Distinguished guests,

Ladies and gentlemen

Introduction

1.                 I am very happy to join you tonight to celebrate your 50^th Anniversary. 

Cornerstone of Singapore’s Social Security

2.                 For 50 years, the CPF has helped Singaporeans to save for a secure retirement.  Established in 1955, the CPF started as a simple compulsory savings scheme for workers.  Back then wages were low, and the scheme started modestly.  Workers set aside 5% of their monthly wages into their CPF accounts; their employers contributed a matching 5%.  It was a small but significant step towards saving for the future.

3.                 Over time, we built up the CPF to what it is today – a comprehensive savings scheme fully-funded by contributions from both workers and employers, which provides the three core elements of financial security: retirement, home ownership and healthcare.  The CPF has enabled every working member to put aside a prudent amount for his retirement needs.  It has made Singapore a nation of home owners, and given everyone a stake in our country’s well-being.  And the CPF-funded medical schemes – Medisave and MediShield – are key components of our 3M framework for providing high quality medical care to all Singaporeans. 

4.                 The CPF model has many strengths, especially compared to pension schemes in the developed countries.  In the US, for example, the Social Security system faces a serious long-term funding gap.  In Europe, the state-run pensions are in financial difficulties, which will only get worse with a shrinking workforce and a rapidly ageing population.  A major cause of their problems is that these are defined-benefit, pay-as-you-go schemes, in which the current generation of workers pays for the pension needs of the previous generation through taxes. In contrast, our CPF system is a defined-contribution, fully funded scheme, based on each individual saving for his own future needs.

5.                 Many countries admire our CPF model, and wish they could somehow reform their pension systems to become more like ours.  But this is politically very difficult to do. The most that is feasible is to make some adjustments to the existing pay-as-you-go state pensions, and begin to build up a new scheme based on savings like the CPF. This is what Australia and Sweden have done, and what in the US President George Bush is also trying to do with his Social Security reforms.

6.                 Nevertheless, our CPF system is not perfect, and needs to be continually improved and adapted as our needs and circumstances change.  Thus, in 2002 and 2003, as part of the Economic Review Committee exercise, we carried out a fundamental review of the CPF, and decided on several major changes to the scheme.  We revised the long-term contribution target from 40% to a flexible target of between 30% and 36%, to make our workers more competitive in a new globalised environment.  We adjusted the balance between housing and cash, to ensure that members did not over-invest in housing, at the expense of their cash savings.  We are also raising the Minimum Sum progressively to $120,000 (in 2003 dollars), to help members meet their retirement needs. 

7.                 These changes brought the CPF scheme up to date, and put CPF members in a stronger position to meet their future needs.

Future Directions

8.                 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.

9.                 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.   

10.             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.  

11.             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. 

12.             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. 

13.             A bolder but more promising approach is to design an opt-out scheme – 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.

14.             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.

15.             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. 

16.             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.

Conclusion

17.             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.  

18.             But there is a minority of workers who have little CPF savings, because they are self-employed or work in the informal sector doing odd jobs. They miss the protection of this comprehensive social security mechanism.  This is why we strongly encourage the self-employed to contribute to their CPF, especially their Medisave accounts, to provide for their retirement and medical needs. 

19.             As we move forward, the CPF Board will need to strengthen its regulatory and financial management capabilities to achieve its mission of ensuring a secure retirement for all Singaporeans.  I am confident that the Board will rise to this challenge and build an even better and more robust CPF system for the future.  Over the last 50 years, the Board has managed the growth in the CPF scheme and implemented successive changes in the CPF policies.  I thank all the Board directors and officers in the Board, past and present, for your dedicated service.  Your efforts have contributed to the success of the CPF and provided financial security to millions of Singaporeans. I wish you all a happy 50^th Anniversary.