IPS forum on CPF: Something light and something dark (purple).

I have been doing quite a bit of heavy duty blogging on the "IPS forum on CPF and retirement adequacy" and I am glad I decided to focus on the 8 expert speakers at the two panel discussions because there is not enough coverage provided by the media.

If you would like to read what was reported in the media, here are links to ChannelNewsAsia's reports:

When the CPF system was introduced in 1955, the retirement age was 55. Life expectancy then, was between 60 and 62. Today, for those turning 65, one in two will live beyond 85, and one in three will live beyond 90. 

"What happens if you are that one in three? What happens if you are that one in two?,” said Mr Tan. “So when we talk about shifting goal posts, I would say it is actually not about shifting goal posts. I think the game has changed, it is the same game but the rules have changed. The playing pitch has enlarged in very significant ways, the game is played slightly differently."

The Minimum Sum provides for a basic level of retirement payout. As people live longer, the Minimum Sum goes up too, to ensure adequate payouts. Currently, the Minimum Sum stands at S$155,000, after adjusting for inflation, for those who turn 55 in July. How the sum will be calculated beyond that is being reviewed.

Source: ChannelNewsAsia




Speaking at a forum on CPF and Retirement Adequacy organised by the Institute of Policy Studies on Tuesday (July 22), Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said options like private pension plans have to be studied carefully and it is important that people understand the risks involved.

Mr Tharman said the CPF system has served Singaporeans well, and it will keep evolving to meet their changing needs. However, even as improvements are being made, it is important to keep the basic strengths of the CPF system, he added. These strengths include giving a fair return to ordinary CPF members, without exposing them to financial risks they cannot carry.

For those who can stomach higher risks, he said he agreed that the Government should study how to provide options so that they can try to earn higher returns than what is currently provided under the CPF investment scheme.

Source: ChannelNewsAsia




Anyway, enough of heavy duty blogging for now. Here is something light to give my brain a break.

Photos of lunch at the forum:

Garden salad.

Chicken, carrots, cucumber and potato.

Fruits and some French sounding dessert.

Everyone had the same 3 course lunch and I hope Roy enjoyed the lunch treat as well.

Roy?

Which Roy?

This Roy:

Roy Ngerng at the forum.

I saw him during the coffee breaks but the face did not register until he stood up, identified himself before putting questions to DPM in the afternoon.

Till now, I still think his current situation could have been avoided. Seriously. 

Many have questioned the CPF system before. Many have criticised the CPF system before. However, not many, if any, were foolish enough to defame the Prime Minister in the process.

Still, I wish him the best of luck and I hope he does not do anything foolish again.




Related posts:
1. "Return our CPF" protest in Hong Lim Park.
2. "Return our CPF" protest? Why not a contest?
3. We can manage our money better than CPF can.

IPS forum on CPF: Improving the CPF system.

The final speaker in the afternoon session's panel discussion was Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy. He tried to suggest ways in which the CPF could help to meet not only the basic retirement needs of Singaporeans but to maintain their current lifestyles at retirement.

Prof Hui said that in order for people to maintain their current lifestyles at retirement, they would have to have a retirement income that has an IRR (income replacement rate) of 60 to 80%. 

He shared that the CPF provides a higher IRR for lower income groups than it does for people who command higher salaries, typically, of more than $5000 a month due to a contribution cap set by the government. 

In his opinion, this cap should be raised and CPF members should be allowed to contribute more to their CPF accounts if they want to.

I feel that Prof Hui missed the point that the CPF is primarily meant to cater to the needs of lower income Singaporeans. This is the reason for the extra 1% of interest paid only on the first $20K in our CPF-OA and the first $40K in our CPF-SA. 

If we are financially more capable, we will have to find ways to make more money for our retirement years ourselves. We shouldn't burden the system.

I also wonder if there is a need to maintain pre-retirement lifestyle at retirement. Is an IRR of 60 to 80% really necessary? Could we not lead a simpler life during retirement? In my case, although  some would argue that I already have a simple life, I could give up my little car when I retire, for example.



With the purchase of housing, the IRR falls naturally.
I feel that monetisation is a solution in funding retirements for some.

It is difficult to have our cake and eat it too. Although Prof Hui does not seem to like the idea of monetisation of our homes as an option for retirement funding, we have to be pragmatic. 

Prof Cherian said that the Americans are quite pragmatic when it comes to downsizing their homes if there is a need and why shouldn't Singaporeans be pragmatic too?

