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.