, the main challenge will be for private pension plans to offer a "realistic chance" of achieving a better rate of return than the CPF Special Account guaranteed rate of 4 per cent to 5 per cent.

When asked about the CPF scheme over the next 50 years, Mr Tharman said: "We are in the rare position of being able to strengthen our system as we go forward, while most other systems are having to cut back on benefits or raise more taxes to sustain their social security systems. We are in a very rare situation of starting from a very strong foundation and being able to improve our system, and improve we will."

A RARE POSITION

We are in the rare position of being able to strengthen our system as we go forward, while most other systems are having to cut back on benefits or raise more taxes to sustain their social security systems. We are in a very rare situation of starting from a very strong foundation and being able to improve our system, and improve we will.
- DPM Tharman Shanmugaratnam

A COLONIAL HANGOVER

The Institute of Policy Studies should offer to educate people on the fact that 55 never made sense. It was a colonial hangover. When UK coal miners were working until 65, the Brits here fixed 55 so they could go back and become a bursar of an Oxford college or something. And then when poor (former health minister) Howe Yoon Chong (proposed in 1984 to raise the CPF withdrawal age from 55 to 60), we behaved like idiots and clobbered the Government at the next election.
- Social work veteran Ann Wee, on the CPF withdrawal age of 55

GIVE MORE DATA

It is so hard for us to get statistics based on age, gender, and who are the people who really are the beneficiaries of CPF. For us to give you relevant feedback, that is very important... I think the CPF is accountable to all its members to give as much information as possible. This is not national security or anything like that.
- Dr Kanwaljit Soin, immediate past president of Women's Initiative for Ageing Successfully (WINGS), on seeking disaggregated CPF statistics

BAD DECISIONS

How about doing a survey? At this current moment, based on the last CPF reports, 50 per cent of the people can withdraw (money from their CPF accounts after setting aside the) Minimum Sum.

What happens to their lives after they've withdrawn their CPF? Based on what we see, we have seen members who turn 55, I tell you that's the worst thing that happens to them, because they meet some young girls and then their families totally break down.
- Mr Alfred Chia, chief executive of financial advisory firm SingCapital, on the Minimum Sum being an important safety net for some who cannot manage their finances

CPF savings 'backed by Govt's substantial assets'
By Tham Yuen-C, The Straits Times, 23 Jul 2014

SINGAPOREANS who wonder if their Central Provident Fund (CPF) monies are safe can rest assured, because their CPF savings are backed by a government that has substantial assets in excess of its liabilities, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.

The evidence of these net assets is in the Net Investment Returns Contribution (NIRC) to the Budget each year, which amounts to some $8 billion. The NIRC comprises up to 50 per cent of net investment returns on the net assets managed by the GIC and the Monetary Authority of Singapore (MAS), and also up to 50 per cent of the investment income of Temasek Holdings.

Mr Tharman, who is also Finance Minister, was responding to a question from Mr Alan Ng. The NTUC Income executive asked if CPF monies are safe, and said that if the safety of CPF savings was premised on the Government's triple-A rating and its funds being properly managed, "one wrong move" from fund manager GIC could "bring the downfall of the country".

To this, Mr Tharman said the Government's triple-A rating "doesn't come out of the blue", and had been given as a result of credit agencies evaluating that it has substantial net assets, among other things. These assets, which had come about as a result of prudent fiscal planning since the 1960s, also explain the Government's ability to meet CPF commitments with "absolute confidence", he added.

Blogger Roy Ngerng, who is facing a defamation suit for alleging that Prime Minister Lee Hsien Loong had misappropriated CPF funds, also asked about the GIC's role in managing CPF funds at yesterday's forum. He said that last month, the GIC had said on its website that it did not know if it was managing CPF monies. But earlier this month, he noted, Mr Tharman had said in Parliament that the GIC does manage CPF monies as part of a pool of the Government's assets.

In response, Mr Tharman said: "GIC knows it is managing government assets, that is the Government's mandate for the GIC. The mandate is irrespective of the sources of funds it manages... and the GIC (hence) pays no regard to what the source of funds is."

That the GIC is able to manage the Government's assets as a pool - including the proceeds from the Special Singapore Government Securities issued to the CPF Board - has allowed it to invest in the long term and take bigger risks in the hope of better returns that are significantly higher than global inflation, he added.

