You are here

Pension reforms can boost equity market, bridge wealth gap

Creating more structures and channels for Singapore's retail investors to access private markets as well as deploying CPF pension assets into equity markets can create social and economic benefits.

The hollowing out of Singapore’s securities market as more firms privatise will not only see the wealth gap grow as more capital is concentrated in private markets, but also a diminishment of wealth creation prospects for the broader public.

FUNDAMENTAL reforms to Singapore's pension system can serve to bridge income inequality as well as revive its public equities market. Continued lack of reforms will worsen the wealth gap and the retirement adequacy of its ageing population, as well as ability to sustain itself as a financial and commercial centre.

Singapore's equity markets are somewhat dysfunctional relative to international best practices - pension assets are not deployed to support local capital markets but often invested abroad via GIC. Through the 2010s, the equity sector has been plagued by illiquidity, and a wave of privatisation. This global phenomenon is reflected in the stock markets of mature economies - listings on the New York Stock Exchange (NYSE) more than halved over the past 20 years, while IPOs in London fell 20 per cent between 2003 and 2018 - and is rooted in the emergence of private capital as a compelling alternative worldwide.

The moribund equity market not only devalues Singapore's status as a financial hub and commercial centre, it also worsens the prospects for retail investors to access the wealth creation opportunities available in private markets and in Singapore's appeal as an enterprise financing hub.

The equity markets of Hong Kong, Sydney, Tokyo, Bangkok and New York highlight the crucial role of pension funds in supporting healthy domestic investor liquidity, as well as their key role in their capital markets. For instance, in Singapore, stocks and securities account for 9.6 per cent of household assets according to government data. Wharton Business School estimates that the equivalent percentage of equities in household assets stands at 10 per cent-15 per cent in emerging markets and 25 per cent-30 per cent in mature economies.

Market voices on:

Enabling greater access to the stock market for its pension system can drive greater investment returns and lift the market, in addition to potentially boosting the economy. Singapore's stock market can support robust equity growth. From 2009 to 2018 the compound annual inflation rate of the local economy was 1.76 per cent. That same period saw the Straits Times Index (STI) post annualised compound returns (accounting for dividend reinvestment and capital growth) of 9.2 per cent. Without reinvesting dividends, this yielded annualised returns of 5.7 per cent.

By and large, in the long run, the performance of stock markets outpace inflation. In the UK inflation averaged 3.1 per cent per annum from 2009 to 2018. The FTSE 100 Index, representing the top 100 companies on the London Stock Exchange (LSE) by market capitalisation, yielded compound returns of 8.3 per cent for the same period, with annualised returns of 4.3 per cent. Meanwhile, from 1957 to 2018, the S&P 500 posted average compound returns of ~8 per cent, despite market shocks in intervening years.

Nearer home, Hong Kong can leverage an ascendant Greater China market, pension assets of the Mandatory Provident Fund (MPF) and stock market links with the bourses of Shenzhen and Shanghai, as well as a retail investor pool estimated to range from 130 million to 200 million people. In Australia, Sydney's equity market enjoys similar support via its superannuation fund regime, with pension assets estimated at A$2.5 trillion (S$2.34 trillion) in 2018. One report suggests that Australia's pension funds will own more than half the share market by 2030.

A 2010 paper, The role of pension funds in capital market development by Meng, Channarith, and Pfau for the National Graduate Institute for Policy Studies in Japan, illustrated that pension assets have positive impacts on stock market depth and liquidity. They also enhance private bond market depth for countries with high levels of financial development, reinforcing the case for pension fund involvement in equity markets.

Singapore's CPF is structured to hold its retail wealth - valued at S$391.1 billion as at end-2018 - in a largely static state. Most Singaporean household wealth is invested in illiquid property assets; the adoption of more liquid investment accounts can permit greater support of the local equities market, as well as boost the potential for greater wealth generation nationwide.


Personalised investment accounts based on the Swedish model could help retail investors make greater use of a portion of their wealth. In 2012, Sweden introduced the Swedish investment savings account (Investeringssparkonto, ISK) for individual investors. With no maximum amount, investors can freely move funds and invest in cash (including foreign currency) and various financial instruments traded on a regulated market or multilateral trading facility.

Operating on the basis of an annual standardised tax rather than capital gains - capital losses can be offset in tax returns against income in the account - assets stored in the ISK are subject to the provisions of a corresponding deposit guarantee that reimburses capital and accrued interest up to a maximum amount equivalent to 100,000 euros (S$154,000) per person and per institution. From 2014 to 2016, enhanced ISK activity was linked to greater IPO activity in Sweden's equity market.

