Managing National Provident Funds in
Malaysia and Singapore
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.
1
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
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Governance Structure
• The EPF (Established in 1951) The CPF (Established In 1955),
Have Statutory Authority Status.
• Malaysia’s EPF Is Under The Ministry of Finance.
• Singapore's CPF Is Under The Ministry of Manpower
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Governance Structure Contd.
• Malaysia’s EPF:
– Operational (Mainly Administrative) Autonomy
– The EPF Board Has Representation From The Government,
Employers, Employees And Professionals.
– The Investment Panel Is Separate From The Board.
It Has Six Members, Executive Chairman Of The EPF,
And Representatives Form The Finance Ministry And
Private Sector Experts.
– There are Indications That The Trade Unions and Other
Groups in Malaysia are Uneasy About the functioning of the
Investment Panel. They Desire Greater Transparency and
Representation on the Investment Panel.
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Governance Structure Contd.
• Malaysia’s EPF Contd.:
– Investment By The EPF Have Been Wholly Domestic.
– Lack of Policy Autonomy And Research Capability
– Insulation From Political Risk In Investments Primarily
Through Government Guarantees of Individual Investments.
However No Guarantee of Return on Overall Balances
– Moderately Open Information Regime
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Governance Structure Contd.
• Singapore’s CPF
– Operational (Mainly Administrative) Autonomy
– The CPF Board Has Representation From The Government,
Employers, Employees And Professionals. It Has 12 Members.
– Key Challenge: How To Get Competent and Independent
Representation on the Board in a Mono-centric Power
Structure ?
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Governance Structure Contd.
• Singapore’s CPF Contd.:
– Investment Function In Reality Performed Outside The
CPF Board’s Jurisdiction By The Government Of Singapore
Investment Corporation (GSIC), And Other Government
Investment Holding Companies.
– No Statutory Obligation On These Holding Companies
To Reveal Investment Portfolio And Performance of
CPF Balances.
– International Investment Is However
Believed To Predominate.
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Governance Structure Contd.
• Singapore’s CPF Contd.:
– Lack of Policy Autonomy and Research Expertise.
– 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 CPF’s
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.
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Importance of Investment Policies and
Performance
• The National Provident Funds of Malaysia (the EPF) And
Singapore (The CPF) Are Nominally DC-FF Schemes
• Such Schemes Rely On The Power of Compound Interest
• To Realize This Power, Need Effective Asset Diversification; Low
Administration and Investment Management Costs;
And Internationally Benchmarked Pension Fund Governance
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Main Characteristics Of The EPF And The CPF
• Contribution Rate
– More Complex And Varied The Objectives, Higher The Contribution
Rate Required.
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
55–60; 11.0% for those 60-65; 8.5%for those >65).
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Main Characteristics Of The EPF And The CPF
Contd.
• Contribution Rate Contd.:
– Self-employed May Join Voluntarily (But Must Contribute to
the Medisave Account). They Get Tax Relief for CPF
Contributions up to the Combined Employer and Employee
Contributions, Subject to Same Ceiling.
– The CPF Contributions are channeled into three Accounts.
§ Ordinary Account:
− 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.
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Main Characteristics Of The EPF And The CPF
Contd.
• Contribution Rate Contd.:
§ Special Account:
− This Account is for Retirement. For those < 55 years,
between 11.1 percent and 16.7 percent of the
contributions are channeled into this Account, with the
proportion increasing with age.
− The proportion for Retirement purposes is rather low by
international standards.
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Main Characteristics Of The EPF And The CPF
Contd.
• Contribution Rate Contd.:
§ Medisave Account:
− For those < 55 years, between 16.7% and 22.2% of the
contributions are channeled into this Account, with the
proportion increasing with age.
− Funds from this Account are used to pay for hospital and
selected out-patient services; and for Catastrophic Health
Insurance Premium which covers between 20 and 40 percent of
the total hospital bill.
− The Medisave amount can not be withdrawn until death, when it
reverts to the nominee.
− The Average Medisave balance of 55 year old in mid 2001 was
S$16,000, while the required sum for those with enough
balances is S$21,000. So many do not have even the minimum
balances.
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Main Characteristics Of The EPF And The CPF
Contd.
• Contribution Rate Contd.:
The EPF
– 23% (11% By The Employee And 12% By The Employer,
With No Wage Ceiling).
– From April 1 2001, There were plans to reduce Employees’
Contribution Rate to the EPF to 9% for a Period of One Year.
