Channel NewsAsia

Experts worried about retirees squandering CPF monies

The Government has to find a “judicious balance” between ensuring sufficient funds for members’ retirement and allowing them to enjoy the fruits of their labour, MPs say.

SINGAPORE: While they acknowledged the need to provide flexibility in Central Provident Fund (CPF) withdrawals, especially for those who need cash for necessities, experts cautioned that allowing lump-sum withdrawals – albeit with limits – could lead to members squandering their retirement savings.

On Sunday (Aug 17), Prime Minister Lee Hsien Loong announced at the National Day Rally that CPF members would be allowed to withdraw part of their CPF savings in a lump sum when they need to, subject to limits and only during retirement.

Several Members of Parliament (MPs) have also expressed concerns about this impending change. But they also said that given the desire for greater control over their CPF monies, the Government must trust CPF members to use their savings wisely.

To mitigate the risk of squandered monies, they suggested that withdrawals be limited to specific groups, allowed only on a case-by-case basis, be subject to caps and permitted only after counselling.

OPPORTUNITY COSTS

Insurance players say it is important for CPF members to understand the opportunity costs involved. While the move to increase more flexibility into the CPF system may be a popular one, some insurance companies Channel NewsAsia spoke to are concerned that retirees may not be in the best position to monitor their own finances, and may face difficulty beating the interest rates offered by the CPF.

Mr Nishit Majmudar, CEO of Aviva Singapore, says there aren't many annuity products in the market after retirement, and some would prefer a lump sum to CPF Life. "Once they have the lump sum, I don't think there are any easy products which provide you a guaranteed investment return. Investing your money into foolproof, guaranteed 1 per cent return will actually not be enough for your retirement," he said. 

"So individuals will have to invest in a broad portfolio with equities, property, fixed income/bonds - and that is where my concerns are. Will these individuals, at the age of 65, be able to manage their money judiciously?" added Mr Majmudar.

POSSIBLE GUIDELINES

Mr Alfred Chia, chief executive officer of financial advisory firm SingCapital, said the withdrawals could be done on a case-by-case basis.

“Before they do the withdrawal, the CPF Board can actually consider (doing) counselling, to understand what they need the funds for, and remind them of the importance of retirement funding,” he said, adding that applicants could be assessed based on their household income.

Mr Christopher Tan, CEO of financial advisory firm Providend, was “not very comfortable” with allowing lump-sum withdrawals, arguing that it would result in smaller payouts thereafter. “I let you take out, for example, S$10,000, S$20,000, and you are left with only a bit, (then) the CPF LIFE annuity (scheme) doesn’t make sense any more,” he said.

For those in dire need of money, he suggested there be guidelines to regulate such withdrawals, taking into account the minimum amount needed to provide for basic needs and the circumstances for withdrawal.

“If you really have no choice, and you are going to die without withdrawing, then we have no choice but to give it to them,” said Mr Tan, adding that this group is likely to depend on government welfare once the lump sum runs out.

BALANCE NEEDED

MPs noted that CPF members have been asking to be given greater control over their CPF savings. The Government has to find a “judicious balance” between ensuring sufficient funds for members’ retirement and allowing them to enjoy the fruits of their labour, said Mr Zainudin Nordin, an MP for Bishan-Toa Payoh who also chairs the Government Parliamentary Committee for Manpower.

The move is a major shift in CPF policy, but such a shift cannot be taken to the extreme, he added. In giving members greater control, he pointed out, more efforts need to be made to educate Singaporeans and help them become more financially-savvy – a view also held by other MPs and experts.

Ms Foo Mee Har, an MP for West Coast, said the Government’s decision to respond to public calls reflects a maturing society.

She felt the option should be given to all retiring CPF members, not only those in need. There could be members who want to fulfil personal goals or invest the sum withdrawn for potentially higher returns, she said.

The Government, she added, could encourage saving by allowing members the option to top-up beyond the Minimum Sum, increasing their CPF Life payouts.

LONGER LIFE EXPECTANCY

With longer life expectancy and lower interest rates, retirement adequacy is a growing concern among Singaporeans. According to consumer surveys in 2014, half of Singaporeans say their savings will be insufficient to cover retirement expenses, and only one in three think they can retire at their preferred age.

Mr Lee Swee Kiang, Chief Product Officer at Great Eastern, said: "They want returns that can beat inflation. They want guarantees. They also want flexibility in terms of premium payment terms and pay out terms. And they also want lifetime income, if possible. So the question that follows is: what if we are unable to provide a lifetime income? The alternative is whether they are happy if the income can be payable up to age 80 or 85. Generally, it's acceptable."

RETIREMENT PRODUCTS

Some insurers already offer retirement products to supplement the CPF scheme. Great Eastern, for example, has a Supreme Retirement product which offers a projected yield of 3.76 per cent per year. An individual will have to pay premiums for say, 20 years, in order to get a one-off lump sum on retirement, and a guaranteed monthly payout that increases over the years.

However, some analysts say reforms are needed to give people more investment options - such as investing through an employer-sponsored pension plan. "If we are able to create a more conducive environment for employers to set up these plans, then you'll see the tak- up rates start to grow, slowly. And when the take-up rates start growing, you'll see a lot of these pension funds start to grow too. Once these pension funds start to grow, it'll attract a lot of these investment managers to look into this particular portfolio and create better products to suit our retirement needs," said Mr Marcus Kok, Principal Pension Consultant at PwC Asia Actuarial Services.

PwC says more than 30 companies in Singapore have these employer-sponsored plans, where the employer makes a matching contribution to the amount of money saved by the employee.