Friday 5 August 2016

CPF review: New CPF LIFE plan with Escalating Payouts and Lifetime Retirement Investment Scheme recommended

CPF Advisory Panel Part Two Recommendations - 3 Aug 2016

New CPF Life plan offers rising payouts
Scheme provides buffer against inflation in exchange for lower or delayed initial payouts
By Rachel Au-Yong, The Straits Times, 4 Aug 2016

A new retirement plan to help Singaporeans cope with the rising costs of living in their golden years is in the works, after the Government yesterday accepted fresh recommendations to improve the Central Provident Fund (CPF) scheme from an advisory panel.

In its second and final set of proposals, the CPF Advisory Panel also suggested creating a new, low-cost investment scheme which will give more options to investors who want to invest their CPF funds for higher returns but may not know how to do so.

"If I had to encapsulate what we're trying to do in one line: We are providing more choices to give you more control over your retirement plan," said panel chairman Tan Chorh Chuan.

The new CPF Life plan, which adds to the current two, will see monthly payouts increase by 2 per cent every year to keep pace with inflation. But those who opt for this CPF Life plan with "escalating payouts" will start with payments that are about 20 per cent lower compared to the current default plan.

Under the default option, the CPF Life Standard Plan, a CPF member with about $80,500 in his Retirement Account at age 55 can expect to receive $720 a month when he turns 65 for the rest of his life.

If the member chooses the new plan, he gets just $560 at the start. But the monthly payout will increase every year.

By the time he is 75, his monthly payments will reach $680. And when he is 87, his monthly payments will be $860 a month.

Those who want higher initial payouts under the new scheme can either top up their CPF Life premiums, or delay the starting age for payouts up to age 70.

The plan has been configured in this way to ensure that the system remains sustainable, said Prof Tan.

The panel, which was appointed in September 2014, came up with the latest proposals after consultations with industry players and more than 1,000 Singaporeans over focus-group discussions, telephone polls and through written feedback.

Manpower Minister Lim Swee Say yesterday accepted the recommendations on behalf of the Government and thanked the panel for its work. Noting that the panel had been given a complex task, he described its recommendations as "both elegant in their simplicity and far-sighted".

He added that the Government will "proactively promote awareness and understanding of these new CPF options so that members can make informed decisions to better meet their retirement needs".

The Ministry of Manpower and CPF Board will work towards implementing the recommendations in stages, which panel members said could take "a few years".

NTUC assistant secretary-general Cham Hui Fong welcomed the recommendations, saying they were "in line with our call to provide members with more options and flexibility" to better meet different retirement needs.

The 13-member panel submitted the first set of recommendations, including allowing lump-sum withdrawal at age 65 of up to 20 per cent of CPF savings, in February last year and they have been implemented.

Simpler investment scheme to grow retirement nest egg
Govt accepts proposal to offer low-cost investment option for CPF members
By Olivia Ho, The Straits Times, 4 Aug 2016

Central Provident Fund (CPF) members who want to take bigger risks to grow their nest egg, but lack the time or know-how to do so, can look forward to a new, simplified retirement investment scheme.

The Government yesterday accepted a proposal from an advisory panel that the CPF Board introduce a low-cost investment option for its members.

The Lifetime Retirement Investment Scheme (LRIS) would offer a smaller number of well-diversified funds, which do not need active management.

This is because an existing high-risk investing option has not helped many members realise returns superior to CPF interest rates.

Panel member Christopher Tan, chief executive of financial advisory firm Providend, called the scheme a "game changer" for CPF investments.

He said: "For the longest time, there have been members who don't have regular experience investing their CPF, because they don't have the time or knowledge, and it is also very expensive."

Another panellist, Mr Ng Cher Yan, managing partner of auditing and accounting practice Plus LLP, noted that a majority of CPF members met the savings threshold for this scheme, and this figure was likely to increase in the future.

Six in 10 active CPF members aged 45 today have Special Account (SA) savings in excess of $40,000, he said. This is expected to go up to nine in 10 in 2030.

The LRIS aims to bridge the gap between leaving one's savings in the Ordinary Account (OA) or SA, and putting them into the CPF Investment Scheme (CPFIS), a higher-risk option more suitable for savvier investors.