Mr Ngerng also asked how CPF monies were invested before the GIC was set up in 1981.

Mr Tharman explained that CPF funds were invested by the MAS. Then the late deputy prime minister Goh Keng Swee had changed the system as the Government's longer-term assets should be invested for the longer term. After that, a "significant chunk" of the reserves managed by the MAS was passed back to the Government which then passed it to its fund manager GIC to manage, said Mr Tharman. He said government investment firm Temasek has never invested CPF funds.

In the past, CPF monies invested in government securities could be used by the Government to finance infrastructure. That changed in 1992 when the Constitution was amended and the new Government Securities Act, which disallowed the Government from using borrowings for spending, was introduced, he added.

Strength of govt’s investment system is “we have assets that exceed our liabilities”: Tharman
By Wong Siew Ying, Channel NewsAsia, 23 Jul 2014

Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam fielded questions about the Central Provident Fund (CPF) and retirement adequacy at a forum organised by the Institute of Policy Studies on Tuesday (July 22).

Questions touched on areas ranging from increasing the withdrawal amount beyond S$5,000 for CPF members who are not able to set aside the Minimum Sum after they turn 55 years old, to coping with inflation.

In response, Mr Tharman said: "You do want to provide some flexibility for withdrawal, some people incurred debts, some people have sudden needs and allowing them to withdraw some monies meets a real need, but it comes at a cost, because if you withdraw monies early, it means that the stream of income you have for the rest of your life diminishes. And it diminishes by more than most people expect because you are losing out not just on that lump sum but the interest that you are going to accumulate in retirement. And bear in mind that the interest rate that our annuity scheme provides through CPF Life is vastly superior to most others."

There were also questions about helping lower-income Singaporeans meet their retirement needs. Mr Tharman said that the CPF today, along with Government subsidies targeted at lower- and middle-income CPF members, provides a solid foundation for the future.

"If you take what we are doing in the Government budget, through all the enhancements we have made, it is really a different set of social policy and social support for lower-income Singaporeans, through life and in retirement compared to what we used to have," he said. "If you take Workfare, if you take the housing grants, if you take the support for medical needs, if you take the range of support that we are providing, if you just look at what goes through the CPF system and leave out support outside the CPF system, what it will mean is by the time today's lower-income young family retires, the Government would have given them about $160,000 by the time they are 65."

Blogger Roy Ngerng, who attended the forum, asked DPM Tharman several questions, including whether Temasek Holdings had managed CPF monies prior to the establishment of GIC and why GIC did not know if it was investing CPF funds.

A full of transcript of their exchange follows:

Mr Ngerng: Now that we know that the CPF is invested in the GIC, is it also possible to know what is the interest earned in SG terms since inception? Secondly, Temasek Holdings has said that they do not invest our CPF, is it possible to know if in the past Temasek Holdings had invested our CPF? Because the GIC was only set up in 1981, so prior to 1981, how was the CPF used and otherwise was it invested in Temasek Holdings? Thirdly, how much has the Government earned in absolute monetary terms from the excess returns of the CPF and will the Government consider returning some of them to Singaporeans? Finally, the GIC has said before June this year that they do not know if they invest our CPF because it is not made explicit to them – they said this on the GIC FAQ. But the Government made an about-turn in June this year and admitted that they do. So in the interest of public interest, is it possibly to know why the Government made an about-turn? It might also be intriguing because the Government is also on the board of the GIC, so it would be insightful to know why. Thank you.

DPM Tharman: I’ll start with Roy Ngerng’s points. First, a few factual matters; you asked some factual questions. Did Temasek manage the CPF funds in the past? No. It has never managed CPF funds. Temasek started off with a set of assets which were transferred by the Government at time of inception. I don’t have the exact figure in my head – but about $400 million dollars worth of assets in the form of a set of companies. It has never received CPF monies to invest.

What was the case in the early days, before we amended the constitution in 1992, is that CPF monies, which were invested in Special Singapore Government Securities (SSGS), could be used by the Government to finance infrastructure - such as road infrastructure, Singapore’s economic infrastructure and social infrastructure. Just like (other) Singapore Government Securities (SGS), the Government was allowed to use borrowings in addition to the revenues it got in its budget, to finance infrastructural investments. That was the old system.

