SINGAPORE’S CENTRAL PROVIDENT FUND: HEADING FOR ANNUITY SCHEME COMMENCING 2013
While our Malaysian Government is mulling over the actual landscape of its intended Private Retirement Scheme (PRS) as a voluntary programme open to Malaysians to supplement the Employees Provident Fund (EPF), I believe you will be keen to join me in taking a peep at Malaysia’s immediate and next door neighbour – Singapore – to find out the changes that will take place with regard to plans for retirees there. Yes, as the heading (above) depicts, it is to do with monthly income pay-outs from Singaporeans’ account in the Central Provident Fund (CPF) in the near future.
But before zooming into it, please allow me to divert the flow of communication to the “puzzle” whether annuity products would be, or not be, incorporated into final PRS scope (refer to my last posting on Feb. 29, 2012). A few officers of life insurers, in my casual check with them, express positive hope that annuities should ultimately emerge on stage at a later chapter, after Securities Commission (SC) has sorted out the applications from fund houses to be product providers. I also understand that certain quarters among the sales force of life insurers have raised queries with relevant representative bodies. Only time will tell about the outcome in due course. Hopefully any of the relevant regulating or supervising bodies could quell the suspense early by clearing the air via a press statement – off or on it is to be, rightly so interested parties, including life insurers and family takaful operators, at this juncture should by now be able to see.
Now, coming back to the Singapore scene regarding the latest developments to the CPF, I retrieved a few reports from the electronic web about the island state’s provident fund being ready to implement a compulsory annuity scheme for members effective 2013 onwards. The best reference is the report compiled by Don Yeo, the Deputy CEO of CPF Board, entitled “CPF-Life: Singapore’s National Annuity Scheme”. It was dated 2011.
Let us look at the key points of the report:
Current Relevant Background Statistics
· *Average life expectancy in 2010 was high - 81.4 years and 85.4 years for males and females respectively.
· *The projected average balance at age 55 in 2013 is US$70,000 (around S$87,500 at existing exchange rate of 1.25).
· *Currently, at age 55, members can draw down via a programmed withdrawal scheme; pay-outs for approximately 20 years.
Intended National Annuity Scheme called CPF-LIFE
· *Steady income for life.
· *Entry age at 55.
· *Operated by the CPF Board.
· *Mandatory for members at age 55 from 2013 onwards, with minimum US32,000 (or S$40,000) in balance.
· *Investment in 10-year Singapore government securities; yield plus 1%.
· *No expense to be charged – government administrator.
· *Pay-outs will not be guaranteed but are designed to be stable. However, pay-outs may be adjusted to reflect actual investment returns and mortality experience. (Note: the report did not indicate the age for commencement of pay-outs, but a separate report by consultant firm Mercer, posted on Oct. 18, 2010, cited age 65. This ties in with the tenure of the 10-year government securities.)
· *Four (4) plans are lined up for selection by members. The Income Plan offers the highest monthly pay-out but no bequest benefit to the next-of-kin upon death. At the other extreme end, the Basic Plan provides the lowest monthly pay-out but high bequest benefit. In between are the Plus Plan and Balanced Plan.
· *Using the assumption of male aged 55 with equivalent US$70,000 converted to CPF-Life, and assuming rate of interest to be 4%, the annuitized monthly pay-out commencing at age 65 would work out to be US$680 for Income Plan, US$640 for Plus Plan, US$607 for Balanced Plan and US$569 for Basic Plan. (Note: Mercer’s report said a guaranteed minimum rate of return of 2.5% per annum is incorporated).
A report on “Longevity Risk & Annuities in Singapore” which appeared in the electronic website of Singapore Management University, outlined the reasons for the Singapore Government wanting to implement the annuity scheme. Over the last two decades, the proportion of CPF members aged 55 and above had increased four-fold, from 5.5% in 1985 to 25.1% in 2005. The group younger than age 24 fell from 25.1% to 9.2% in 2007. Based on this working paper, the obvious conclusion that can be drawn is that the intended annuity is to sustain the needs of the fast ageing population trend amidst diminishing average CPF account balance at age 55. The report also said annuities either from a government-administered entity or qualifying private insurer are available.
Neither of the two postings by CPF nor Mercer touched on non-Singaporeans staying and working in the island state. However, in the provident fund’s detailed “Employers’ Guide to CPF”, it is stated that CPF contributions are mandatory for foreigners with permanent resident (PR) status. Foreigners working there with employment pass or work permit do not contribute to the fund. Going by this guide, Malaysians who are PRs of Singapore should logically be included in the incoming annuity scheme, if nothing is mentioned that they would be excluded or granted an option.
The Malaysian Insider on April 28, 2011 quoted a World Bank’s source that Singapore had “absorbed 57% of Malaysia’s overseas citizens.” A freelance journalist, Anil Netto, reported on April 29, 2011 in his portal that according to Singapore’s 2010 Census published by the Department of Statistics, 386,000 were residents born in Malaysia. I believe by now, the figure may be noticeably more.
Now, back to Malaysia…………if ever an annuity scheme is launched by the Malaysian Government for us Malaysians at home in the future (If and when, we do not know), what model or arrangement would it likely be? Would it be a public or private scheme, or both public and private open for choice? Or would the proposed Private Retirement Scheme (PRS) now being explored with the support of private fund houses be ultimately linked to a type of annuity scheme? Only time will tell about the final outcome.
Like Singapore, the average account balance of Malaysians in the Employees Provident Fund (EPF) at age 55 is low. A report by Mercer on “Malaysia’s Pension System: Current Status, Issues and Way Forward”, which was completed in October 2010, shared some salient facts:
· *Average EPF balance for men retiring in 2010 was RM160,000. For women, it was RM100,002.
· *Fifty per cent (50%) of EPF members retiring in 2010 had a balance of less than RM50,000.
· *Malaysia is expected to reach ageing nation status by 2020, when the proportion of population age above 60 years exceeds 10%. (My note: 2020 is also the targeted year set by the Government for our country to attain high income and developed nation status.)
· *It is important to start plan for the provision of financial protection for the senior citizens now whilst time is still on our side.
Surely, in line with the noble objective of high income and developed nation status, proactive measures need to be put in place right now - just 8 years away from 2020 – to cater for the welfare of senior citizens by then.
Best Regards. 
IMPORTANT NOTE: This sharing is based on reports extracted from various sources. In event of inaccuracies or later changes/updates not included in the reports after their dates of compilation, please note I am in no position to ascertain the veracity of contents; neither should I be deemed responsible for the inaccuracies. It is best that you source out for more information and details by yourself so that you can properly form your own perception.
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