Prof Hui made a point about raising the CPF withdrawal age for younger workers who are likely to live a longer life on average. I do agree with this as life expectancy increases some 2 to 3 years every decade. This helps to address the issue of increasing longevity and keeping CPF retirement payouts more sustainable.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Young working Singaporeans, you are OK.
3. Why a wealthy nation cannot afford to retire?

IPS forum on CPF: The CPF-IS and its alternatives.

The afternoon's third speaker was Mr. Alfred Chia whose job was to talk about the CPF-IS. 

He had to walk carefully through his presentation because people could feel that he had vested interests to protect if he was not objective enough. 

To his credit, I think he did quite well in toeing the line.

Mr. Chia said that whenever the CPF Board liberalised rules to allow members to use their CPF funds for investments, it would be the insurance companies and banks who got very excited. Their motivation is to make money from fees, after all. 

Plenty of products would be pushed out then to entice CPF members. Unfortunately, these have happened more often than not during market peaks.

Click to enlarge.

Anyway, very unfortunately, 85% of CPF members have lost money under the CPF-IS. 

This is due to a cocktail of factors but such a high percentage could be reduced if CPF members are better educated on things investment.

Mr. Chia also talked about Dollar Cost Averaging and how, for the average guy, this could be the best way to go. Of course, this should not be a new concept for regular readers.

I believe that sales people will always be sales people. They have to sell things to make money for themselves. 

We have to take on the responsibility of deciding for ourselves if a financial product makes sense at all. So, increasing our financial literacy, like it or not, is important in our society.

Personally, I have always said that the CPF pays risk free rates of 2.5% to 5% per annum. Unless a certain investment product is able to do better, it is better to leave our CPF money where it is. 

Indeed, I find the risk free rates in the CPF-SA so attractive that I would encourage anyone to do Minimum Sum Top Ups if they are allowed to. Of course, they would enjoy income tax relief at the same time.




"We can never be too sure about our investments and how they will do. However, the CPF gives us a measure of certainty which we need in our golden years. So, it is a good tool in retirement planning and we should make good use of it." AK, 24 March 2014 in Securing risk free returns early for retirement.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Dollar Cost Averaging and expected returns.
3. Nobody cares more about our money than we do.
4. Double your income, not your income tax.

IPS forum on CPF: Balancing returns, risks, facts and fallacies.

The second speaker in the afternoon session was Professor Joseph Cherian who is the Practice Professor of Finance and Director at the Centre for Asset Management Research and Investments in NUS.

Prof Cherian listed three fundamental concerns about retirement funding:

1. That retirees receive a reasonable level of payout every month.

2. That the payouts should last for as long as one lives.

3. That the payouts should be indexed to inflation.

This is where the CPF Life comes in and although it promises to give a monthly payout for life, the payout is not indexed to inflation. So, for the same person, $1,000 at age 65 is probably very different from $1,000 at age 75, for example. This is a very good point.

He went on to share some myths surrounding the CPF and inflation in Singapore. His slides are very good and I will share them here:



Click to enlarge.

Prof Cherian also raised the point about how the private sector should not be allowed into the reverse mortgage business of HDB flats because they are only interested in charging exhorbitant rates like what happened in the USA. This should be the government's responsibility.

Lastly, some might remember that in my open letter to the Prime Minister, I said that not enough has been done to communicate issues regarding the CPF clearly to Singaporeans. Prof Cherian said that we have to keep the messages simple and that we should conduct communication programs on retirement and the importance of the CPF. I agree wholeheartedly.

See slides: here.
(I highly recommend that you go through Prof Cherian's slides which are very detailed and also entertaining.)

Related posts:
1. AK attended forum on CPF.
2. An(other) open letter to the PM.
3. We do better managing our savings than the CPF does.

IPS forum on CPF: International retirement income systems.

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.

IPS forum on CPF: Behavioural perspectives on the CPF.

The morning session's last speaker was Mr. Donald Low who is an Associate Dean and Senior Fellow at Lee Kuan Yew School of Public Policy. Mr. Low's training is in Behavioural Economics and something he said confirmed a suspicion of mine which is, left to their own devices, most people will not save for their retirement. When it comes to saving for retirement, there has to be a degree of compulsion as a vast majority will give in to present day wants and prefer immediate gratification.

Mr. Low also said that people overestimate their own abilities and are often overly optimistic. He feels that lump sum withdrawals increase the risk of monetary loss and that an annuity payment like the CPF Life is better.

He said many things about the genesis of the CPF and the huge political loss of 1984 and why raising of the withdrawal age (from age 55) was never mentioned again, why this led to the minimum sum being formed and how it is in effect a backdoor to the raising of the withdrawal age.