That changed in 1992. Together with Constitutional amendments, we introduced the new Government Securities Act, which disallowed the Government from using borrowings for spending. From then onwards, all borrowings - the SGS, SSGS - have had to be invested.

How are they invested? Prior to the formation of the GIC, it was the MAS (Monetary Authority of Singapore). It was an old-fashioned, central bank investment system. Dr Goh (Keng Swee) changed that, explained why, explained that these are basically longer-term assets, and we should invest them for the longer term. And a significant chunk of reserves that were managed by the MAS were passed back to the Government, which then had the GIC manage them.

So that was the system in the old days; the MAS manages the CPF assets, but after the GIC was set up in the early 1980s, it was essentially the GIC that manages CPF assets - but not as CPF assets. It is managing Government assets: managing all Government assets put together.

Which brings me to the next question about whether GIC knows it is managing CPF assets. GIC knows it is managing Government assets. That is the Government’s mandate for the GIC. The mandate is irrespective of the sources of funds it manages, which comprise the SSGS, the SGS, Government surpluses, the proceeds from land sales - all Government funds.

And the GIC (hence) pays no regard to what the source of funds is. It just has to meet its mandate: to invest for the long term, take risks, in the hope of achieving good long-term returns, significantly about global inflation.

And that is a real strength of our system. The real strength of our system is that besides the CPF, we have unencumbered Government assets – Government assets that don’t have liabilities like the CPF. And the GIC is therefore able to invest, blind to where the funds come from. It’s able to invest the whole pool of funds for the long term. If the GIC was just managing CPF funds as a CPF fund manager, it would be managed quite differently. To provide a guaranteed interest rate of four to five per cent of the Special Account, or 2.5 to 3.5 per cent of the Ordinary Account, capital guaranteed and interest rate guaranteed, it would be a very different fund that it would be managing.

It would be invested largely in bond securities, and earning returns that are very different from what it is able to earn by investing for the long term in higher-risk assets. Plus, it would mean the interest rates that the Government has committed to would be unsustainable, because it is no longer possible to earn these interest rates on a guaranteed basis, using a bond portfolio. It’s very difficult.

So the GIC manages a pool of Government assets, irrespective of sources of the funds. It is the Government that then takes the risk. The Government takes the risk that the performance of the GIC from year to year, sometimes even over five-year periods, may not be adequate for it to meet commitments to the CPF. But the Government balance sheet takes the risk to ensure that we can meet those commitments.

And that’s the strength of the system. The strength of the system is we have assets that exceed our liabilities, that enable us to meet our commitments. And that’s why we’re not just triple-A-rated, but we’re able to provide CPF members with a very fair return on a guaranteed basis.

That’s the system. For the GIC as the manager, it is blind to the sources of funds, because of our strength of having assets significantly in excess of liabilities. GIC managers do not need to know exactly where the funds come from because that’s not part of their mandate. There’s no mystery to that.

Next question had to do with excess returns. The GIC publishes five-year, 10-year, 20-year returns. You can look at the returns, and they are easily computed into Singapore dollars. Over the last five years it earned 0.5 per cent in Singapore dollar terms, over the last 10 years it earned five per cent in Singapore dollar terms, over the last 20 years it earned five per cent in Singapore dollar terms. So those are the facts, but that’s not returns gained from investing CPF monies. That’s returns gained from investing all Government assets including the unencumbered assets; it’s returns gained from investing in higher-risk portfolios for the long term. If it was just CPF monies, it will be a different portfolio and a different set of returns. Every serious financial professional knows that.

Minimum Sum, pace of increase come under scrutiny
By Charissa Yong, The Straits Times, 23 Jul 2014

THE Minimum Sum an average Singaporean must save for retirement in his Central Provident Fund (CPF) account, particularly the pace at which it is going up, came under scrutiny at a forum yesterday.

Two participants asked if wages were rising fast enough to keep up with the recent annual increases in the Minimum Sum.

Another participant called for a change in the way the Minimum Sum is calculated, urging that the formula exclude imputed rent, which is what home owners would pay if they were renting their homes.

In response, Manpower Minister Tan Chuan-Jin, who was one of the speakers at the Institute of Policy Studies (IPS) forum, gave figures to show that people's real wages - which take into account inflation - have gone up in the past few years, including those of the lower income.

