Friday, September 30, 2005

CPF changes.

From Today online:

26 Sept 2005

New pension plan in works: PM

To help Singaporeans meet their financial needs during their golden years, the Government is studying plans for a new pension scheme, including the provision of life annuities, Prime Minister Lee Hsien Loong revealed last night.
"Life annuities, which provide a guaranteed income for life, is especially of benefit to those who live longer than average, which a significant proportion will do," said Mr Lee.
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.
Mr Lee, who was speaking at the CPF's 50th anniversary dinner, said: "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." However, the need to help Singaporeans earn better long-term returns on their savings is significant when seen against the relative lack of success of the CPF Investment Scheme (CPFIS).
Under this scheme, members were given considerable latitude to invest their CPF savings as they saw fit.
"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," said Mr Lee.
Almost three-quarters of the members who invested under CPFIS from 1993 to last year would have been better off leaving their savings with the Board.
In particular, those who invested in unit trusts and investment-linked products have generally received mediocre returns.
One reason for the poor returns is the high cost of investing.
A more fundamental approach to the issue was called for. A bolder but more promising approach is to design an opt-out scheme — to offer a default pension plan which members will go for 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.
Said Mr Lee: "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."
The Government also has to do more to help Singaporeans stretch their minimum sum to ensure financial security through their lives.
Currently, members at age 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 money with the Board in return for payments over a fixed period, said Mr Lee.
He stressed that 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," he said.
This is why when the minimum sum was raised in 2003, the increase was phased in over 10 years.
"Similarly, when we are ready to update the CPF scheme, we will give ample lead time for Singaporeans to adjust," said Mr Lee.

Finally our govt. has recognised that the CPF investment scheme is in a need of drastic revamp. Frankly, it is pretty appalling that 75% of the people who participated in the scheme are worse off than if they did not. Of course, one can argue that it is the people who made the choice on what to invest in and thus the govt. cannot be blamed for their loss.

However the fact is that when CPFIS was first launched in 1993, people were encouraged by the govt. to buy stocks from GLCs such as Singtel. I still remembered that then Prime Minister Goh Chok Tong had personally encouraged all Singaporeans to use their CPF to buy Singtel stocks. Given the legendary level of trust that Singaporeans had in our govt., that was exactly what many did. We all know what happened in the aftermath, the stock price of Singtel dropped to a level below the prices at which they were offered between 2001 and 2002 (possibly even longer). One of the reason for the drop, given by ex-SingTel chairman Koh Boon Hwee, is that Singtel stock was overpriced when launched. As a result of this, many people burned their fingers.

Thus our govt. must share some of the responsibility when it comes to the failure of CPFIS.

My personal opinion is that CPFIS should be abolished, given that most CPF members are not financially savvy. The CPF current ordinary account should be converted to an investment account and made the default plan as Mr Lee had suggested. The newly converted account must be capital guaranteed although there will be no promise on the level of returns. The CPF special account should remain intact to provide an alternative for people who are risk averse and purely wanted to save for old age.

GIC and/or Temasek Holdings can then manage the funds in the investment account, since these 2 govt. institutions always boast that they achieved a level of returns that are higher than the market rate. Furthermore since taxpayers fund them, it should not be any problem for them to set up an extra department to manage the money. In this arrangement CPF members won’t need to pay any commission for the fund management service provided, thus increasing the potential returns for them.

However given the trend of privatisation and the sensitive nature of GIC and Temasek Holdings (GIC and Temasek Holdings might come under pressure to open their accounts to public scrutiny if they are made to manage CPF money), the govt. might prefer to let private financial institutions managed the money instead. Similar capital garanteed investment plans are offered by various banks like UOB in Singapore, so it is nothing new to them. Given enough incentives or govt interventions, in the case of DBS, it can be done.

All that being said, I hope that the govt. can come up with an even better and more comprehensive plan to increase the returns of the CPF. However most importantly, whatever govt do, they MUST NOT increase the minimum sum and withdrawal age again!

For if this goes on, I scare I cannot live long enough to get my money back!


At 12:30 AM, June 26, 2009, Anonymous hey said...

in my opinion, CPF is useless.
abolish it and cut unnecessary lavish government spending and give out the distributions to the citizens of this nation

taking this system offline will also increase over competitiveness IMMEDIATELY!what does NWC has to say?

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At 2:42 PM, July 04, 2013, Anonymous Anonymous said...

well i guess the government should have a revise option for this..A much more understandable one to which simple people can relate too..
Like those that are being implemented in web hosting atlanta companies..


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