WITH a proposal for a new low-fuss, low-cost investment scheme, the CPF Advisory Panel is hoping to finally solve the long-standing problem of under-utilised investible funds languishing untouched in retirement accounts.
The Singapore government has accepted that recommendation, as well as proposals by the panel to also offer an escalating payout plan for the CPF Life annuity scheme, to review the CPF Investment Scheme (CPFIS) and to educate the public on the new options.
Under the new recommendations, CPF members will be able to invest part of their retirement savings into what is envisaged to be a limited offering of passively managed funds through a single administrator. Dubbed the Lifetime Retirement Investment Scheme (LRIS), the structure is aimed at providing convenience and simplicity for investors at bare-bones costs through low-fuss products that could include life-cycle funds.
In order to address concerns about inflation and longevity, the panel is also recommending that the CPF Life scheme, which currently pays a fixed monthly amount to retirees for the rest of their lives, offer an escalating option. Under that option, investors will receive a lower starting payout, but the payout amount will increase by 2 per cent per year for the rest of the investor's life.
The panel also made recommendations to review the CPF Investment Scheme, and to educate the public on the LRIS.
Tan Chorh Chuan, who headed the panel, said that the review was guided by three principles: To achieve adequacy for members as life expectancy increases, to provide flexibility for members with different needs, and to maintain simplicity in a complex system.
In a statement, Minister of Manpower Lim Swee Say described the recommendations as "elegant in their simplicity and far-sighted", and said that the government agrees with the panel's views.
"These additional options will help address the concerns some Singaporeans may have with regards to the rising cost of living in retirement, and the desire for higher expected investment returns for those prepared to take on some investment risk," Mr Lim wrote.
The LRIS directly addresses one of the biggest long-standing issues surrounding the under-used CPF Investment Scheme (CPFIS), which allows CPF members to invest excess savings in retail funds. Official data shows that only S$25 billion of CPF savings were invested through CPFIS as at end 2015, compared to a further S$105 billion of funds that could be but are not invested through the CPFIS.
The panel found that the low utilisation was not for lack of interest. Some members who were interested in pursuing better returns, albeit at more risk, did not do so because of lack of time, resources or knowhow.
The LRIS aims to remove those barriers by offering only a small number of funds to keep choices simple. The funds offered could include life-cycle funds, which would free investors from having to actively balance their portfolios. By using a single administrator and pooling investments under the scheme, the panel also hoped to drive down costs in order to improve potential returns. A study by Mercer for the panel found that with just S$500 million invested, the scheme could potentially cut its annual fee to just 0.5 per cent.
The panel is recommending that a panel of experts be convened to iron out the details of the scheme, including which funds to include, the fee structure, and terms and conditions for re-allocations.
If the LRIS is implemented, it also raises the possibility for CPFIS to be tweaked.
For example, the number of choices under CPFIS could be reduced, and targeted at more sophisticated members, so that the funds being offered under CPFIS can enjoy better economies of scale and potentially offer lower fees.
"LRIS to me is a game changer for CPFIS investments," panel member and Providend chief executive Christopher Tan said.
The panel also sought to address concerns that payouts from CPF Life do not account for inflation because the current plans pay a fixed amount every month that will lose purchasing power over time.
The proposal is for an escalating payout option. In exchange for a lower starting payout, investors will subsequently receive payouts that increase by 2 per cent every year for the rest of their lives. At 2 per cent, the payouts will increase more than the 20- and 30-year average inflation rate of about 1.6 to 1.7 per cent. Over the 10 years to 2015, however, annual core inflation increased by 2 per cent while annual headline inflation increased by 2.6 per cent on average.
The panel estimated that the starting payout for the escalating option will be lower than the payout under the CPF Life's Standard plan by about 20 per cent. That would suggest that it would take about 23 to 25 years for the cumulative payouts from the escalating option to catch up with the returns from the fixed option, after which the escalating option would outperform.
The panel said that it decided against payouts that were more closely pegged to actual inflation rates, because that would create fluctuating monthly payouts and would be harder to sustain without an existing inflation-linked asset class in Singapore.
Addressing concerns that the escalating payout might not benefit cash-strapped members who could not accept lower payouts upfront, the panel noted constraints in making sure that the escalating option was neutral from an actuarial perspective. One of the key objectives was also to fundamentally provide another option for those who wanted the flexibility.
"We're not trying to find solutions that will help everybody. For the panel, we're providing more choices that will give CPF members more control over their retirement planning," Prof Tan said.
Implementation of the proposals will take place in stages, the Ministry of Manpower said.
NTUC assistant secretary-general Cham Hui Fong said: "The labour movement is happy that the government has accepted the CPF Advisory Panel's recommendations that are in line with our call to provide members with more options and flexibility in managing their CPF savings to better meet individuals' retirement needs.
"We urge the government to ensure that proper public education and advisory services are made available to all so that members can make informed choices which best meet their needs."