CPF members can currently invest their OA and SA savings above the first $20,000 and $40,000 respectively through the CPFIS, which has more than 200 funds to choose from.

At the end of last year, $25 billion was invested through the CPFIS. A further $105 billion remains to be invested.

The panel recommended that the LRIS funds should not be managed actively, which would incur higher management fees, but passively by a single administrator.

Because the CPFIS operates under a retail model, investment fees are high - as much as 3 per cent for sales charges - and this significantly erodes returns.

These costs could be reduced by aggregating a "critical mass of assets" from many members, said National University of Singapore (NUS) Business School practice professor of finance Joseph Cherian.

He added that returns are also affected when inexperienced investors "churn", or buy and sell their investments frequently. The new scheme should have measures to prevent such "churn", he said.

The panel engaged consulting firm Mercer to study models such as static risk funds and life-cycle planning, in which the exposure to risk is reduced the closer the investor gets to retirement.

It advised the Government to establish an expert investment council to set up and implement the LRIS.

It also suggested that the Government review the CPFIS so it can be better targeted at experienced investors.

CPF review: New annuity plan 'unlikely to attract most retirees'
By Rachel Au-Yong and Olivia Ho, The Straits Times, 4 Aug 2016

A new annuity plan that will give Central Provident Fund (CPF) members increasing payouts each year is not likely to find favour with the majority of retirees, said MPs and academics yesterday.

The reason: The initial payouts from age 65 will be about 20 per cent lower than those of the default plan offered by the CPF Board.

Two groups, in particular, will find the new CPF Life plan unattractive. These are the active seniors who want more cash in hand for their social activities, and those who have less non-CPF savings.

MP Foo Mee Har, chief executive of the Wealth Management Institute, questioned the attractiveness of a plan that requires a "pay cut" when compared with the CPF Life Standard Plan, which gives a fixed payout every month. "It's quite a big sacrifice because, at that age, you're probably still active and want to do more, like travel," she said.

The plan, announced yesterday by the CPF Advisory Panel and accepted by the Government, will give "escalating payouts" of 2 per cent a year to keep pace with the rising cost of living.

MP Liang Eng Hwa, who chairs the Government Parliamentary Committee for Finance and Trade and Industry, felt that the lower income who have little personal savings or family support would need bigger payouts from the start to cope with daily expenses.

Their sentiments have been anticipated by the advisory panel, which said it is likely that a minority would take up the new plan when it is ready in a few years' time.

Still, it is useful for those who want payouts to keep pace with inflation but are unwilling or do not know how to set aside sufficient funds, said SIM University economist Walter Theseira.

Subsidies could be given to bring the initial payouts up to the starting level of the standard plan but such a move would ultimately be borne by the taxpayer, he added.

The other change from the advisory panel is for a low-cost private investment scheme for investors with an appetite for risk but little time or know-how to delve into it.

This new Lifetime Retirement Investment Scheme (LRIS) was welcomed by academics and industry experts because it is an alternative to leaving one's savings in the risk-free Ordinary and Special CPF accounts and investing them under the current higher-risk CPF Investment Scheme.

It is an attractive option, especially for younger investors who can bear more risks, said Mr Marcus Kok of PwC Singapore.

But the LRIS is "not fail-safe" and the investor must be prepared to shoulder some risk, said Nanyang Technological University economics head Euston Quah.

Economist Chia Ngee Choon of the National University of Singapore called for investors to be given clear and simple information on the LRIS investment strategies and the investment record of the fund administrator, which has yet to be picked.

Labour MP Zainal Sapari suggested that future reviews should look at ways to encourage members to top up the accounts of their non-working spouses.

She is ready to take initial hit for escalating payouts
By Olivia Ho, The Straits Times, 4 Aug 2016

Some might blanch at the idea of starting with lower payouts from their Central Provident Fund (CPF) accounts upon retirement.

But Madam Salamah Abdoll, 55, is willing to take an initial hit in return for escalating payouts that can help combat a rising cost of living in later years.