Higher Priority to Short-Term Stabilization Over Retirement
Security implicit in this has proved to be very unpopular The
trade union and other public pressure has forced a change
from mandatory to voluntary reduction in the contribution
rate.
– Self-employed are Permitted to Join the EPF voluntarily,
but Few Do.
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Main Characteristics Of The EPF And The CPF
Contd.
•
Contribution Rate Contd.:
The Contributions to the EPF are channeled into three Accounts.
I.
Account I: 60 percent
Main purpose is Retirement.
20 percent of the Balance in this Account over RM 55,000 may be
withdrawn for investments in Unit Trusts approved by the EPF.
Members not permitted to purchase stocks directly. Potential
amount that can be thus invested, and potential number of
individuals which can participate is limited.
II.
Account II: 30 percent
Main purpose is Housing.
III. Account III: 10 percent
Main Purpose is Healthcare.
There are however no health insurance schemes.
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Main Characteristics Of The EPF And The CPF
Contd.
III.Coverage
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
V. For Malaysia as at end 2000: 9.2 Million
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Main Characteristics Of The EPF And The CPF
Contd.
• Contributors/Members In 2000: 50.5% For EPF, And 43.2%
For CPF.
• EPF(2000): Total Members 9.97 Million (of which 0.6 Million
Foreign Workers). [AACGR:1990-2000: 5.3%) Pressure to
exclude foreign workers on grounds of disproportionate
administrative and compliance costs
• Active Members: 5.03 Million. [AACGR:1990-2000: 5.5%)
• Total Employers 318, 220 (Default Rate 5.65%) [AACGR:19902000: 6.2%)
• CPF(1999):Members 2.83 Million; [AACGR:1987-99: 3%)
• CPF Contributors (1999) 1.22 Million. [AACGR:1987-99: 2.3%)
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Main Characteristics Of The EPF And The CPF
Contd.
III.Contributions And Withdrawals
III.Too Many Pre-Retirement Withdrawals Distract From
The Retirement Objective
IV.AACGR: EPF (1990-2000): Contributions: 15.2%;
Withdrawals 18.0%.
Withdrawals/Contributions EPF (1990-2000): 37.6%.
V. AACGR CPF (1987-99): Contributions 9.2%
Withdrawals 9.5%.
Withdrawals/Contributions CPF (1987-99): 71.9%.
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Main Characteristics Of The EPF And The CPF
Contd.
III.Members Balances :
III.EPF: RM 180.1 Billion (55.4% of GDP) End 2000
IV.CPF: S$ 90.3 Billion (56.8% of GDP) End 2000
IV.Average Balance per member for EPF: Year 2000
III.RM 18,067
V. Average Balance per member for CPF: Year 2000
III.S$ 31,137
VI.Per Capita GDP: 2000
III.RM 12,883
VII.Per Capita GNP: 2000
III.S$ 42,212
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Main Characteristics Of The EPF And The CPF
Contd.
VIII.These Balances Are A Significant Proportion of Total Savings
And Stock Market Capitalization. Given low levels of free-float
and liquidity, market prices (and even management control)
may be significantly impacted by the provident fund authorities.
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Investment allocation of the EPF, 1991-2000
80
Composition of
investment (%)
70
60
MGS
50
D&L
40
30
Equi
20
MM
10
0
1990
1992
1994
1996
1998
2000
Time
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Investment Policies And Performance:
The Accumulation Phase Contd.
• Investment Performance of The EPF
– Average Returns Over 40 Years Satisfactory in Absolute
Terms.
– Challenge Is How to Sustain At Least The Current Level of
Returns In The New Economic Environment, particularly as
there is considerable unease concerning the perception that
the EPF and other provident and pension funds are being
used to help support the government-favored firms and
business groups.
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Table 1
Malaysia: Nominal and Real Rates of
Dividend On EPF Balances 1961-2000
Period
Nominal
Dividend
Rate
%
Inflation
Rate (CPI)
%
Real Rate
of
Dividend
%
AACGR (%) (1961-2000)
7.04
3.49
3.55
AACGR (%) (1983-2000)
8.24
3.14
5.11
AACGR (%) (1987-2000)
8.16
3.47
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.
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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.
Malaysia
(KLSE)
Cumulative Returns 78.1
Global
Bond
Global
Equity
AsiaPac
US
Japan
139.1
172.8
-12.3
401.8
-25.6
Returns (% P.A.)