Hence, Mr Tan is confident that more and more people will be able to meet the Minimum Sum.

The issue of the Minimum Sum has been at the forefront of an ongoing debate among many in Singapore - about whether people can meet the rising amount, which was $80,000 in 2003.

Since then, it has risen yearly to adjust for inflation.

The current sum is $155,000 - or $117,500 in terms of what the Singapore dollar was in 2003. The new amount for next year has not been announced.

But the sum is already too much, too soon, said financial consultant Edwin Siew and blogger Roy Ngerng at the forum.

They argued that wages are stagnating and not growing fast enough to keep pace with the continual rise in the Minimum Sum.

Also, the CPF interest rates "have grown a lot slower than the CPF Minimum Sum", said Mr Ngerng, who is being sued by Prime Minister Lee Hsien Loong for defamation, for alleging that Mr Lee criminally misappropriated CPF monies.

When the Minimum Sum is not met, a Singaporean is allowed to withdraw only up to $5,000 in cash from his CPF savings upon turning 55. The rest goes into his Retirement Account, half of which can be in the form of a pledge on the home he owns.

But the CPF Board's annual reports show that 49.4 per cent of active CPF members who turned 55 last year met the Minimum Sum. The figure was 48.7 per cent in 2012 and 45 per cent in 2011.

Mr Tan noted that overall real wages have risen by 2 per cent to 3 per cent in the last few years, with the progressive wage model helping low-income workers like cleaners get higher pay according to a wage ladder. The Workfare scheme also tops up the salaries and CPF accounts of those earning $1,900 and less a month.

But executive Alan Ng of NTUC Income worked out that the Minimum Sum would shrink by $10,000 if imputed rent is taken out of the inflation formula.

He asked why these rents are included in calculating the Minimum Sum, when many Singaporeans own their homes.

Mr Tan said the Government is looking into it. "In terms of computing our inflation rate, one of the things we're looking at is actually imputed rents... (This) is something that perhaps we may want to consider not including," he said.

At the discussion, economist Augustine Tan expressed concern that wages were too high and eroding Singapore's economic edge, saying: "Are you not giving way too much to social pressure to raise wages, even when the economy really cannot afford it?"

The former People's Action Party MP also asked if the Government would rethink its foreign labour quotas.

The minister replied: "The answer is no. Foreign labour growth needs to be kept at a sustainable pace."

But the professor raised a valid point and there were "contending pressures" at play, he said. "On some of the challenges we face, you will realise there are actually divergent pressures... But at the end of (the day), we do need to make that judgment call about how best to strike the balance between all the different pressures."

Is ‘generous’ use of CPF funds a threat to retirement adequacy?
Participants at forum propose social pension scheme to ensure financial security for vulnerable groups
By Ng Jing Yng and Joy Fang, TODAY, 23 Jul 2014

Has the Central Provident Fund (CPF) scheme been too liberal in its use for housing and medical purposes, which, in turn, threatens retirement adequacy? Should there be a social pension scheme to ensure financial security for those with little CPF monies, such as stay-home women and the unemployed?

These were among the issues raised at the Institute of Policy Studies’ CPF and Retirement Adequacy forum yesterday, whose 260 participants included academics and members of the public.

Associate Professor Lum Sau Kim from the National University of Singapore (NUS) noted that the ability to withdraw CPF funds for housing has “constrained retirement adequacy”.

She added that many people invested in housing due to expected good returns. “If so much of CPF funds are dedicated to housing, then we have poorly diversified household portfolios ... so the nest-egg that we have will be vulnerable to housing sector shocks and greater risks,” she said.

Other participants also cautioned excessive Medisave withdrawals from CPF.

Singapore Management University academic Augustine Tan asked if such withdrawals have been “too generous”, while medical doctor Paul Tambyah felt that this might result in burdening future generations.

NUS business professor Joseph Cherian, one of the forum’s panelists, also felt that there is need to keep CPF funds for retirement and other uses separate, to reduce the temptation of tapping on one’s retirement savings.

And with the CPF scheme meant for working individuals, some participants also raised concerns about women who might drop out of the workforce early or vulnerable groups like the disabled.

Dr Vivienne Wee, from the Association of Women for Action and Research (AWARE), noted that there are still families today where the man is the sole breadwinner, and this has resulted in the woman not being able to accumulate CPF monies.