A new CPF Life plan was mooted yesterday to help Singaporeans cope with inflation through payouts that increase by 2 per cent every year.

The trade-off is that the payouts, which begin at age 65, start at about 20 per cent lower than they would with the standard annuity plan.

Madam Salamah, a mosque manager for nine years, said a lower initial payout would not be a problem. She said: "I plan to still be working when I am 65, if my health permits. If I have income, I won't need a higher payout."

She currently earns about $3,300 a month, and has less than $100,000 saved in her CPF account.

She suffers from chronic conditions such as high blood pressure. "I would rather keep my CPF money in reserve first and get more later, in case I need more money for my bills later on."

The mother of four children, aged 14 to 32, said her desires for her autumn years are simple, as she has accomplished much of what she wants to do in life.

"I have gone on my haj pilgrimage, I have visited some other countries as a tourist. I am comfortable where I am.

"I am not a high-risk investor. As long as I have some money to rely on, I think I am content."

Earlier proposals
The Straits Times, 4 Aug 2016

In the first part of its review in February last year, the Central Provident Fund (CPF) proposed the following:

• CPF members could now choose to lock away a basic sum of $80,500, a higher sum of $161,000 or an enhanced sum of $241,500 at age 55, instead of meeting a standard minimum sum. Members will get higher monthly payouts if they opted to receive them later.

• Members got to withdraw up to 20 per cent of their savings at 65.

• Basic retirement sums for Singaporeans turning 55 from 2017 to 2020 were to be increased by 3 per cent for each cohort, to account for inflation.

• Higher CPF contribution rates for older workers

New CPF schemes open up more options: Lim Swee Say
They offer members more flexibility but also keep system simple enough to understand
By Olivia Ho, The Straits Times, 5 Aug 2016

Central Provident Fund (CPF) members have now been offered more options for their retirement needs, Manpower Minister Lim Swee Say said yesterday.

They can choose between fixed payouts and one that starts lower but keeps rising. There is also a new investment option for those who seek higher returns on their CPF funds, but may not have the time or know-how to invest on their own.

The changes also keep the system simple enough for the public to make a suitable choice, he told reporters a day after the Government accepted ideas from an advisory panel to improve the CPF scheme.

"In the past, we may have offered you laksa and chicken rice, and now we offer you nasi lemak. If you ask me, is laksa better than chicken rice or nasi lemak, it all depends on what you are looking for," he said.

"All these options are good, but you have to find the one that is most suitable."

One new option is a CPF Life plan that gives escalating payouts to keep pace with inflation. Monthly payouts will go up by 2 per cent every year, but payments start at about 20 per cent lower than those of the current default plan.

"We will probably be able to put the escalating payouts in place in the next couple of years," said Mr Lim. It will take "a bit longer", he added, to implement the new, low- cost investment scheme that the panel also introduced.

The Lifetime Retirement Investment Scheme (LRIS) opens up a new option for investors, he said.

Speaking to reporters at the launch of a central kitchen for eight Indian restaurant operators, Mr Lim said the LRIS might have "tremendous impact in the future" as it plugs a gap in existing investment options.

On the one hand, he said, members are guaranteed risk-free interest for their Ordinary and Special accounts. On the other, they have the CPF Investment Scheme (CPFIS), a higher-risk option that requires more financial knowledge to manage and is also costlier.

"There is a growing number of CPF members who feel they can strive for higher returns than the risk-free ones, but don't have the time, expertise or know-how to manage their private investments.

"This is a simple scheme for individual investors which is less costly and less time-consuming," he said.

He said that it is an "immediate priority" to spend time ensuring the smooth implementation of the panel's recommendations.

More will also be done to explain the changes to the public so they can make suitable choices.

Industry experts like Mr Marcus Kok, principal pension consultant for PwC Singapore, welcomed the LRIS as a boon for younger members, who can take on more risk.

But, he said: "If you are five years away from retirement age, it might be better to just let the money sit in your retirement account."

Aon Hewitt Wealth Management executive director Shikha Gaur said members should "understand what these options mean for them and how they supplement a retirement plan that has been well thought through".

