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Outline of Opening Remarks by Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam at IPS Forum on CPF And Retirement Adequacy

22 Jul 2014

1. Our CPF system has served Singaporeans well. It has done this by evolving over the years, so that it responds to the needs of each generation of Singaporeans.

2. It never was a perfect scheme but, together with our HDB policies, it is regarded as one of the better retirement schemes around the world. We have to keep evolving it, and we will, to ensure that it continues to serve Singaporeans well.

3. The changes have been significant over the years.

a. In the first phase of the CPF, when Singapore was a developing country, people were largely poor and home ownership was limited, CPF was a simple scheme.

i. It reflected the times.

ii. In substance, it worked like a savings scheme for home ownership, rather than a scheme for retirement income. Most of a member’s CPF money could be withdrawn for housing. There was no Special, Retirement of Medisave account aimed at meeting spending needs in old age. Savings could be withdrawn at 55, with no requirement to ensure a stream of income for basic spending through life.

iii. Over 90% of elderly Singaporeans own their homes.

iv. Unlike many other countries, ordinary workers including lower income Singaporeans, not just the middle class or higher income group, benefited from owning a housing asset. They need not use retirement savings to pay for rentals, and most in fact have substantial assets.

v. However, many Singaporeans in that older generation are asset rich and cash poor. We will help them get cash out of their homes. Some of today’s speakers have suggested ways of doing this. There are ways, and we are studying this very seriously.

b. In the second phase, starting around the mid-1990s, we began rebalancing the CPF system. 

i. The later generations enjoyed considerably higher incomes.

ii. Improvements were made to the CPF system to boost cash savings for retirement. The Special, Medisave and Retirement Accounts were put in place; we gradually introduced limits to the amount of CPF savings that can be withdrawn for housing; and the Minimum Sum Scheme was implemented.

iii.  We raised the interest rates on the Special/Retirement Account. We also introduced the extra 1% interest on the first $60,000 of CPF balances to benefit the lower and middle-income groups.  Most CPF members hence earn 5% on the SMRA today, and 3.5% on the OA -  well above market rates for comparable financial instruments.

iv. The CPF system has hence developed features that will provide for significantly better incomes in retirement.

v. But it retains a significant and unique feature -  it still enables homeownership for most Singaporeans.  The OA scheme, coupled with a substantial increase in Government grants for the lower and middle income group to own their homes, enables widespread home ownership. Most countries look at that as a strength.

vi. We also enhanced Government subsidies for CPF members, through the Budget.  Besides larger housing grants, we now provide a regular top-up of lower income Singaporeans’ savings through Workfare.

• These subsidies amount to a significant boost to what a typical low-income member earns on his balances[1] . For example, on top of the 3.5% interest rate on his OA, the Workfare payments and housing grants he gets (amortised over his working life) will in effect grow his savings by at least 2.5% per year over a 30-40 year working life. In effect, his savings ‘earn’ 6% per annum through the combination of CPF interest rates and Government subsidies.

•  This does not include the OA savings he uses to purchase his home, which benefits separately from appreciation in asset value.

• It also does not include the support we are providing for medical needs, which are another important objective of the CPF. We are helping Medisave monies go further.  We are providing members of the Pioneer Generation annual top-ups to their Medisave.  And we will be proving large subsidies to lower and middle-income Singaporeans to pay for MediShield-Life premiums.

4. The CPF today, combined with Government subsidies that are targeted at lower and middle income CPF members, provides a solid foundation for the future. 

5. We will continue to evolve the system, so that it adapts to new needs. As PM has said, we want to provide greater security in retirement, especially for lower-income Singaporeans. We want to help retirees meet their basic needs even as costs go up over time. And we want to help the current generation of older folk to unlock the value in their homes. This includes helping those who prefer to stay in their current homes, to get cash from their homes.

6. But as we make improvements to the CPF, we must keep its basic strengths - basic strengths that will serve Singaporeans well today and tomorrow.  

i. We must give a fair return to ordinary CPF members, without exposing them to financial risks that they cannot carry.

ii. And we must keep the CPF system sustainable for the long term. We must continue to subsidise CPF members, but we should do so through the Government Budget.

• That’s critical for sustainability. Under our Constitutional rules, the Government has to run a balanced budget over time. We must continue to avoid what has been seen in many countries, where ordinary tax-payers will face a higher tax burden in future because of unsustainable social security systems.

7. The risk faced by ordinary working people must be a key consideration for any social security system. The CPF does not provide the highest returns in the world, but it provides fair returns and is certainly one of the safest for its members.

i. Few systems offer the guaranteed floors on interest rates that we do – in effect 3.5% for OA and currently 5% on SMRA for the majority, and up to 1% less for those with larger balances.

8. I agree that we should study how to provide better options for members who are able to take higher risks, so that they can try and earn higher returns - better options than currently provided for under the CPFIS. We previously studied enabling members to use their CPF monies to invest in private pension plans, and this remains an option for the future.

9. In 2007, when we last reviewed this, we decided not to go ahead as yet. This was because most members had low balances, and could not absorb investment risks. Our main focus then was to introduce good, sustainable interest rates on the SMRA and provide extra interest to help those who did not have larger balances.

10. However, we have to study any new options carefully, take in views, and ensure people understand the risks. Private pension plans will not be a walk in the park.

a. In principle, you should expect to earn higher returns over the long term by investing more in riskier plans.

b. In practice, you can go through long periods -  5 years, even 10 to 15 years, without seeing higher returns. The markets move in cycles, and often these are long cycles.

i. The experience of Hong Kong’s Mandatory Provident Fund (MPF) illustrates this. It is effectively a scheme where members choose a pension plan, and can take more risk in the hope of higher returns.

ii. Since its inception at the end of 2000, the MPF in total has had a rate of return of 4%, in nominal HK dollars.

iii. That is in fact about the same as what CPF monies in aggregate have earned, and lower than what was earned on SMRA monies in Singapore dollars. This is despite the Singapore dollar having strengthened significantly over the period, which means the same foreign currency returns translate into less Singapore dollars. 

iv. Even for the most aggressive fund type of the Hong Kong MPF – the HK MPF Equity Fund – the returns were 4.5% since inception. 

v. It doesn’t mean these are ill conceived funds. In principle, in the long term, you should expect to earn higher returns for higher risks. But you can go through long periods where higher returns do not materialise. That is the basic lesson from the evidence on market cycles.

vi. And what of the future? Investment professionals know that the global market landscape has changed. Low bond yields and weaker growth prospects in the major economies have made it challenging period for funds with traditional balanced portfolios. For example, a simple, ‘60:40’ global fund -  i.e 60% invested in global equities and 40% in global bonds, is now estimated to earn just 4% pa in nominal US$ terms over  the next 10 years [2]. That’s before conversion into Singapore dollars.

vii. The main challenge will be for private pension plans to offer a realistic chance of achieving better returns than the CPF SA rate. They have to compete with guaranteed 4-5% returns on the SA; members are allowed to shift monies from their OA to their SA accounts to earn these returns.



[1] The calculations refer to a Singaporean at the 10th percentile of the income ladder.

[2] Projections by Bridgewater Associates, an investment company that manages US$150 billion in global investments.