4.5
6.8
7.9
-1.0
13.0
-2.2
Std. Dev. (% P.A.)
35.7
6.3
14.0
22.3
13.7
25.0
KLSE: Kuala Lumpur Stock Exchange
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.
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Table 2
Comments on Table 2
- The annual return on KLSE is lower and volatility (as represented
by the standard deviation) is much greater than the EPF
dividends to members. (7.68 percent per year for 1987-99
period)
- The EPF dividend is also higher than Global Bond, Asia-Pac, and
Japan market returns.
- But it is slightly lower than Global Equity; and substantially lower
than US market returns.
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Table 2
Comments on Table 2 contd.
- If returns net of taxes and investment management fees are
considered, than only the US (and Europe but not UK) returns
are likely to have exceeded the EPF returns during this period.
But volatility in other markets is much lower.
- 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.
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Table 2
Comments on Table 2 contd.
Implications
- Improve KLSE’s quality and depth.
- Some international diversification will be needed as funds
continue to accumulate. At present rates EPF’s balances may be
RM 1,000 billion in next 15 years or so. Current Market
Capitalization of the KLSE is only about RM 400 billion.
- Needs to increase understanding of and develop expertise
concerning the international markets.
- Develop expertise and tools to manage the exchange rate risk
when diversifying internationally.
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Investment Policies And Performance:
The Accumulation Phase Contd.
•
Investment Allocation And Returns:
–
The CPF
–
Three Pools of investment funds
I.
Members’ Balances Invested By the CPF Board.
Largest Pool (S$ 90.3 Billion As At End 2000)
•
On the CPF’s balance sheet, 100 percent of the S$90.3 billion
is shown as invested in non-marketable government
securities (or as advanced deposits to the Monetary Authority
of Singapore for buying such securities.
•
Singapore Government’s total Internal Debt as at end March
2001 S$138.9 billion (87.4 percent of year 2000 GDP)
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Investment Policies And Performance:
The Accumulation Phase Contd.
•
The interest on government securities is same as that paid by
the CPF Board to its members. It is a weighted average of
one year fixed deposits (80% weight), and savings account
rate (20% weight) of the four domestically owned
commercial banks.
•
Interest is paid quarterly and is variable (subject to a
minimum of 2.5 percent).
•
By administrative decision, balances in the Special Account
(which is for Retirement only) receive 1.5 percentage points
higher interest than on other balances. From October 1,
2001, the higher interest will also be paid on Medisave
Balances. This further demonstrates the administrative
nature of the interest rates.
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Investment Policies And Performance:
The Accumulation Phase Contd.
•
The receipts from the sale of government securities are
not needed to finance government expenditure as the
budget has been in surplus for more than two decades.
•
The money is channeled through the Consolidated Fund
to investment holding companies of the Singapore
Government, such as Temasek Holdings and Singapore
Government Investment Corporation.
•
The operations of these holding companies are by law
and practice secret and no public disclosure is required
or made.
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Investment Policies And Performance:
The Accumulation Phase Contd.
• The non-transparency and non-accountability of the CPF
balances, along with administered rate of interest has
turned the CPF from nominally DC-FF scheme to a
Notional Defined Benefit (NDB) Scheme, financed on PAYG
basis.
• To the extent the government holding companies earn
higher than what is paid to the CPF members, implicit tax
on CPF wealth occurs.
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Investment Policies And Performance:
The Accumulation Phase Contd.
•
The implicit tax is recurrent, and it is regressive as lowincome individuals hold proportionally greater wealth in
the form of CPF balances.
Moreover, as only about a third of the labor force pays
personal income tax, the low-income members do not
receive tax subsidy for contribution, income on preretirement investments, and at the time of withdrawal.
II. Investment of the Insurance Funds S$ 2.9 Billion
as at End 1999.
III. The CPFIS Scheme
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Fig. 2
10
Singapore's CPF : Average Annual Compound
Growth Rate (AACGR)
9.35
8.09
8
7.53
7.04
%
6
4
2
3.41
2.83
2.0
0.88
0
AACGR (%)(83-99)
Real Rate of return on Balances
GDP (Real)
The Public Policy Programme, National University of Singapore
AACGR (%)[1987-99]
Real rate of return on Insurance Funds
Average Monthly Nominal Earnings
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$2.1 billion (17% of the Potential) was
invested from the Special Account; with about 90% in insurance
products, both investment-linked and endowment.
