Professional Documents
Culture Documents
By Mukul G. Asher
Professor, Public Policy Programme National University Of Singapore E-mail: mppasher@nus.edu.sg Fax: (65) 778 1020
To be presented at the World Bank Conference on Public Pension Fund Management, 24 ~ 26 September 2001, Washington D.C.
Organization
I. Governance Structure II. Importance of Investment Policies And Performance III.Main Characteristics of the EPF And The CPF IV.Investment Policies And Performance: The Accumulation Phase V. Will The EPF And The CPF Be Adequate For Retirement? VI.Distribution Of Accumulated Funds VII.Suggestions For Reform
The Public Policy Programme, National University of Singapore
2
Governance Structure
The EPF (Established in 1951) The CPF (Established In 1955), Have Statutory Authority Status.
No Statutory Obligation On These Holding Companies To Reveal Investment Portfolio And Performance of CPF Balances. International Investment Is However Believed To Predominate.
Very Selective Openness Relating to Information; So Extensive Data Collected and Stored in Its Supper Computer Is Used in A Strategic Manner And Not As A Public Good. Therefore, Unsurprisingly Data Made Publicly Available Are Insufficient for Independent Analysis.
A Guarantee of 2.5% Nominal Return on the CPFs Accumulated Balances. The CPF Act Requires That the Permission of the Finance Minister Be Obtained for Paying Interest Rate Higher Than 2.5 Percent. No Other Provision For Insulation Against Political Risk.
The Public Policy Programme, National University of Singapore
8
THE CPF
CPF has many other objectives beside Retirement. It Administers many schemes covering Housing, Medical Savings Accounts, Tertiary Education, and permits extensive pre-retirement investments in real estate and financial assets. CPF Contribution Rate effective from January 1, 2001: 36% (20% By The Employee And 16% By The Employer); With The Wage Ceiling Of S$ 6000 Per Month. Lower contribution Rates for Those > 55 (18.5% for those between 5560; 11.0% for those 60-65; 8.5%for those >65).
The Public Policy Programme, National University of Singapore
10
For those below 55 years, between 72.2 percent and 61.1 percent of the contributions are channeled into this Account depending on age, with the proportion decreasing with age. Balance in this Account can be used for housing, preretirement investment schemes, and others. For most members, housing is the pre-dominant expense.
The Public Policy Programme, National University of Singapore
11
12
13
Self-employed are Permitted to Join the EPF voluntarily, but Few Do.
The Public Policy Programme, National University of Singapore
14
III.Contributors/Labor Force In 2000: 54.7% For The EPF, And Rising As Formal Sector Expands. For CPF (in 1999): 62.0% And Falling, But Not of Concern Due To 25% of Labor Force Consisting of Foreign Workers.
IV.Total Labor Force in June 2000 For Singapore: 2.19 Million
16
18
19
20
Time
The Public Policy Programme, National University of Singapore
21
22
Table 1 Malaysia: Nominal and Real Rates of Dividend On EPF Balances 1961-2000
Period Nominal Dividend Rate % 7.04 8.24 8.16 Inflation Rate (CPI) % 3.49 3.14 3.47 Real Rate of Dividend % 3.55 5.11 4.70
AACGR (%) (1990-2000) For Nominal GDP: 10.56% - This is higher than the nominal dividend rate. So low replacement rate. AACGR (%) (1990-2000) For Members Balances: 14.18% Note: This return is after taxes and investment management fees.
The Public Policy Programme, National University of Singapore
23
Table 2 Nominal Return Risk Performance of Malaysian and other Markets, Jan 1988 Jan 2001 period
There are other ways to compare the EPF Returns.
AsiaPac -12.3
US
Japan
401.8
-25.6
Returns (% P.A.)
Std. Dev. (% P.A.)
4.5
35.7
6.8
6.3
7.9
14.0
-1.0
22.3
13.0
13.7
-2.2
25.0
Source: Eliza Lim Importance of Portfolio Diversification, Asian Pension Funds Seminar, organized by the Citigroup Asset Management, Kuala Lumpur, May 911, 2001. Lim is Asset Consultant with Towers Perrin, Hong Kong.
Note: Exchange rate risk is not taken into account in Table 2.
The Public Policy Programme, National University of Singapore
24
25
- The pension funds in Chile had annual real rate of return of 10.9 percent between 1981-2000. The return to the members was somewhat less due to administrative and investment management costs, and taxes. This is clearly higher than the EPF, and comparable to the U.S. and Europe.
26
28
30
31
II. Investment of the Insurance Funds S$ 2.9 Billion as at End 1999. III. The CPFIS Scheme
32
10 8 6
4 2 0
2 .0
3 .4 1 2 .8 3 0 .8 8
AACGR (%)(83-99)
Re a l Ra t e o f re t urn o n B a la nc e s GD P ( R e a l )
AACGR (%)[1987-99]
R e a l r a t e o f r e t u r n o n In s u r a n c e Fu n d s A v e r a g e Mo n t h l y N o m i n a l Ea r n i n g s
33
CPFIS Scheme
This is a pre-retirement withdrawal scheme. A Member May Open A CPF Investment Account With Approved Agent Banks, All of Whom are Locally Controlled Banks. Their Charges and Fees Are Not regulated. Individual CPF Members May invest their Ordinary Account balance as well as Special Account Balance In approved assets. All investments must be in Singapore dollars. Only safer Investments are permitted from the Special Account. Form the Ordinary Account up to 35% can be invested in shares and corporate bonds by the members directly. As at end April 2001, S$2.1 billion (17% of the Potential) was invested from the Special Account; with about 90% in insurance products, both investment-linked and endowment.
The Public Policy Programme, National University of Singapore
34
Till September 30, 2001, 100.0% of the profits realized (less accrued interest which would have been payable by the CPF Board on ALL of the amounts withdrawn under this scheme) may be withdrawn by the individuals.