She said: “The CPF is pegged to the individual employee, individual CPF holder — what about the woman?”

Some participants proposed a social pension scheme tied to economic growth so vulnerable groups could be provided with a basic social safety net.

Offering a different perspective, panelist Wong Su-Yen, chairman of Marsh & McLennan Companies in Singapore, noted that Singaporeans should not equate retirement with CPF, since people do rely on other sources, such as their families. There is a need, she added, to move beyond CPF to look at other sources — such as investments and savings — depending on a person’s own level of adequacy. “It doesn’t mean to say that retirement is solely provided by CPF,” said Ms Wong.

Fellow panelist Alfred Chia, chief executive at SingCapital, also noted that it will be insufficient to rely on CPF for retirement as it is meant to act as a social safety net. He called on the Government to give Singaporeans more autonomy to exercise their own investment choices.

Manpower Minister Tan Chuan-Jin, who spoke at the forum, reiterated that the Government is looking to strengthen the CPF system to ensure its sustainability. Among other things, he cited existing policies, such as MediFund, which helps needy seniors pay for their medical bills to avoid overtaxing the younger generation’s Medisave savings.

But Mr Tan stressed that CPF is by and large a sound system. “It is very much a judgment call as to how much we want to accumulate, how much flexibility we want to afford because all this has an impact,” he said.

“It (CPF) plays an important part in housing, which we believe continues to be an important part of providing that level of assurance for Singaporeans, not just in retirement but for their daily living needs”.

How to improve CPF: Experts' take
Singapore's social security savings plan, the Central Provident Fund, is in the spotlight as people worry it will not meet their retirement needs. Ways to reform it were discussed at a forum organised by the Institute of Policy Studies on Tuesday. Insight looks at some of the proposals.
By Tham Yuen-C, The Straits Times, 26 Jul 2014

"IMPROVE the returns on people's CPF savings" is a common refrain these days, one that was picked up by experts speaking at a forum on CPF and Retirement Adequacy on Tuesday, but they varied over how to achieve this.

Some proposed making the system more flexible, so CPF members could try and earn higher returns themselves. The lively discussion also threw up views by others who felt that the CPF Board could tweak how much it gives back to members.

Indeed, Deputy Prime Minister Tharman Shanmugaratnam surprised participants by raising an idea last considered by the Government in 2007 - he said that allowing people to invest their CPF savings in private pension plans remains an option for the future.

His comment comes amid concerns that CPF retirement savings are not growing fast enough. Fifteen years ago this month, CPF interest rates hit the Government's guaranteed minimum, and have stayed there ever since - at least 2.5 per cent for the Ordinary Account (OA) and at least 4 per cent for the Special Account (SA).

Private pension plans got the thumbs up from National University of Singapore Business School professor Joseph Cherian but even then, a portion of the CPF savings - the part that will go into annuity payments - should be "left untouched".

For funds above and beyond, he said, the CPF Board should offer a risk-adjusted programme of three choices for those with conservative, moderate and aggressive risk appetites to choose from. The plethora of investment options in the current CPF Investment Scheme makes things too complicated for the average CPF member, he tells Insight.

Under this scheme, CPF members can invest in approved products. But only funds in excess of $20,000 in the OA, and $40,000 in the SA, can be used.

As a result, there is not much diversification, Ms Wong Su-Yen, chairman of financial services firm Marsh & McLennan Companies, told the forum. Already, the CPF Board invests a large portion in government bonds, while individual CPF members often opt for deposits.

"The strength is that there is very little investment risk. But it doesn't allow members to increase capital as much as you would expect," she said.

She suggested allowing CPF members to start investing earlier, before they have saved up the minimum required, and lowering administrative costs. Financial modelling by Mercer, a subsidiary of her firm and which is a former investment consultant to the CPF Investment Scheme, shows this could increase retirement income by 16 per cent.

Offering more investment choices makes sense, says Lee Kuan Yew School of Public Policy associate dean Donald Low, because CPF members, who range from young adults to those nearing retirement, have different risk profiles. He tells Insight: "(Not giving them a choice) effectively treats the 25-year-old CPF member no differently from the 65-year-old. How can that be right? People's risk appetites change across their lifespan."

Some warn, however, that high returns involve high risk.