Navigating through new CPF options
Latest enhancements to CPF plans offer more choice and flexibility, to suit individual needs
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 7 Aug 2016

Change is afoot at the Central Provident Fund (CPF) scheme with the two new options announced on Wednesday.

While the new options may take two years or more before they are available, other CPF enhancements - announced early last year by the CPF Advisory Panel - have already kicked in.

They include different payout options to give us more choice as well as the flexibility of deferring payouts up to age 70 so as to receive more cash later.

The Sunday Times highlights the two new options and provides a guide for you to plan ahead for your CPF Life payouts.

CPF Life plan with escalating payout option

The two CPF Life plans - Standard and Basic - pay fixed monthly amounts for life.

The new escalating option is provided to address the concerns of some members about the rising cost of living.


The recommendation is for payouts to increase at a rate of 2 per cent per year to cope with inflation. However, those opting for this plan will start with payouts that are about 20 per cent lower compared with the current level plans.

Let's assume that CPF member Henry Tan (not his real name) has set aside the Full Retirement Sum of $161,000 at age 55 in his Retirement Account. When he reaches his payout eligibility age of 65, his Retirement Account would have grown to $243,900 because of the interest received from CPF.

Under the CPF Life Standard plan, he can expect monthly payouts of $1,320 when he turns 65 for as long as he lives. If he opts for the escalating option, he gets just $1,020 at the start but the payouts will increase at 2 per cent annually.

It may take Mr Tan about 25 years for his cumulative payouts from the escalating option to catch up with the payouts from the alternative fixed-amounts option, after which the escalating option would outperform.

At age 78, Mr Tan's monthly payout will be $1,330, exceeding that of the Standard Plan. And when he is 87, his monthly payout would have increased to about $1,580.

Those who want higher initial payouts under the new escalating option can either top up their CPF Life premiums or delay the payout start age up to age 70. The escalating option is not available for the Basic Plan.


Finance experts say members should decide based on which payout structure best suits their retirement needs.

For those who may be concerned about increases in the cost of living as they grow older, the escalating option could be attractive, notes Mr Colin Pakshong, CPF Advisory Panel member and actuarial consultant.

One in three CPF members aged 65 are expected to live beyond the age of 90, and more will do so as life expectancies keep rising.

Mr Pakshong says: "If you have other sources of income in the initial years, perhaps through part-time work, savings or family support, deferring your payouts to enjoy the benefit of inflation protection may be a good idea."

He adds that members can think of the deferral or top-up as what they need in order to "buy" inflation protection.

"For others who may not be able to top up their accounts or defer their payouts, they must decide if the lower initial payments will mean their retirement income is too low for their needs. If so, the escalating annuity may not be a viable option for them."

Members should also keep in mind that whatever option they choose, their beneficiaries will always get back the remainder of principal amount of money that was put in. "Anything that has not been paid out as retirement income will be paid out to beneficiaries on the passing of a member," says Mr Pakshong.

Lifetime Retirement Investment Scheme (LRIS) CPF members who want to invest their retirement savings can do so via the CPF Investment Scheme (CPFIS).

The LRIS is an alternative, simplified investment option which will offer a small number of low-fee, well-diversified and passively managed funds. It is targeted at members who do not have the financial expertise and/or time to select and monitor their investments.


The CPF Advisory Panel has recommended that the funds be professionally managed, with its net return to investors enhanced by low or zero sales charges and low fees, taking advantage of economies of scale from pooling members' investments, says Mr Pakshong.


Mr Brandon Lam, head of retail financial planning, consumer banking group at DBS Bank Singapore, says the LRIS is ideal for those who have a long-term investment horizon and who do not want their investment returns to be eroded by fees and charges over time.

However, it is important to note that investment returns are subject to the performance of the underlying fund.

CPF Advisory Panel member and Providend chief executive Christopher Tan notes that there is no need to invest your CPF savings if you are content with the current annual returns of your CPF accounts.

Another scenario is where you may already have investments funded by cash, and treat your CPF, especially your Special Account savings, like the bond allocation of your overall portfolio.

Members who want or need higher returns for their CPF savings and are prepared to take a higher risk have two options - CPFIS, for savvier investors, and the LRIS.

