Singapore
Puttering with pension
Exploring various options to increase CPF funds for retirees. Institutional Investor
June 7, 2002

So central is the Central Provident Fund to Singapore's economy that the Economic Review Committee set up to ensure the city-state's competitiveness is studying the S$91.2-billion ($50.6 billion) national pension system with an eye to reform.

That should elicit a guarded hooray from the CPF's 2.9 million long-suffering members.

The fund does not adequately cater to the retirement income needs of a rapidly aging society.

The proportion of the city-state's population over 65 is set to rise from 7.3 percent in 1999 to 18.9 percent by 2030.

And the fear is that unless strong remedial measures are taken, the CPF's failings could sap Singapore's vitality and competitiveness.

Based on a defined-contribution scheme to which workers must contribute 20 percent of their income each year and employers an additional 16 percent, the CPF has produced abysmal investment returns over the years.

The foremost private sector authority on the fund, Mukul Asher, head of the Public Policy Programme at the National University of Singapore, calculates that compound annual real returns on CPF investable balances averaged an anemic 1.83 percent between 1983 and 2000, at a time when Singapore's GDP was surging at about 8 percent a year. (The CPF doesn't publish numbers on investment returns.)

Why such dismal returns?

The vast majority of CPF funds must be invested in special floating-rate government bonds paying an average of the fixed-deposit and month-end flexible saving rates.

But even if the CPF had produced a somewhat more respectable investment return of 5 percent, the median Singapore family would still be S$17,395, or 41 percent, short of annual pension income, estimate analysts at ING Baring Securities (Singapore).

They base their calculation on a pension income equivalent to 50 percent of preretirement earnings.

Returns from CPF investments would have to rise to 8.1 percent per annum - or 5.6 percentage points above the 2.5 percent nominal interest rate currently offered on CPF accounts - for the median household to earn an adequate pension, according to ING figures.

Among the fund's shortcomings, says Singapore University's Asher, is "a lack of transparency and accountability, particularly in investment management." Indeed, the CPF is prevented by statute from disclosing its investment policies - even to Parliament.

Purely a pension scheme when it was founded in 1955, a decade before Singapore's independence, the CPF has taken on a grab-bag of functions: Participants can use their balances to buy public apartments as well as invest in mutual funds.

The fund also provides medical coverage for members, who may have as much as 22 percent of their contributions channeled into a Medisave account that can be used to pay hospital bills and some outpatient fees.

The government "is constantly unhappy with the CPF because it serves too many objectives," acknowledges Minister of Trade and Industry George Yeo. He expects the review commission to recommend "resimplifying" the CPF, but how remains to be decided.

Senior Minister of State for Trade and Education Tharman Shanmugaratnam, who heads the commission subcommittee looking into the fund, indicates that after examining defined contribution pension systems in Hong Kong and Chile that use private fund management firms, the commission may seek to "graft some more of the features of a private pension fund scheme onto the CPF system."

The CPF already allows participants to invest a part of their balances in mutual funds, stocks and annuities.

Currently, S$63.8 billion in balances that participants could be investing is idling in the fund's coffers.

It is this money, together with S$25 billion in funds already withdrawn by participants for investment, that the government would likely target for management in a private pension fund.

Asher would like to see the retirement portion of the fund taken away from the CPF Board and invested instead through a new asset management organisation.

It should have an explicit mandate of fiduciary responsibility, an internationally accepted governance structure, and practice transparency, accountability and full disclosure, he says.

Asher proposes that contributions of 10 to 15 percent of salaries be dedicated to the new retirement fund.

The CPF Board, meanwhile, should continue to look after public housing, health care and other social welfare schemes, he says.

Still, he's pessimistic about the prospects for significant reform. "The CPF has become an integral part of social-economic-political management in Singapore," he notes.

"There is, therefore, considerable resistance to any substantive changes."

Nevertheless, he says, the government recognises that its authority depends on fulfilling Singaporeans' material needs and that "it is by now apparent that the current pension arrangements are inadequate for providing financial security in old age."

Minister of Trade and Industry Yeo also emphasises that the CPF is integral to Singapore's economy.

By promoting home ownership, he points out, the fund gives Singaporeans a stake in the country and ties them to it.

"The CPF is deep in the machine," he cautions. "You can't just tinker with it by itself. If you tinker with it, you affect every other part of the machine."

Still, the CPF could use an overhaul.
--Institutional Investor, May 2002