MUCH is being said about the Central Provident Fund (CPF) and the larger issue of social security in Singapore, and everyone seems to have an opinion. Unfortunately, in the clamour of voices, confusion often reigns and the people who need the most help often struggle to find the right advice.
Mercer conducted its Melbourne Global Pension Index report in 2012, which compared global retirement income systems and ranked them based on their adequacy, sustainability and integrity. At the time, it was felt that some aspects of the report may have unfairly penalised the Singapore retirement system. However, the main issue of less than adequate investment returns remains very relevant today.
Mercer has a long-term presence in Singapore and in other markets, advising clients on how to protect and manage retirement funds. Having studied social security systems around the world, one must applaud the Singapore government for having built a robust, safe and sustainable social security system in the form of the CPF.
"Safe" is an important imperative and increasingly so, given the need for governments to insulate retirement incomes from volatility in global capital markets. This need was exacerbated by the global financial crisis. Many retirees who have left the workforce since 2008 have seen their retirement savings almost wiped out. CPF draws a good balance in mitigating some of the inherent risks found in retirement systems elsewhere.
The challenge of achieving higher returns while taking on less risk can be addressed in the current design of the CPF.
Singaporeans - many of whom are worried about the adequacy of their retirement incomes - may not necessarily understand their choices, for a number of reasons.
Firstly, life itself has changed. Shifting demographics have accentuated concerns, as one can no longer count on the traditional practice of relying on children in old age. Increases in life expectancy, falling birth rates and changing social values have altered life forever.
Secondly, the system itself is very complex.
CPF members can either use their Ordinary Account (OA) and/or Special Account (SA) savings for investments under the CPF Investment Scheme, or opt for an additional one per cent bonus interest rate, if the cumulative contributions meet the minimum threshold balance of S$20,000 in their OA, or S$40,000 in their SA. Yet, over 70 per cent of the total balances within the CPF SA (designated for retirement savings) that could be invested under the CPF Investment Scheme, remain in CPF accounts, earning the default interest rate of 3.5 per cent per annum on the OA and 5 per cent per annum on the SA.
Most Singaporeans on an average income are likely to reach the minimum threshold balance around the age of 35 to 40. This leaves ample time to invest safely in high yield equities or growth funds until retirement. Yet most do not. Why?
Inflation (CPI) in Singapore, except for the last few years, has been running at 2 per cent to 4 per cent per year. Therefore, without higher returns over the default rate or rates, it is quite possible that the future Retirement Account (R") of most members, at draw-down age, may barely be enough for basic retirement needs, even with discounted public healthcare.
Why then do members shy away from investing in the more than 200 funds they could choose from?
The government is taking steps in the right direction - for example, recently inviting opinions from employee groups, academia and policymakers - yet, there exists entrenched disenchantment with the CPF. We now await the results of the Retirement and Health Study 2014 (RHS) to elicit public opinion on the issue of retirement income adequacy. Prime Minister Lee Hsien Loong also announced at the recent National Day Rally that an advisory group would be set up to review design aspects of the CPF. It will, however, still be some time before any resulting changes to the CPF see the light of the day.
A guided approach
There are three main reasons why many people do not invest in the CPF Investment Scheme.
The primary reason is that the flexibility of investment choice is not well understood. Secondly, even if members understand the choices, having over 200 funds to invest in without any guidance is overwhelming. Thirdly, the lack of awareness is compounded by the often-prohibitive 60 to 200 basis points fees charged by the fund managers. With such steep expense ratios, most funds will be hard pressed to earn enough returns to cover these expenses.
While it is understandable that individuals have varying degrees of risk tolerance and will make different investment choices, we believe that the CPF could provide support in several ways. The CPF could develop individual risk assessments of the members based on demographics, income, investment tolerance and background. It could provide investment options tailored to specific risk profiles. It could also limit the number of fund choices, and pre-select those with more competitive expense ratios relative to past investment performance.
Employers have an important role to play too. As part of their corporate social responsibility and employee benefit programmes, employers could provide more education and support regarding retirement savings and investments. As most employers in Singapore do not provide any corporate pension plans to employees (other than the mandatory CPF contributions), employees bear the responsibility of investing appropriately and saving enough for their retirement. Employees would benefit hugely from getting support and direction in managing their investments and potentially developing a voluntary savings plan.
Given the current structure and setup of the system, the government has a pivotal role to play in facilitating awareness and offering a choice that has already been built into the CPF design. Meanwhile, employers should look at including retirement awareness as part of their corporate social responsibility and employee benefit programmes, and consider whether a corporate pension plan is needed to augment the CPF.
While the CPF Investment Scheme does provide a large number of fund options, it could be significantly simplified and reduced to a smaller number of choices with lower expense ratios. Furthermore, the CPF Investment Scheme can be transformed to cater to investors of varying sophistication and risk tolerance.
Lastly, continued constructive dialogue will foster better appreciation of the Singaporean social security net, while allowing employees to make more informed retirement planning decisions.
With everyone working together with more education and more support, hopefully there will be fewer arguments. As Louis Brandeis once said, "Behind every argument is someone's ignorance". Let's take the ignorance away.
The writer is Asean Business Leader at Mercer Retirement Consulting