Integrating a similar model as part of the CPF Investment Scheme (CPFIS) can offer retail investors greater liquidity for a portion of their pension wealth. It can also provide a boost for local asset managers. Melding this with the trust management structures employed in the Australian and Hong Kong pension systems - where asset managers offer professionalised investment management - can permit retail investors greater choice and freedom in their investment options.

The scheme can also draw lessons from the Bangkok bourse in the form of two programmes - Long-Term Equity Funds (LTFs) and Retirement Mutual Funds (RMFs). LTFs encourage longer-term investing in Thai equities while RMFs spur people to save for retirement by providing tax benefits on savings. Subject to meeting fund requirements, capital from these accounts can also be withdrawn tax-free. A number of different LTFs and RMFS are managed by the various Thai asset management companies and distributed either directly or through affiliated bank branch networks.

Leveraging Singapore's financial technology infrastructure, such a scheme can be coupled with robo-advisers to automate management. Furthermore, riding on the strength of its business trust platform, Singapore can explore replicating the listed investment trust (LIT) structure present in the bourses of Sydney and London.

These close-ended vehicles enable exposure to a basket of underlying shares and asset classes (eg international shares, real estate, private equity) or specialist funds focused on specific sectoral themes. They pay out surplus income to investors via distributions like investment trusts, and their different strategies can lead to significant differentiation in investment techniques and operational characteristics.

Being close-ended, they offer investment managers and long-term investors a higher chance of performing well in dysfunctional and falling markets. Providing a fixed amount of capital to investment managers allows them to invest when markets are distressed or counter-cyclical, without concern about potential redemptions from investors.

In contrast, open-ended vehicles like exchange-traded funds (ETFs) can see capital contract as investors redeem or sell investments. This can happen at inopportune times - such as during a distressed market - and works against long-term investing.

State funds like Temasek and GIC get the chance to potentially expand their available capital, via the use of LITs to tap public equity markets in a transparent manner. To illustrate, they can easily underwrite a small part (eg 10 per cent to 15 per cent) of an LIT's fund corpus, while raising capital from foreign institutional investors (FIIs), other capital allocators and the investment public to various asset classes.

These LITs can target private equity or otherwise track indices in the FTSE ST Index Series, offering broad exposure to the overall market. The Astrea Private Equity Bonds issued by Azalea Asset Management, an affiliate of Temasek Holdings, already serve as a precedent of sorts, being backed by cash flows from a diverse portfolio of PE funds. The Astrea bonds offer yields with a relatively low risk, and offer a degree of liquidity via their listing on public markets.


Singapore requires pension system reforms, especially as it seeks to finance the needs of an ageing population. Moreover, its equity market has been plagued by criticisms of low valuations and poor trading liquidity.

Stock markets reflect to an extent the overall economy's growth prospects. Beyond facilitating access to financing for enterprises and entrepreneurs, as well as promoting employment growth - enterprises going public often increase employment by 45 per cent relative to private companies, according to venture fund Andreessen Horowitz - public equity market activity generates new revenue and expands the tax base. Research by Nasdaq Inc found that from 1970-2017, 92 per cent of job creation occurred after a company's public float.

An earlier opinion piece, Towards asset-based welfare policies (BT, 3 May 2019), illustrates how boosting equities ownership could yield social benefits, and is possibly the best way to stay ahead of inflation - historically, owners of equities earned a higher return than those with savings in bank deposits and other low-risk financial products. This is backed by research by Wharton Business School's Russell E Palmer Professor of Finance, Jeremy Siegel, whose findings highlighted that in the long run, equities beat the returns of corporate and government bonds, certificates of deposit (CDs), gold and cash.

But now, mature economies like the US, UK and Australia are following a trajectory where a two-tiered capital market structure has emerged, with most value appreciation accruing to institutional investors and wealthy individuals with access to private markets. Meanwhile, the retail investor base misses out on these wealth creation opportunities.

Microsoft and Amazon highlight the shift of wealth from public markets to private investors. Microsoft went public in March 1986 at a market cap of U$350 million; today it's valued at US$1 trillion, with public holdings enjoying a return of more than 1,365 times. Amazon went public in May 1997 with an initial market cap of estimated at US$440 million and is today valued around US$950 billion, with returns in excess of 1,100 times in the public markets. In contrast, Facebook debuted in public markets on May 2012 at around US$100 billion market cap, with a current value of over US$550 billion. The returns to public market investors are about 5.1 times.

Looking at developments internationally, the hollowing out of Singapore's securities market as more firms privatise will not only see the wealth gap grow as more capital is concentrated in private markets, but also a diminishment of wealth creation prospects for the broader public.

Creating more structures and channels for Singapore's retail investors to access private markets - much like the Astrea bonds - as well as the deployment of CPF pension assets into Singapore's equity markets can create social and economic benefits, serving to mitigate the wealth gap and boosting our equity market.

The writer is a partner at Silvercliff Capital.