With dwindling CPF rates, depending on CPF alone is proving to be insufficient

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CPF investments in funds have dropped. How else can Singaporeans retire comfortably?

By Joelyn Chan

Singapore’s Central Provident Fund (CPF) stands out globally amongst other pension systems. Close to 3.7 million working Singaporeans and permanent residents use this compulsory saving scheme for retirement, housing and healthcare.

Melbourne Mercer Global Pension Index (MMGPI) measures 27 countries against over 40 indicators. In MMGPI’s 2015 report, Singapore ranked seventh globally and maintained its top position in Asia for the fourth consecutive year. Its score improved from a grade C+ to B due to an improvement in pension adequacy.

Neil Narale, Singapore Mercer Marsh Benefits leader, said  “Creating incentives for corporate retirement plans, opening CPF to non-residents and continuing to increase the labour force participation rate as life expectancies rise will improve Singapore’s score in the future.”

Financial management options available in Singapore

Depending on the individual’s life circumstances, his or her financial plan will differ. It typically undergoes the following four phases – wealth accumulation, consolidation, decumulation and gifting. At each stage, the individual will have varying investment objectives and risk tolerance.

Sources: CPF (Schemes, Life-cycle investing), Summit Planners (Millennials’ financial planning, Stages of retirement), Ministry of Manpower

To accumulate wealth for a stress-free retirement life, the citizens can put their money in banks, CPF, insurance policies or investments. As a rule of thumb, individuals need to plan their retirement fund for at least 30 years ahead. With the average life expectancy of 82 years old and minimum retirement age at 62 years old, Singaporeans’ retirement nest should have enough for 20 years or more. Given extremely volatile economic climate now, it may be a case of the earlier you start saving, the better your retirement will be.

As of 2016, three-month banks’ deposit rate stands at 0.19% per annum. Although it is unattractive and incapable of beating the country’s inflation rate – 1.4% as of May 2017, it is a guaranteed sum and provides flexibility in withdrawal.

Like bank deposits, CPF is another familiar savings option used by Singaporeans. This compulsory social security savings scheme strive to meet retirement, housing and healthcare needs. At the end of 2016, CPF membership rose by 2.0% to 3.8 million. CPF members can also participate in the Investment Scheme (CPFIS) to invest their CPF savings in various instruments.

Alternatively, a variety of insurance policies can offer customers a choice to get extra protection and coverage. The insurance industry keeps the customers in mind, and it is evolving to stay relevant. According to Stephen Chew, principal consultant of Summit Planners, “Insurance used to be sold by tied agents. Today, the FA [Financial Advisers] firms provide options to the clients through the distribution of products offered by different insurers. The manner in which insurance are being sold will change over the years. Fintech will be the main mover to speed up the change in the future.”

The other option is to invest in equities, bonds and other financial derivatives. They carry the highest risk and provide flexibility. But, there are no guarantees of returns. Those with larger risk appetites or greater financial knowledge may choose to maintain a diversified portfolio.
CPF must continuously evolve to meet the citizens’ retirement needs

The locals usually perceived CPF contributions as a loss or a property-financing tool rather than a retirement tool. This represents the diverging perceptions on CPF’s basic ambit.

Last year, there were calls for Singapore’s S$293.9 billion (US$215.3 billion) Central Provident Fund to undergo modest reforms on members’ investment options. The intention was to bolster retirement security. Now, the current proposed change in CPF act discusses the transfer of personal CPF savings to parents and grandparents. CPF Lifetime Retirement Investment Scheme (LRIS) is also in the midst of simplification.

In 2016, there was a 7.6% drop in CPF withdrawals used for investment schemes. The current value stands at S$1.5 billion (US$1.1 billion). Similarly, the number of CPF Investment Scheme – Ordinary Account (CPFIS-OA) investors who had investments during the reporting period decreased by 2.7% to about 567,000 in FY2016. The figures suggest the unattractiveness of CPFIS to both the new investors and current investors. Mere reduction in fees, simplification of investment choices and mechanisms to promote longer-term investment will not help all of its investors beat the risk-free 2.5% returns.

Is CPF progressing in the right direction?  Stephen said, “It depends on the purpose of CPF Board. In my view, CPF should now focus on how to grow the retirement fund of the individual. Perhaps, if CPF is being used for housing, any profit arising from the sale of property should go into the CPF account. CPF money should be allowed to use only for public housing. This will allow more cash to be built in the CPF account for retirement.”

A further restriction on property type will help limit the outflow of CPF savings. Back in 2006, CPF dropped their Non-Residential Properties Scheme, which allowed properties purchase for investment or personal use. Currently, the usable amount of CPF savings varies with the type of property and loan chosen. If CPF wants the citizens to keep their money inside the three different savings accounts, it needs to first prove its capability in generating greater returns and interest for its users.

A comparison of CPF against its peers

When compared to Malaysia’s Employee Provident Fund (EPF), Australia’s MySuper and United Kingdom’s Pension pot and Annuity, CPF’s multifunctional withdrawals stand out. Due to differences in policies, not all criteria are comparable.

Malaysia’s EPF is more straightforward, with lesser account categorisation than Singapore. CPF’s returns could generally be lower. Whereas the Australian and United Kingdom citizens bear large self-accountability and control over the rewards they earn.

Sources: CPF, EPF, MySuper, United Kingdom’s Pension pot and Annuity

At the end of the day, a ‘one size fits all’ policy remains as an ideal for the governments trying to ensure retirement adequacy. What worked in Australia may not work in Singapore, due to cultural and legislative differences. In Singapore, CPFIS’ fluctuation in returns and constant revision in CPF Life payout erode retirees’ confidence in CPF. Unlike the past, Singaporeans today may be better off diversifying their retirement nest in the long run.