Two things Mr. Low said which I feel should be considered and, in fact, implemented:

1. People are definitely living longer. Why should not the withdrawal age be raised? Raise it not for everyone but for future cohorts of workers. Make the process automatic and transparent. So, for example, in every 3 years, increase the withdrawal age by 1 year for the next cohort of workers.

Life expectancy improves 2 or 3 years in every decade. Peg the withdrawal age to life expectancy. I think this makes a whole lot of sense.

2. What the government should also do is to help people better visualise what it is like to age. People tend to think that they are invulnerable when they are younger. If we can help them visualise what it is like to be much older with all the implications, they could become more pro-active in retirement planning. This gels with my idea that more could be done to educate Singaporeans on retirement planning and how the CPF should be a cornerstone of their efforts.

People sometimes wonder why I do not maximise returns by investing all the CPF-OA I am allowed to invest with. In fact, to some, they are puzzled why I am contented to receive 2.5% per annum in interest rate.

My usual explanation is that I do not know everything but I do know that the CPF-OA pays me a risk free rate and because the interest paid is not withdrawn, 2.5% per annum compounded becomes a rather powerful force.

As Mr. Low pointed out, people are usually over-confident of their abilities and the more educated they are, the more optimistic they are. They will take more risk.

Perhaps, my approach of staying invested for income but always having a war chest ready (and I have said before that my CPF-OA money is one such war chest) shows that I am a little less confident of my own abilities.

Aiyoh, who threw a shoe at me? Who? Who?

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. We do better managing our savings than the CPF does.

IPS forum on CPF: Housing and the CPF.

The next speaker was Associate Professor Lum Sau Kim who is the Director of Graduate Programmes in the Department of Real Estate in NUS.

She spoke about what I would call the love affair Singaporeans have with real estate. Housing takes a big chunk of our CPF money. It is the dominant use of our CPF money, she said. 

Many would completely exhaust their CPF money for housing. Many people actually leverage as much as possible and buy the biggest homes possible.

Prof Lum said that, in effect, many are using housing as their pension funds and this is, in part, due to the lack of alternative investment vehicles. AK feels that this phenomenon can also be described as an overconsumption in housing and regular readers will remember that this is something I blog about often. 

People mistakenly think that their homes are investments when they are in reality consumption items unless they decide to rent out a room or two if they have spare rooms.

Prof Lum also made a good point on how due to Singapore's demographics, demand will not support higher prices of housing in future. Bigger flats will go down in prices faster than smaller flats as seniors downsize their homes, monetizing their bigger flats.

"Managing house price expectations is key. Otherwise, as we hit various demographic bumps, there may be clustering or cohort effects where the simultaneous rebalancing of household portfolios induces new shocks to the system, for instance in asset sales." Prof Lum.

We should also remember that with 99 years leases as the norm, as properties age and have less than 60 years left to their leases, it becomes harder for buyers to get financing. 

So, prices of such older properties could also suffer declines when the time comes. What the sellers are doing are selling the tail end of the leasehold.



Click to enlarge.

Interesting? I believe that this was something I cautioned readers about before on the buying of HDB flats with relatively shorter leases left.

In conclusion, please be prudent in the purchase of our homes. Do not over-consume thinking that housing prices will only go up and never go down. 

Housing prices and rentals are volatile and thinking of our homes as our future pension funds could be a bad idea.

See slides: here.

Related posts:
1. AK attended forum on CPF.
2. Buying an apartment: Considerations.
3. Don't think and grow rich.
4. Never lose money in real estate?

IPS forum on CPF: Future needs and wants of seniors.

The next speaker was Associate Professor Tan Ern Ser from the Department of Sociology in NUS. His presentation looked at three categories of seniors aged 55-65, 65-74 and those 75 and older.

In general, younger seniors as well as male seniors do better in having CPF savings. More older seniors receive retirement funding from their children compared to the younger seniors. 

This, to me, shows that the CPF has become a more important part of retirement funding for Singaporeans and will continue to be so for younger generations, basic safety net though it may be.

Prof Tan also revealed that despite some worries, most of our seniors have seemingly been prudent with the CPF money they withdrew. See table below:

Usage of withdrawn CPF money.

Frankly, if I were to withdraw my CPF money just to plonk almost half of it in a savings account, I would rather leave it in the CPF to earn 4% per annum in interest. 

Of course, this could change in future. Who knows? By the time I reach 55 years of age, fixed deposits in the banks here could attract interest payments of more than 5% per annum.