This proportion will be reduce to 50% for the period October 1, 2001 to September 30, 2002; and to zero thereafter.
35
36
37
Transactions Costs of Unit Trust Investments Are High, With 5 to 7 Percent Spread Between the Offer and Bid (Buy and Sell) Prices Common. In addition, there is an annual investment management fee of between 1 and 2 percent of total investments of members.
Some Effort to Address This Issue, but Low Average Investment and Small Size of the Unit Trusts Market Major Constraints. Investment Performance Under This Scheme Appears To Be Unsatisfactory. But Insufficient Data for Rigorous Analysis.
The Public Policy Programme, National University of Singapore
38
No estimates of the replacement rate provided by the EPF Board. But it is likely to be quite low for most members.
39
Will The EPF And The CPF Be Adequate For Retirement? Contd.
CPF (Figure 3 and 4) The CPF Board Estimated In 1987 (No updates Since Then) That The Replacement Rate Will Vary Between 20 And 40 Percent For The Members, With No Inflation Protection, And Only A Very Limited Protection Against Longevity. Fig 3 Shows That Average Balance Per CPF Member Doubled Between 1987-99, While The Average Monthly Earnings In 1999 Were 2.4 Times The Earnings in 1987. Thus, Monthly Earnings Have Risen Faster Than Average Balances Per Member. For October-December 2000 Period, Average Cash Balance Withdrawn At Age 55 was Only $19,111.
40
Fig. 3
Singapore : Average Balances per member and Average Monthly Earnings , 1987-99
20000 15000 10000 5000 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Year Average Monthly Earnings (including Employers CPF Contribution) Average Balance Per Member
41
Fig. 4
Singapore CPF : Average Balance Per Member/Average Monthly Earnings (including employers contribution)
14 12 10 8 6 4 2 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Y ear Average Balance Per Member/Average Monthly Earnings (including employers contribution)
11.6
11.1 10.1
10.4
10.3
10.5 9.6
10.1
9.9
42
43
45
46
SRS Contd.
50 Percent of Accumulated Balances at the Time of Statutory Withdrawal Subject to Applicable Marginal Income Tax Rate. Withdrawals can be Made Over a Period of Ten Years to Permit Flexibility in Conversion of Investments in to Cash (Withdrawals Can only be Made in Cash), and for tax Planning.
47
SRS Contd.
Full Taxation Plus 5 Percent Penalty for Early Withdrawal Some Restrictions (Eg Concerning Property and Certain Types of Insurance) on Investment of SRS Funds.
48
SRS Contd.
Limitations: Only One Third of the Labor Force Which Pays Income Tax Has the Potential to Benefit From the SRS Restrictive Conditions Foreigners Must Keep the Balances in the SRS for at Least 10 Years. Only Half of the Accumulated Balances Exempt From Tax. Penalty for Early Withdrawals: 100% Tax, Plus 5 Percent Penalty.
49
SRS Contd.
High Transaction Costs Restricted Competition Among the SRS Providers No Regulation Concerning Fees to Be Charged by the SRS Providers or by Investment Managers. So, for Those With Small Balances And/or Low Marginal Tax Rates, Transactions Costs May Outweigh Tax Benefits.
50
SRS Contd.
Assessment Impact of the SRS Will Be Marginal As It Does Not Address Lack of Protection Against Inflation and Longevity; and Does Not Help the Lifetime Poor. The Exchange Rate risk may deter expatriates, particularly as the minimum period of membership is ten years. Will Benefit Local Banks and Investment Managers
51
Options:
Lump-Sum, Periodic Withdrawals, Annuities or a Combination. Annuities are Like Any Other Financial Product, So Cost of Purchasing Annuity (Therefore Rate of Return from Annuity Purchase) Varies With the Market Structure and the Features (Individual Vs. Joint Annuity, Inflation Indexing etc.) Provided.
52
53
This will become S$ 80,000 on July 1, 2003, with the Amount Equally Divided Between Cash and Property.
Three Options with the Cash Component of the Minimum Sum Buy a Life Annuity from an Approved Insurance Company. Currently, Inflation Index annuities are not Available in the Market. In 1999, >10% of the 26,000 Covered Under the Minimum Sum Scheme chose the Annuity Option Keep it with an Approved Bank Leave It with the CPF Board This Effectively Increases the Politically Sensitive Withdrawal Age For This Component.
54
55
56
57
58
Singapore - CPF
End Implicit Tax on CPF wealth immediately In the Medium-Term (two to three years) consider making CPF a DCFF system in reality by: i. Establishing a CPF Authority, with independent Board of Directors, whose sole objective would be to act in the interest of the members. Appropriate legislation be introduced to accomplish this. The investment policies and performance of the CPF Authority should be completely transparent, and de-linked from the government holding companies. All investments, wherever feasible, should be mark-to-market.
ii.
iii. All returns on investment must be made known and go directly to the members individual accounts.
The Public Policy Programme, National University of Singapore
59
This will permit individuals to shift to different risk-return profile at different ages, and permit some accommodation of different preferences. Develop the market for annuity products, and make their purchase compulsory.
60
61
Malaysia - EPF
The main challenge is to invest growing balances in good quality assets with commensurate real returns. It will need to find ways to reduce the rapid accumulation of net additions to its balances as the risks (including political and fiscal risks) are too high in having a government agency manage such large funds in relation to GDP and the stock market capitalization. This will require institutional reforms of Malaysias stock markets, other financial and capital markets, and improved corporate governance. The EPF must continue its gradual shift towards greater transparency of investment policies and performance, including widening the scope of mark-to-market practices. It will need to engage in more effective investment diversification, including international diversification.
62
63
64
Thank you
65