Statistics show only 18 per cent who have risked their OA savings between 2004 and last year have outdone the minimum interest guaranteed by the Government. Almost half incurred losses.

But financial advisory firm SingCapital's chief executive Alfred Chia cautions against being overly pessimistic, telling Insight: "Investing is an important way to grow CPF savings, because there is a limit to how much you can contribute into your CPF account with the monthly income ceiling for contribution set at $5,000."

Some, comparing CPF returns with the higher returns of other state-run pension funds, wonder if the CPF Board could do better.

Malaysia's Employees Provident Fund, which is comparable in size to the CPF, but invests in more diverse products, delivered a dividend of 6.35 per cent last year, for example.

In Singapore, the CPF OA interest is pegged to the 12-month fixed deposit and month-end savings rates of the major local banks, with a minimum rate of 2.5 per cent, while the SA interest is pegged to the 12-month average yield of 10-year Singapore Government Securities plus 1 percentage point, with a minimum of 4 per cent. Although this means that interest rates can go above the guaranteed minimums in better market conditions, this has not happened since 1999.

Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy, meanwhile, suggests lowering the guaranteed interest rates by 1 percentage point, but giving higher returns to CPF members when the Government's rate of return on the pool of CPF investments exceeds interest rate pegs.

But he notes to Insight: "It will not cause financial or sustainability issues, it's more a political decision."

Help middle-income shore up their CPF savings
By Tham Yuen-C, The Straits Times, 26 Jul 2014

AS MUCH as half of Singapore's working population, many of them graduates in the middle-income group, may not have enough in their Central Provident Fund (CPF) accounts to tide them through their golden years.

The Government should do something to help them shore up their CPF savings, or at least educate them about saving more for retirement on their own.

This warning was sounded by Associate Professor Hui Weng Tat of the Lee Kuan Yew School of Public Policy at the CPF forum.

The problem, he tells Insight, lies in the calculation of the income replacement rate, or IRR - the percentage of a worker's pre-retirement income covered by pension payouts. "My fear is that the overly optimistic expectations created by the misleading official statements and projections will lead to under-saving for retirement and cause much disappointment for middle-income persons in the future," he says. For this group, an IRR of at least 60 per cent is considered adequate for retirement. This means CPF Life payouts would have to amount to at least 60 per cent of what someone earned before retiring. And indeed, based on official calculations, they will.

But these are based on the "unrealistic" assumption that a person starts work and retires in the same income distribution percentile, says Prof Hui. "If you start work as a graduate on about $3,000 a month at 24 years old, you will expect to earn more by the time you retire. People expect some mobility upwards in their income based on seniority or experience."

Taking this into account, he calculates that the IRR for median-income earners starting with a pay of $3,000 would amount to about 50 per cent at the highest. This drops to about 30 per cent if they used CPF savings for housing. "So these people may not save enough, because they think CPF alone is enough," says Prof Hui.

The CPF will be more adequate for those in the lower-income groups, he notes. CPF Life payouts should amount to at least 70 per cent of their last drawn pay, and could even exceed it.

Other panellists, such as financial services firm Marsh & McLennan Companies' chairman Wong Su-Yen and SingCapital chief executive officer Alfred Chia, agreed that the CPF alone may not be enough for retirement for some. Indeed, the Government has stressed this is meant to cater to basic retirement needs up to the middle-income level.

Ms Wong said retirement savings in Singapore are "very concentrated in CPF" compared with other countries where people invest in private pensions as well.

But Prof Hui says expecting people to save on their own will not be easy. Studies show people have a tendency to under-save.

For the group he worries about, the Government can help by raising the CPF contribution income ceiling for employees, or at least adjust it to account for inflation, so those who earn more can save more. Currently, there is a cap of $5,000.

Another way is giving the option of putting more money in the CPF Life annuity account for a larger, steady flow of income in retirement, says Prof Hui. For now, only the Minimum Sum is transferred from the Ordinary and Special accounts to the Retirement Account.

Raising the interest paid on CPF savings by 1 percentage point could also bring IRR for the middle- income group to adequate levels.

One option he is against is to "force" people to downgrade: "You work to save enough to enjoy life later; if you tell people they have to downgrade, why will they want to work any more?"

Raise withdrawal age for the young, gradually
By Charissa Yong, The Straits Times, 26 Jul 2014

IT MAY be time to raise the Central Provident Fund (CPF) withdrawal age of 55 for some, say several academics.