What I also found interesting is in the next slide:

Prof Tan asked whether good relationships with children lead to financial adequacy for the seniors or does financial adequacy of the seniors affect their relationships with their children? 

Well, I think that if the reliance on children should be an important part of some people's retirement planning, then, this could be an interesting question to ponder.

OK, who threw a shoe at me? Who? Who?

See slides: here.

Related posts:
1. AK attended a forum on CPF.
2. What is our attitude towards having children?

IPS forum on CPF: The Future Retirement Landscape.

The first speaker at the forum was Associate Professor Kalyani Mehta who is the head of the Gerontology Programme in the School of Human Development and Social Services at SIM University. In case you are wondering, Gerontology is the study of social, psychological and biological aspects of ageing. Big word, I know.

The main take away for me here is how people are living longer but they are not necessarily healthier. So, we have longer life expectancy (LE) today but what is also important to note is healthy life expectancy (HALE) and this might not match up. Take a look at the slide below:

So, on average, a male would be unhealthy (i.e. needing medical and maybe even palliative care) for 6.6 years while a female would be so for 6.8 years before saying good-bye to this world.

There will also be a growing number of aged who are single or divorced. They could be childless. So, there would be more elderly who stay alone in future.

We always say that family is the first line of defence but for these elderly people, the State will have to take a more active role in providing the necessary care.

What do I think?

Well, it is true that life expectancy has risen as nutrition and hygiene standards improved over time. Medical science has also improved. These factors help to promote longevity.

So, as people live longer, they will need more money for a longer time and healthcare costs will be a big burden if they are not well prepared. I like how our government has come up with Medishield Life to provide coverage for all Singaporeans for life, including those with pre-existing medical conditions. That is fantastic and I can't wait for it to be implemented because it will help people like my father who has pre-existing medical conditions and is almost 70 years old.

More importantly, we have to accept the fact that there will be more elderly people who are without children in future and if they happen to be financially disadvantaged at the same time, how can the government help them to meet their needs in their old age?

The CPF is a system that rewards employees. For those who were not gainfully employed for most of their lives for various reasons, what then? For these people, the CPF will not figure largely in their retirement plans, if at all. Those in such a situation who did not plan for retirement at all would be in dire straits.

The CPF is a system that help people who are able and willing to help themselves.

See slides: here.

Related post:
AK attended forum on CPF.

AK attended a forum on CPF and Retirement Adequacy with Mr. Tan Chuan Jin and Mr. Tharman Shanmugaratnam.

This really came as quite a surprise:

It took me a while to decide on whether I  should attend the event or not because of privacy considerations. Then, when I was talking to my younger sister about it, she told me quite bluntly that the media won't be interested in a certain obscure blog run by a certain obscure AK. They would be zooming in on the ministers! OK, that made up my mind for me.

So, I took a day leave from work and went for the event to see and hear for myself discussions regarding the CPF by probably some of our country's more brilliant thinkers. Issues regarding the CPF and retirement adequacy interest this frog in a well and it is really a privilege for me to be at the forum.

It has been a long day and I am feeling mentally and physically exhausted. Mentally exhausted because I had to process so much information in such a short time. I have not felt so taxed since my undergraduate days! Physically exhausted from sitting down for a whole day? Yup, I also walked from the Shangri-La Hotel to Orchard MRT station. I am so out of shape, I know.

I will try to share more in detail on what was discussed today at the forum in the coming days. I will also share some of my thoughts then.

For this blog post, I am just going to share some photos as well as an outline of the topics discussed.

Here are some photos:



Kiasu AK was quite early so that he could choose a good seat.

Panel discussion in the morning:
Meeting current and future needs and aspirations of Singaporeans.

Minister for Manpower, Mr. Tan Chuan-Jin.



Panel discussion in the afternoon:
Achieving the desired outcomes in a sustainable way.

DPM and Minister for Finance,
Mr. Tharman Shanmugaratnam.

Here is an outline of the issues discussed:

1. Future retirement landscape: Key influencing health and social trends.

2. Future needs and wants of seniors.

3. Housing and the CPF system.

4. Behavioural perspectives of the CPF system.

5. International retirement income systems.

6. Balancing returns, risks, facts and fallacies.

7. Analysing the CPF-IS and its alternatives.

8. Improving the CPF system.

From these 8 titles alone, I think you can guess that my brain had a fulfilling day. Now, some time is needed for digestion.

Related posts:
1. An(other) open letter to the Prime Minister.
2. E-books: Thoughts on financial security for Singaporeans.