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CPFIS Scheme Contd.
• There is no limit on investments in shares through the approved
Unit Trusts.
• Till September 30, 2001, 100.0% of the profits realized (less
accrued interest which would have been payable by the CPF
Board on ALL of the amounts withdrawn under this scheme)
may be withdrawn by the individuals.
• This proportion will be reduce to 50% for the period October 1,
2001 to September 30, 2002; and to zero thereafter.
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CPFIS Scheme Contd.
• As At December,31 2000, Total amount Withdrawn Under
the CPFIS was S$ 18,741 (US$10,771 Million) (43.7% of the
Potential) by 516,386 members,Or 17.8% of total members.
The Average Investment Per Member Thus was
S$36,293(US$20,858).
• As At March 31, 2001, Total Investments Under CPFIS was S$
20.192 Billion (US$ 11,218 Million).
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CPFIS Scheme Contd.
• The Allocation was:
– Stocks and Loan Stocks S$9,550 Million (47.3%);
– Insurance Policies S$9,063 Million (44.9%);
– Unit Trusts S$1,285 Million (6.4%);
– Others S$294 Million (1.5%).
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CPFIS Scheme Contd.
• Thus, Individuals have Invested on Their Own and Not Through
Unit Trusts.
• 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.
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Will The EPF And The CPF Be Adequate
For Retirement?
V. EPF
– Low Balances Per Member. In 2000, RM 18, 067, Only 1.4 Times
The Per Capita GDP.
– No estimates of the replacement rate provided by the EPF
Board. But it is likely to be quite low for most members.
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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 $19,111.
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Fig. 3
Singapore : Average Balances per member and Average Monthly Earnings , 1987-99
35000
30000
25000
($)
20000
15000
10000
5000
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Average Monthly Earnings (including Employer’s CPF Contribution)
1998
1999
Year
Average Balance Per Member
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Fig. 4
Singapore CPF : Average Balance Per Member/Average Monthly Earnings
(including employer’s contribution)
14
12
11.6
11.1
10.1
10.4
10.3
10.5
10.4
10
9.4
9.2
9.3
1993
1994
1995
9.6
10.1
9.9
1998
1999
8
6
4
2
0
1987
1988
1989
1990
1991
1992
1996
1997
Year
Average Balance Per Member/Average Monthly Earnings (including employer’s contribution)
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Why Low Balances?
• Singapore:
– Highly Unequal Wage Structure. In 1999: 51.4% of Contributors
Had Monthly Wage < S$ 2,000: Only 6.3%
Had Wages > S$ 6,000.
– The share of wages in Singapore’s GDP is unusually low at 42
percent; while the share of profits is 48 percent of GDP.
– High Rate of Pre-retirement Withdrawals (71.9% for the 1987-99
period).
• Tied to the Centrality of Real Estate Sector in the Economy.
– Low Real Rate of Return, in Large Part Due to Implicit Tax
on CPF Wealth.
• Current Political Economy and Governing Philosophy Major
impediments to the Reduction or elimination of This Tax.
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Why Low Balances? Contd.
• Singapore Contd.:
– High Transactions Costs
• Restricted Competition and No Regulation Over Prices
Charged for Investment Services. For a sample of 14
funds in Singapore, the EXPENSE RATIO (I.e. total cost of
running the fund divided by the fund size) varied between
2.9 percent and 5.7 percent. The ratio excludes several
charges such as tax at source, front-end load, brokerage
and other transaction costs, and foreign exchange gains
and losses.
• Individual Decentralized Arrangement With Wide
Investment Choices Under the CPFIS Scheme Likely
To Lead to Higher Cost Than a Centralized System,
With Limited Individual Choice Would.
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Why Low Balances? Contd.
• Malaysia
– Highly unequal Wage Structure. In 2000 60.18% of the Active
Contributors to the EPF Reported Monthly Wages Below RM
1,000; 23.96% Between RM1,000-2,000; and only 3.37%
Reported Wages Above RM 5,000.
– Moderate Rate of Pre-retirement Withdrawals
• Tied to Housing withdrawals
• 1/3 of the Accumulated Balances can be Withdrawn at Age 50
– Rate of return is reasonable, but could be Higher
– Restricted Competition and No Regulation Over Prices Changed
for Investment Services.
– Individual Investments through Unit Trusts has High Transaction
Costs Due to The Undeveloped Nature of this Market.
