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IPS forum on CPF: International retirement income systems.

Thursday, July 24, 2014

The first speaker in the afternoon session's panel discussion was Ms. Wong Su-Yen who is the Chairman (Singapore) of Marsh & McLennan Companies. She did a comparative analysis of the best practices in retirement funding around the world.

I will not go into the details but there are 3 points I would note here:

1. The CPF, Singapore's "pension system" does not cover all adult Singaporeans. It is not universal. This is something which was mentioned in the morning session as well.

2. The dependence of the CPF on SSGS to generate returns means it does poorly in asset diversification. She suggested that people be given more flexibility to invest their CPF savings in the earlier years of their working life. This should taper off as they age.

Click to enlarge

3. There is a growing gap between the official retirement age and the life expectancy of Singaporeans. So, there is a question of sustainability of the current system if the official retirement age is not raised.

What do I think?

1. The fact that the CPF cannot be looked at as a relevant retirement planning tool for everyone is something that could have escaped some of us before. It could have simply lurked at the back of our minds. Although this is a problem for some, the CPF can never and should never be used to provide pension payments to all Singaporeans, including those who don't have money in their CPF accounts.

The CPF system is about encouraging people who are gainfully employed to take responsibility for their retirement needs and not someone else's. There has got to be some other measures for people who were unemployed for significant periods of their lives through no fault of their own.

2. The CPF generates risk free returns through the purchase of Special Singapore Government Securities (SSGS) which are basically bonds. This means that investment risk is transferred to the government and CPF members don't have to suffer any heart attacks when times are bad. The suggestion to allow younger Singaporeans to invest a larger portion of their CPF money themselves could, in my opinion, do more harm than good since the majority of Singaporeans actually lose money when they invest their CPF savings in riskier assets.

Conventional wisdom says to avoid concentration risks. However, Warren Buffett and Charlie Munger would say that if we know we have a good thing in hand, we should buy more! And what is a good thing? For most of us who are not financially savvy, the question must be why risk a risk free return of 2.5% to 5% per annum?

3. The growing gap between the official retirement age and the growing life expectancy of Singaporeans is a real worry. People still want to retire at 55 or 62 but, for most of them, their CPF funds will not last them till age 80. This is the reason for CPF Life. This is where there is a shift to risk pooling. Those who live longer get a better deal, so to speak. Those who don't, lose out.

So, taking everything into consideration, the CPF has done pretty well for its members. What we have to think about now, I believe, is to come up with another system to help those who are not able to benefit from the CPF system. The lack of universal coverage is a weakness in our country's "pension system".

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Retiring before 60 is not a dream.


AK71 said...

From my FB wall:


About CPF not covering homemakers, I think the govt's point is that, if you sacrifice employment to take care of kids, your kids should take care of you when they grow up. Hence, govt don't think its that much of a problem.


The CPF is for employees.
For a housewife, she is really at the mercy of her husband and children (if any). If they don't take care of her well into her old age, she is in trouble.

Dr. Kanwaljit Soin, a former NMP, was in the audience and suggested using 1% of the country's GDP to provide a state funded pension plan for seniors who were not able to benefit from the CPF system. I think this idea is worth considering but maybe 1% is too much. 0.5%, perhaps. ;p

Lizardo said...

Wonder where would the 1% come from? Some other Ministry's budget? Or from increase in tax?

AK71 said...

Hi Lizardo,

I guess the Minister of Finance will have to make an allowance for this in the annual budget. Which Ministry the funds go to and how should the funds be disbursed is for them to determine then. :)

pf said...

I think cpf should just remain simple. For employees. I think if society/govt think too much for their people, the people won't learn how to think for themselves. Like parents who are super protective often breeds sheltered kids.

AK71 said...

Hi pf,

Yes, our government is paternalistic and there are pros and cons, obviously.

How much is too paternalistic? That is another question people have debated about and will continue to do so.

I don't mind having a very good "father" who will take good care of me, honestly. I am so lazy. Aiyoh. Bad AK! Bad AK! -.-"

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