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CPF payouts and returns: Proposals focus on providing flexibility

The second set of recommendations from the CPF advisory panel focuses on providing more options and greater flexibility to CPF members with differing risk appetites and lifestyles.

The second set of recommendations from the CPF advisory panel focuses on providing more options and greater flexibility to CPF members with differing risk appetites and lifestyles.

SINGAPORE: An option of a CPF LIFE plan with escalating payouts, and an alternative private investment scheme for those prepared to take some risk for a higher expected return were new recommendations put forth by the CPF advisory panel on Wednesday (Aug 3).

The recommendations, which have been accepted by the Government, conclude almost two years of work by the panel, which was appointed by the Manpower Ministry in September 2014.

According to the panel, the second set of its recommendations focused on providing “an option for members who prefer CPF payouts that are initially lower but rise with time to help with increases in the cost of living”, and providing more flexibility for members who wish to take on higher risk for higher returns, through private investment plans.

ESCALATING PAYOUTS OVER TIME

Take for example, two members who have set aside the Basic Retirement Sum of S$80,500 at age 55. If Person A picks the default CPF LIFE Standard Plan, he gets a monthly, level payout of S$720 from age 65, for life. If Person B picks the proposed CPF LIFE plan with escalating payouts, he gets an initial payout of S$560 at age 65, which increases at 2 per cent per year.


Illustrative examples of payouts under the escalating plan and non-escalating CPF LIFE Standard Plan. (Graph: CPF Advisory Panel)

Starting from a full calendar year at age 65, the cumulative payout for both individuals roughly evens out at age 90, which means to say, both would get a cumulative payout of about S$218,000 in the fourth month of their ninetieth year. Until that point, Person A gets more on a cumulative basis; but beyond that point, Person B gets more.

In the case of death, all annuity premiums which are not paid out through monthly annuities are bequeathed to members’ loved ones. This means that the bequest under the CPF LIFE plan with escalating payouts will be higher compared to the standard plan in the first few years after payouts start.


Based on focus group discussions it conducted, panel chairman Professor Tan Chorh Chuan said there is a sense that the majority of members at the moment are comfortable with the flat, standard plan of level payouts as this is easy to understand. But the new option would cater to a smaller group who are more concerned about the escalating cost of living, and people who are still working, and do not need higher payouts between 65 and 70.

The panel emphasised that the choice between level payouts and escalating payouts is one that hinges on one’s lifestyle and expected lifespan. It also said that it decided to adopt a fixed rate of increase for the payouts, instead of pegging it to the inflation rate, as it wanted members to have certainty of payout, rather than payouts that fluctuate.

The rate of increase is proposed to be set at 2 per cent per year. According to the panel, this is in line with the historical 20- and 30-year average inflation rate, which is a good indication of the approximate cost of living increases over the long term.

The panel also noted that members who would like to receive an escalating payout but are concerned about a lower starting payout can raise this by topping up their CPF LIFE premiums or deferring their payout start age.

LIFETIME RETIREMENT INVESTMENT SCHEME

The panel also spotted a gap between members who are risk-averse and happy with CPF’s risk-free interest rates, and members who are knowledgeable investors and are comfortable actively managing a portfolio of assets under the CPF Investment Scheme (CPFIS), which offers more than 200 funds to choose from. 

A third group, which lacks the financial expertise or time and resources to actively manage investments, would benefit from an additional, simpler investment option, said the panel.

Known as the Lifetime Retirement Investment Scheme (LRIS) for now, the investment option will provide a small number of well-diversified funds for members to choose from. According to the panel, these funds should not require members to actively rebalance their portfolios and “should help them enjoy the benefits of long-term investing”.

The cost of investing should also be kept “as low as possible” by pooling CPF savings to purchase investments in bulk, and through passive management of funds, said the panel.

According to a study it commissioned, the annual expense fees from an aggregated and passively managed fund could be 0.5 per cent per year or lower, compared to fees of up to 1.75 per cent per year for CPFIS funds. “These cost savings would be translated into higher investment returns for CPF investors,” said the panel, which also recommended that an expert investment council be set up to advise on the key parameters for choosing the funds and fund administrator.

It noted that many retirement savings systems - including the UK’s National Employment Savings Trust, Chile, Hong Kong, and many 401k funds in the US - adopt a life-cycle investment approach as the default investment option of their members. This approach “automatically calibrates the amount of asset volatility, or portfolio risk that a member should be exposed to”, given his current age and his expected retirement age, it said.


CPF advisory panel chaired by Professor Tan Chorh Chuan (centre). (Photo: Linette Lim)

The panel added that it is timely to make available the option of an additional investment scheme, based on three observations.

First, more members will reach investment thresholds. For example, nine in 10 active CPF members aged 45 in 2030 will have more than S$40,000 in Special Account savings, up from six in 10 today.

Second, about S$25 billion (S$20 billion of Ordinary Account savings and S$5 billion of Special Account savings) of CPF savings is invested through the CPFIS as at end 2015. There is about S$100 billion of investible savings that is yet to be invested, noted the panel.

Third, younger members in particular, are more keen to invest for their retirement, and have “greater expectations in terms of their lifestyles in retirement”.

On the recommendations, the National Trades Union Congress (NTUC) said in a press release on Wednesday that it was happy that the Government accepted the panel's recommendations. 

It said that they were in line with the labour movement's call to provide members with more options and flexibility in managing their CPF savings to better meet their 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," it said. 

TIMELINE

The 13-member panel was appointed a month after Prime Minister Lee Hsien Loong announced a review of the CPF system in his National Day Rally speech in 2014. It comprises academics, financial experts and representatives from unions, the social sector and the grassroots.

In a letter on Wednesday, Manpower Minister Lim Swee Say accepted the recommendations and described them as "elegant in their simplicity and far-sighted". He added that the Government "will work to implement the panel's recommendations".

When asked if the new recommendations would take up to a few years to be implemented, Professor Tan said, “That’s the indicative sense, of the timing. But to be fair to the CPF board, we should let them have a look at it some more, and see what kind of time frame would be feasible”.

“All our members are slightly different in terms of their circumstances, needs, aspirations, and therefore it's not possible to create a one-size-fits-all solution that fits everybody across the board," said Professor Tan. "We are providing more choices to give you and me more control over our retirement planning.”


The latest recommendations follow the panel’s first set, which were submitted to and accepted by the Government last February. Implemented this January, these include allowing a lump-sum withdrawal of 20 per cent of CPF savings when a person reaches 65, a choice of different levels of CPF LIFE monthly payouts based on different levels of savings, and an option to defer the payout start age, up to age 70, for permanently higher monthly payouts.