Never mind that when this was last proposed, in 1984, in that year's general election, the People's Action Party (PAP) suffered its worst vote swing to date - plunging 12.9 percentage points.

This time, experts suggest that the bitter pill can be sweetened by raising the withdrawal age only for younger people and in gradual doses, instead of all at once across the board.

This increase can be staggered by a regular number of years per cohort, said Lee Kuan Yew School of Public Policy associate dean Donald Low and his colleague, economist Hui Weng Tat, two panellists at a forum on Tuesday.

Life expectancy has risen three to four years for each decade since CPF began in 1955. Yet the withdrawal age has stayed at 55, noted Mr Low.

"Delaying the withdrawal age is reasonable even if unpopular," he argued. Otherwise, if the withdrawal age stays constant despite people living longer, the same amount of money withdrawn will have to last them longer.

"With a life expectancy of 85, you're going to spend as many years in retirement after 55 as you have already worked. That's how ridiculous 55 is in today's context."

Raising the withdrawal age will also give CPF members more time to accumulate savings for retirement, said NUS Business School professor Joseph Cherian. But it would be politically unpopular.

Economist Augustine Tan - who was a PAP MP from 1970 to 1991 - said raising the Minimum Sum was "the next best thing" instead.

Today, people who do not meet the Minimum Sum can withdraw only $5,000 of their CPF savings when they hit 55. The rest of their savings can be taken out in monthly payouts only when they hit the drawdown age of between 60 and 65, according to their year of birth.

This persistent gap between the withdrawal age and the drawdown age is a festering source of unhappiness, said Professor Hui.

The sum has also been raised in a short amount of time - from $80,000 in 2003 to $155,000 this year - to catch up with inflation.

This caused people to perceive the policy as inconsistent, and eroded some public trust in CPF, said Prof Hui.

The key to restoring trust is to make such changes transparently and gradually with widespread public education, said experts.

Prof Hui proposed raising the withdrawal age by two years, only for those entering the labour force now. This is different from the 1984 proposal of raising the withdrawal age across the board, whether someone was a fresh graduate or nearing retirement.

He said: "For a person who is just entering the workforce, it doesn't matter as much because it is 40 years away. They say: 'Why would I worry about withdrawing money 40 years from now?'"

Prof Hui and Mr Low said that had the Government in 1984 committed to increasing the withdrawal age by one year every three years, the age would be 65 this year. That is the current retirement age - "exactly where we want it to be", said Mr Low.

He noted that other countries in similar situations typically choose to delay the pension withdrawal age, or decrease pension benefits, like Sweden in the 1990s - which, however, went one step further and linked the size of its pension payouts automatically to increases in life expectancy.

Look after those who are not in workforce
By Charissa Yong, The Straits Times, 26 Jul 2014

HELPING people who do not work and therefore cannot save much, if at all, for retirement is one of the areas highlighted by the experts where the Central Provident Fund (CPF) scheme could be improved.

Suggestions they came up with at the forum varied from introducing a universal basic pension scheme, to topping up CPF accounts of those who cannot reach the Minimum Sum, to looking at how the rest of the social system can play a role.

The problem arises because CPF is a compulsory savings scheme for employees based on their salaries - and so does not include those who are not in paid employment.

Many women, for example, quit work to take care of their families. Some people with disabilities cannot hold down jobs.

This is a major weakness of CPF today, warned some of the experts."Because CPF is an employee contribution system, people not in the workforce are by definition excluded. This goes right to the heart of what the purpose of the CPF is," said Lee Kuan Yew School of Public Policy associate dean Donald Low.

Sociologist Tan Ern Ser of the National University of Singapore (NUS) pointed to a 2011 survey of 5,000 senior citizens that showed fewer females (47.3 per cent) have CPF savings compared with men (72.6 per cent).

Moreover, older female seniors were less likely to have CPF savings - 37.3 per cent aged 75 and older had CPF savings compared with 69.3 per cent aged 55 to 64.

But forum participants were mostly silent on whether tweaking the CPF is the best way to help those who fall through the cracks.

One suggestion came from Dr Kanwaljit Soin, immediate past president of Women's Initiative for Ageing Successfully, who called for a very basic needs-based pension scheme to "give dignity to older people, so they don't have to stretch out their hand to ask for money from their children".

