Pillars of retirement adequacy

Prime Minister Lee Hsien Loong has promised that retirement adequacy and improving the Central Provident Fund will be key focuses for the Government. Three experts offer their views on the right policies in these areas.
By Joseph Chong, Published The Straits Times, 18 Jul 2014

EVERYONE has to retire eventually, so retirement planning is a non-negotiable activity. You either plan for retirement or live to regret the lack of planning.

There are three pillars to help ensure retirement adequacy that are within the state's control.

The first pillar is tight control over inflation. A 4 per cent guaranteed return is dismal if inflation is running at 4.1 per cent. Singapore's consumer price index (CPI) averaged 4.1 per cent from 2011 to 2013 (despite global disinflation) but averaged only 0.8 per cent between 2000 and 2005.

The Minimum Sum Scheme (MSS) has been adjusted upwards to bring it up to $120,000 in 2003 dollars and to compensate for inflation. I suspect the current unhappiness over the MSS would not be so acute if inflation over the past few years had been 1 per cent.

The poor are defenceless against inflation.

Even if they see it coming, they do not have the resources to exploit it. The steep climb in the Central Provident Fund (CPF) Minimum Sum in recent years to adjust for inflation demonstrates how savings can be devalued by inflation. The lower-income group is the most severely hit because their CPF savings constitute the bulk of their retirement funds.

The second pillar that the Government may use to assist in retirement financing is home monetisation - extracting equity from the value of a home. I am wary of home monetisation because to sustain this policy, there has to be an appreciating bias in home prices. This in turn requires that economic policies need to have an inflationary bias - which contradicts the need to suppress inflation as already explained.

In Singapore, home monetisation is even trickier because of the leasehold status of most homes. All leasehold homes have an underlying depreciating bias because they have the same value when the lease ends - zero. Downgrading from a very old five-room to a three-room flat may thus result in little surplus after transaction, moving and renovation costs.

From a financial planning perspective, the most efficient way to extract value from a home is at the outset - to purchase it as cheaply as possible. The savings on a cheaper mortgage, compounded over time, is the most efficient path.

The Housing Board can take the lead by going back to the basics of public housing - building high-quality, no-frills flats efficiently in order to sell them at the lowest possible prices independent of the state of the market. These low prices may need to be coupled with longer ownership requirements.

My own professional experience suggests that at the bottom end, incomes are so low that people have little savings to fund retirement. Much of the bottom 10 per cent of households can only make ends meet every month with societal assistance.

The final policy option is a National Pension Fund (NPF). Here, I would argue that Singapore needs a basic fund - which pays out a subsistence monthly pension to assist the bottom 25 per cent. Such a proposal would be controversial, particularly when it comes to funding.

I believe that this NPF can be funded by proceeds from Government Land Sales (GLS). Actually, the GLS is a misnomer because the Government has not sold any land at all; it sells leases on the land.

All the land "sold" by the Government reverts back to the state at the end of the lease - so sales proceeds are effectively long-term rental income. In this sense, the GLS provides a perpetual, recurring stream of revenue, although the actual amount is volatile on an annual basis.

Between FY2003 and FY2012, revenue from GLS totalled more than $93 billion. For budgetary purposes, this money remains unspent and is added to the Government's reserves.

A rough calculation indicates that $93 billion could fully fund an NPF that could provide a pension benefit of about $5,000 (real dollars) yearly for about 650,000 retiree citizens.

This calculation is not a policy suggestion, but it outlines what is already possible.

A proper discussion of retirement financing has to be comprehensive. It has to include inflation control, ways to monetise homes, and the establishment of a fund to provide pensions for the poor.

The author was previously a portfolio manager and CEO of a wealth management firm.

Gender bias in CPF
By Kanwaljit Soin, Published The Straits Times, 18 Jul 2014

IN SPITE of phenomenally impressive gross domestic product growth since 1965, most Singaporeans have been troubled by the inadequacy of financial coverage for health and retirement.

Fortunately, universal health coverage will finally begin by the end of next year. This leaves us to reform some aspects of the pension system. Since 1955, the pension system in Singapore has consisted of compulsory Central Provident Fund (CPF) savings.