Mr Pakshong warns that members should remember that the LRIS approach still involves a risk-reward balance.

"There is a risk that actual returns could be lower than those provided on the Ordinary and Special Accounts. Members need to be prepared to accept the risk of this happening if they invest in the LRIS. Otherwise, they can choose to leave their monies in their CPF accounts to earn the current interest rates."

Guide to CPF options for retirement


It is prudent to plan early for retirement. Ms Chung Shaw Bee, UOB's head of wealth management, regional and Singapore, says: "Doing so will reap benefits from the compounding effect of time. Having a long-term horizon can help to smooth out the impact of volatility on investment holdings," she says.


• Transfer your savings from the Ordinary Account to the Special Account to enjoy higher interest. Money can be moved from an Ordinary Account to the Special Account so long as the total amount in the Special Account does not exceed the prevailing Standard Retirement Sum of $161,000. This will enable you to grow your nest egg very quickly, simply by relying on the power of compounding. However, bear in mind that the money will be locked up in the Special Account as it is meant for your retirement. So do so only if you foresee that you will not need the funds in the short term. The Ordinary Account offers a guaranteed annual interest rate of 2.5 per cent while savings in the Special Account attracts 4 per cent. The first $20,000 of Ordinary Account balances, and $40,000 of Special Account balances, earn 1 percentage point more. As of January this year, members aged 55 and older are earning up to 6 per cent for the first $30,000 in their Retirement Account.

• Invest in the LRIS. When it is made available in the coming years, the LRIS will be a simple and low-fee option for members who want to invest to potentially earn relatively higher returns but, do not have the expertise or the time to do so.

• Consider the CPFIS. This will be suitable for savvier members who wish to actively manage their investments.


• Set aside Retirement Sum. At age 55, you will have to decide on the CPF Life payouts you need at your eligibility age and set aside the appropriate Retirement Sum in your Retirement Account.

• Top up your spouse's CPF account. After setting aside your Basic Retirement Sum, which is $80,500, you can consider transferring your CPF to your spouse's CPF so that he/she can also enjoy monthly payouts for life.

• Top up your own CPF account. You may want to top up to the Enhanced Retirement Sum, which is $241,500 presently.


• Choose your CPF Life plan from age 65. You may choose from the Standard (higher monthly payouts, lower bequest) or Basic plans (lower monthly payouts, higher bequest), or the new CPF Life plan with escalating payouts, once it is available.

• Choose to start payouts later. You can opt to defer payouts up to age 70. For each year that you defer, your starting payout increases by up to 7 per cent.

• Opt to withdraw 20 per cent of your savings. The 20 per cent includes the $5,000 sum that you could withdraw at age 55. This helps you to meet any urgent needs after age 65. But it means that your monthly payout quantum will be permanently reduced.

More retirement solutions
CPF members have more choices and better control over their planning
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 7 Aug 2016

That the advisory panel set up to look into possible improvements to the Central Provident Fund (CPF) has finally completed its study after missing its initial deadline of mid-2015 underscores the challenges of reviewing a scheme that is the pillar of Singapore's retirement support structure.

The slew of enhancements and an alternative investment scheme means that members will have more choices and control over their retirement planning.

The 13-member advisory panel was led by National University of Singapore president Tan Chorh Chuan and it was first mentioned at Prime Minister Lee Hsien Loong's National Day Rally in August 2014. No doubt, we are likely to hear about it again this coming National Day Rally.

Three key guiding considerations underlined the panel's work. They are "adequacy" so as to provide a basic level of lifelong support in retirement; "flexibility" in order to cater to varying retirement needs and circumstances; and "simplicity" to enable members to understand how the CPF system works.

The first enhancements were announced in February last year. Though they were not groundbreaking, the incremental improvements meant clearer choices over the retirement sums to be set aside and payouts from the national annuity scheme CPF Life.

Implemented this January, these include a choice of different levels of CPF Life monthly payouts based on different levels of savings. I particularly like the Enhanced Retirement Sum, which means members can set aside a bigger sum at age 55 so as to enjoy higher retirement payouts.

