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CPF - Future Directions



An Excerpt

Going forward, we will have to evolve the CPF to adapt to the twin challenges of longer lifespans and smaller families, resulting in an ageing society and workforce.
By 2030, one in five Singaporeans will be at least 60 years old. With families getting smaller, we will have fewer children around to support us in our old age.
Part of the answer is to get workers to work longer and retire later. But another part is to ensure that Singaporeans have enough savings to continue enjoying financial security and good medical care throughout our lives.
Let me highlight two improvements to the CPF system to meet these challenges.
First, we must help CPF members to earn better long term returns on their savings. Over the years, we have opened up the CPF Investment Scheme (CPFIS) and given members considerable latitude to invest their CPF savings as they judge best.
However, this has not always worked out as well as we hoped, because the options available to the members are not well tailored to their needs, and it is difficult to educate members adequately on how to plan for their long term needs.
Almost three-quarters of the members who invested under CPFIS from 1993 to 2004 would have been better off leaving their savings with the Board. In particular, those who invested in unit trusts and investment-linked products (ILPs) have generally received mediocre returns.
One important reason why CPFIS returns have been mediocre is the high cost of investing. For example, the annual cost to investors in a retail unit trust in Singapore is typically double that of the US. This is because the market is fragmented, many of the unit trusts and ILPs are small, and the overheads and fees are high.
The CPF Board will therefore tighten the requirements of the CPFIS to lower cost ratios, enhance transparency to help members make informed choices, and encourage consolidation among the funds to achieve greater economies of scale.
Beyond fine-tuning the CPFIS scheme, the CPF Board needs to find a simple and convenient means to allow members to aggregate their CPF savings, and invest them in a portfolio which achieves better returns over the long term, and suits their life needs better. This means that the CPF Board has to play a more active role to guide members in their investment choices.
But members still have to make the ultimate decisions themselves, because higher returns come with higher risks, and members have to understand this tradeoff to make the right choice for themselves.
One option which we had considered was to make available privately-managed pension plans or PPPs, in which members can participate on a voluntary, opt-in basis.
But after extensive consultation with industry players, we concluded that an opt-in scheme would not work. It would lack sufficient scale, resulting again in high investment costs and poor returns. Hence we decided to defer this proposal and reconsider the issue more fundamentally.
A bolder but more promising approach is to design an opt-out scheme ¨C to offer a default pension plan which members will go onto unless they opt for something different.
The default plan should be optimised for the needs of a typical member, while the alternatives offered should include a range of plans, some offering better returns at higher risk, and others lower returns but less risk.
We are still studying this. It is not just a matter of designing the right scheme, but also educating people to understand the choices, and accept responsibility for the outcomes.
Second, we need to do more to help Singaporeans stretch their Minimum Sum to ensure financial security through their lives.
Presently, members at 62 can either leave their Minimum Sum with the CPF Board and receive payments for a fixed period of 20 years (which is the default option), or use their Minimum Sum to purchase an annuity which will make payments for the rest of the members¡¯ life.
But most Singa­poreans do not understand annuities, and in practice nearly all CPF members leave their monies with the Board in return for payments over a fixed period. For those who live longer than average, which a significant proportion will do, their savings may run out, leaving them with nothing to fall back on in old age.
The solution is for members to purchase life annuities, which provide a guaranteed income for life.
The CPF Board is developing programmes to teach CPF members about annuities, and encourage more members to take them up.
One way is to change the default option to annuities for all members upon retirement, unless the member specifically decides to opt out.
These ideas are being studied carefully, because they are issues for the longer term, with major implications for many members. We are mindful that any change to the CPF system must be made gradually, so as not to destabilise the system or disrupt the plans of Singaporeans approaching retirement.
This is why when we raised the Minimum Sum in 2003, we phased in the increase over 10 years. Similarly, when we are ready to update the CPF scheme, we will give ample lead time for Singaporeans to adjust.
The improvements to the CPF scheme will benefit all CPF members, which includes a large majority of Singaporeans. In particular, they will help the average worker who is not financially sophisticated, is saving about enough to meet his basic retirement needs, and will in old age depend on the CPF as a major source of support.

Full Text of Speech

Source: Media Release 25 Sep 2005


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26 September 2005