CPF is a work-based scheme and therefore excludes anyone who may never have been in the workforce, such as housewives, the disabled and the pioneer generation of women who worked in home-based industries and were not paid.

In most developed countries, retirement schemes are usually multi-pronged. However, in Singapore, we depend on a single-tier retirement financing system of mandatory savings during working years. This is not fair to women. They have lower labour force participation rates and shorter work histories due to childcare responsibilities.

The CPF Life annuity scheme also disadvantages women. They have to pay higher premiums because they are expected to live longer. Let us look at a common scenario where the husband is in full-time employment and the wife is a housewife.

When the husband turns 65 and is retired, both he and his wife may depend on the man's CPF Life annuity to get by. However, the wife will be in trouble after the husband's death, as the monthly annuity payouts will stop. There are no survivors' benefits to address gender imbalances during retirement.

Women, on average, live longer than men, and so the old-old will be disproportionately women who, as a group, have lower lifetime incomes. So it is essential to have survivors' benefits.

A system of retirement savings linked to employment is therefore not enough. According to the World Bank, countries should have another pillar, in the form of a government financed social pension. This pillar would provide the elderly with a minimal level of protection.

An example of this type of social pension is what is called the "fruit money" scheme in Hong Kong. Under this scheme, everyone on reaching the age of 70 receives HK$1,090 (S$175) a month in "fruit money" without having to declare their means.

A similar scheme should be started in Singapore.

The writer is a former Nominated MP and immediate past president of Women's Initiative for Ageing Successfully (WINGS).

Back to basics
By Victor Lye, Published The Straits Times, 18 Jul 2014

SINGAPORE'S Central Provident Fund (CPF) system has changed significantly since its birth in 1955.

Significant changes include allowing the use of CPF monies to purchase HDB flats in 1968, the use of Medisave in 1984 to pay hospital bills, and the introduction of the Minimum Sum in 1987.

In 1997, the CPF Investment Scheme allowed members to invest for themselves.

By most expert accounts, our CPF system works well.

But some fundamental issues need to be reviewed.

The use of CPF savings in the name of asset enhancement has arguably led to asset inflation.

Perhaps CPF savings should be used only for owner-occupier homes, or for one residential property.

This would reduce potential froth in land costs when bouts of liquidity entice CPF members to tap their long-term savings.

The CPF has been overly weighted on housing when it should be about retirement.

With about 80 per cent of Singaporeans owning their own HDB flats, the country will witness more asset-rich cash-poor CPF members as the population ages. And the problem could be exacerbated with the immigration slowdown.

The HDB's decision to ramp up the construction of build-to- order (BTO) flats will see an average of 26,000 new HDB flats coming into the market each year.

But demand for HDB resale flats has shrunk, and prices have fallen, creating a medium-term supply overhang with price pressures.

One solution may be to progressively take HDB flats off the market, possibly older flats above 40 years, as more BTO flats are completed.

As a retirement nest egg, CPF money should not become short- term punting funds or fodder for high trading turnover, where fees and commissions erode its long- term value. Members need to understand they get a risk-free minimum return on their CPF balances. But this is easily forgotten when they are swayed by reports in the media about bigger returns elsewhere.

That said, CPF members should be given the choice of staying with the "risk-free" CPF or taking on higher risk portfolios - all to be managed professionally.

As for the asset-rich cash poor, one consideration is for the HDB to widen the current Enhanced Lease Buyback Scheme to include four-room flats, subject to conditions.

The CPF debate is potentially divisive because most people do not understand how it works. As more citizens approach the age of 55, the CPF will become more controversial.

Unlike earlier cohorts, these people are more likely to be staring at a pile of CPF cash due to better progressive earning power.

Apart from looking at ways to improve the CPF system, there is a need to educate people about it. What is alarming is how way-off-the-mark commentaries can produce so much angst and insecurity.

The writer is CEO of an insurance company. He is also the People's Action Party branch chairman at the Bedok Reservoir-Punggol division of Aljunied GRC.