Mr Low also called on the Government to shore up CPF by giving members who cannot meet the Minimum Sum a top-up grant.

When the Minimum Sum is not met, a Singaporean can withdraw only up to $5,000 in cash from his CPF savings on turning 55. The rest goes into his Retirement Account, half of which can be in the form of a pledge on the home he owns.

To avoid people misusing the system, Mr Low suggested that a CPF member be given a Minimum Sum top-up grant only when he turns 75, so he still has an incentive to work before that.

But Manpower Minister Tan Chuan-Jin, while agreeing that the CPF system has limitations, said that topping up CPF accounts can only go so far. "The CPF, while important, is part of a larger system. And some needs are perhaps better met through other systems," he said, noting the Ministry of Social and Family Development's schemes.

"The key question is: Can we look after those who are vulnerable? The CPF system aims to do part of that, through whatever we can do to top up the accounts of some who may be vulnerable." This includes the Workfare scheme for those earning $1,900 and less a month.

He added: "But if individuals - not just women - remain vulnerable for a range of reasons, I think that's where the rest of the social system needs to kick in to provide for their respective needs."

Prof Tan was more sanguine, pointing to a trend showing that younger women nowadays have more CPF savings. This is because more women work and young adults are better educated.

"It does look like the future is going to be better - assuming all else remains constant," he said.

Reduce amounts allowed for buying property
By Charissa Yong, The Straits Times, 26 Jul 2014

THREE forum experts dared to take a tilt at a sacred cow - the use of CPF funds to buy property.

Improve the Central Provident Fund scheme by lowering the current amounts of CPF money that can be used for this purpose, was their call to the Government.

Singaporeans have put too much of their nest egg in one basket - one that is illiquid, risky in terms of timing the market if it is to be turned into cash, and difficult to extract an income from, they said.

For the younger generation, using up too much CPF money for housing can spell problems later, warned Lee Kuan Yew School of Public Policy associate dean Donald Low, one of those who want the caps lowered, along with real estate expert Lum Sau Kim of the National University of Singapore (NUS) and NUS Business School professor Joseph Cherian.

It may not be easy to convert property into cash when needed. Also, the selling price depends heavily on the market at that point, and housing prices may be volatile.

This could come to a head if many decide to monetise their flats at the same time, which may happen with Singapore's ageing population.

Said economist Augustine Tan: "Asset appreciation is going to be very problematic in a very aged population. Who's going to buy your flats?"

Prof Lum tells Insight: "People spend 30, 40 years building up this (property) asset and then wonder how to get money out of it."

Also, if people have spent much of their CPF funds on property, they will have low cash balances later.

Nearly 20 per cent of younger Singaporeans' wages goes into their CPF Ordinary Accounts, with which they can buy flats. Only after they turn 51 does this proportion shrink markedly, with more CPF savings going into the accounts meant for retirement and health care.

For today's seniors, this can mean that they are sitting on a goldmine of valuable property, while not having enough cash for their daily needs. But they are reluctant to sell or lease out their houses for cash due to their emotional ties to their homes, or because they want to bequeath them to their children, says Prof Lum.

This is even though HDB flats are on 99-year leases, noted NUS' Prof Cherian at the forum.

But options for monetising flats tend not to be popular and have weaknesses. The Lease Buyback Scheme (LBS) lets the elderly sell part of their flat's lease back to the Housing Board, and they can keep living in it for the next 30 years.

"It's not for life," says Prof Cherian. "Although the Government says that they will take care of people if they live beyond that, I say, 'Put it in writing'.

"Tell people it will be for 30 years or until they die. If you start (the LBS) at 62, what if you live until 95? You don't want to find out you will be homeless at 92."

The HDB has also said that it may reintroduce reverse mortgages, which were phased out in 2008 after few people took them up. In this, flat owners use their home as security for a loan that is dispensed in regular cash payouts.

Prof Lum, however, says that the Government has to price reverse mortgages carefully, as people may not take them up due to worries that they will have difficulty repaying the loan.

"If we're not careful about creating proper monetisation options, many households may not have an orderly exit from the market," she tells Insight.

"If you don't want future generations to continually deal with this kind of risk, maybe we shouldn't allow so much CPF to be used on housing."

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