One of the biggest changes was allowing members to withdraw up to 20 per cent of their Retirement Account savings at the payout eligibility age, to address the demand for more flexibility. They could also defer their payout start age up to 70 to enjoy higher monthly payouts of 6 per cent to 7 per cent for each year deferred.

It would give them more choice and help boost their nest egg, but it also means that people do not get their payouts till later. However, this would meet the needs of some members who could afford to delay their payouts because they receive pocket money from their children or have sufficient income, according to the CPF Board.

Last Wednesday, the panel announced its second and last set of recommendations after much deliberation and feedback from focus-group discussions. I was a participant at one of the discussions.


To assuage concerns about the rising cost of living, the panel has recommended an optional CPF Life plan with payouts that increase at a set 2 per cent a year. However, this option may not be what some members were looking for as it comes with lower starting payouts.

Furthermore, it would take about 25 years - for members with the Basic Retirement Sum - for the cumulative payouts from the escalating option to catch up with that of the fixed-amount option, after which the escalating option would outperform.

To this, CPF Board says that based on actuarial calculations, one in three CPF members aged 65 now are expected to live beyond the age of 90, and more will do so as life expectancies continue to rise.

The CPF does provide the option of allowing members to choose to top up their CPF Life premiums further and/or delay their payout start age up to age 70 to avoid lower starting payouts.

Not surprisingly, the panel believes the new escalating-payout plan is unlikely to attract the bulk of retirees who would be more comfortable with the level-payout plans.


(LRIS) CPF members, particularly those with a 20- to 30-year investment time horizon, will be interested in a new LRIS to help grow their savings.

Potentially a game changer, it will provide a few simple investment choices - likely to be low-fee, passively managed life cycle funds with varying risk characteristics. Consultant Mercer found that with a fund size of just $500 million, the scheme's expense ratio could be a low 0.5 per cent.

Currently, CPF members who wish to invest their retirement savings can do so only via the CPF Investment Scheme (CPFIS). For the year ended Sept 30, 2015, a significant 84 per cent of CPF members who invested in CPFIS either made losses or generated returns of up to 2.5 per cent. The lacklustre experience has been attributed to various reasons like high cost, restrictive funds, as well as poor financial knowledge, poor understanding of risk-reward balance and the lack of time to manage their investments.

In fact, some financial experts have, in the past, advised members against using their CPF funds, particularly Special Account funds - which attract up to 4 per cent returns - to invest due to the high risks involved.

The new LRIS is catered to members who want to invest but lack the financial expertise, time and resources to do so. It is akin to eating a set menu at a buffet while savvier members can continue to invest via the CPFIS which has more than 200 CPFIS-included funds and is also due for a review to enhance it.

However, members will have to wait, for perhaps a few years, before the LRIS is launched. An Expert Investment Council will be set up to look into the LRIS details and implementation. The LRIS, with its focus on low fees, is a timely move in the light of recent reports indicating significantly lower and volatile investment returns in the coming years.

For instance, GIC recently said in its annual report that it anticipates significantly lower and more volatile returns in the next 10 to 20 years, compared to its experience in the last two to three decades. This is due to a difficult investment environment with modest growth prospects, greater uncertainty and a high degree of volatility.

Hence, controlling investment cost will be an important factor in enhancing returns.

Still, members who do not wish to take risks with LRIS can leave their monies in their CPF accounts.


The panel's recommended suite of CPF options has taken into account the need to cater to members with different financial circumstances and investment know-how. Overall, the proposed enhancements are a move in the right direction and will be a boon to CPF members, offering more choices via a suite of flexible tools for them to shape their retirement solutions.

Still, there is much work to do as the implementation dates for the escalating payout option and the LRIS are a few years away.

Now that the panel's work is done, it is up to members to make the effort to understand what is in store for them. After all, the CPF is a fundamental component in our retirement planning. As in most things in life, having more options is good when you know what to do with them.

So it pays to understand what are your retirement objectives, do your homework and make informed choices.


CPF Advisory Panel Full Report:
- Part One
- Part Two 
Making CPF a stronger player - CPF Advisory Panel
Singaporeans don't realise what a good deal the CPF is

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