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The Supplementary Retirement Scheme (SRS)
• Implemented From April 1, 2001
• Employers Are Not Allowed To Contribute. Self Employed
May Participate.
• Contribution and Income (Except Dividends) Can Be
Accumulated Tax Free.
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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.
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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.
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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.
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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.
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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
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Distribution of Accumulated Funds
• Importance Of Inflation And Longevity Protection And
Survivors’ Benefits.
• 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.
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The Decumulation Phase of the CPF
•
The CPF Permits:
– Withdrawal at Age 55 of All Accumulated Balances over and
Above the Required Minimum Sum.
– If a Member’s Balances are Below the Required Minimum
Sum, it Does not Have to make it up From Other Sources.
A Significant Proportion of the CPF Members’ Accumulated
Balances Fall Below the Minimum Sum. Children May
Top-up Parents CPF Account.
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The Decumulation Phase of the CPF Contd.
• Required Minimum Sum
– As of July 2001: S$ 70,000, of Which S$ 30,000 in Cash:
S$ 40,000 Can be Pledged in Property.
• 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.
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The Decumulation Phase of the EPF
• The EPF Has Traditionally Permitted Lump Sum Withdrawal:
– 1/3 of the Total Balance at Age 50
– The Remaining at Age 55
– Given the longevity of the Population, the Withdrawal Age
is Too Low.
The Public Policy Programme, National University of Singapore
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The Decumulation Phase of the EPF Contd.
• In July 2000, the EPF Introduced Two Differed Annuity
Schemes. These Can be Purchased in Small Amounts
Throughout the Person’s Working Period. In Principle, This is
Desirable.
The Key is However the Implicit Rate of Return on the Annuity
Products, in Comparison with the EPF Dividend Rate. As the
Former is Lower, then the Dividend Rate for the Existing Two
Annuity Products, the Response may be Adversely Affected.
• As at end December 2000, 33,412 Members Had bought
Annuities Totaling RM 764.4 Million
The Public Policy Programme, National University of Singapore
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The Decumulation Phase of the EPF Contd.
• In May 2001, the government appointed a consultant to
review the annuity schemes. This was a result of opposition
from the trade unions and the public.
• Options being considered:
– EPF to provide annuities in-house
– Continuation of the current insurance companies based
arrangements
• Positive aspect is that the usefulness of the deferred annuity
concept has been accepted by all parties. The disagreements
centre on risk sharing and returns to be provided.
The Public Policy Programme, National University of Singapore
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Suggestions For Reform
Key Challenges:
–
Managing Investments of growing balances for which
development of financial and capital markets and greater
attention to corporate governance will be necessary
–
Achieving transparency and accountability
–
Giving higher priority to fiduciary responsibility
–
Reducing administrative costs, and investment management
fees and charges
The Public Policy Programme, National University of Singapore
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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.
ii.
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.
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
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Singapore - CPF contd.
•
Consider providing limited investment options to individuals on a
pooled basis, to be administered by the proposed CPF
Authority’s Investment Committee. A member may divide the
balances among the options on a periodic basis. Default options
on investment allocation can be introduced in cases where no
choice has been made.
•
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.
The Public Policy Programme, National University of Singapore
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Singapore - CPF Contd.
• End discrimination in tax treatment against non-CPF retirement
benefits.
• There are broader social security reforms needed in Singapore
(such as the introduction of tax-financed redistributive tier, and
revamping of the current inadequate health insurance
arrangements), but these are beyond the scope of this paper.
The Public Policy Programme, National University of Singapore
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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 Malaysia’s 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.
The Public Policy Programme, National University of Singapore
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Malaysia – EPF contd.
• It will also need to develop expertise in contracting – out of
balances to various specialized investment management funds,
even as it continues to enhance its in-house investment
management skills and capacities.
• The EPF needs to find a practical solution to continuing offering
deferred annuity option, making it mandatory once sufficient
expertise and experience has been developed. The annuity
product (or at least a periodic payment) should be made
compulsory.
The withdrawal age must be increased (at least for those below
30 years of age) to 60.
The Public Policy Programme, National University of Singapore
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Malaysia - EPF Contd.
• The EPF should encourage greater involvement of outside
experts, and its members to enhance its autonomy in pursuing its
fiduciary objectives. However, the EPF’s role in economic
development should not be totally abandoned, but made more
transparent and accountable.
• Greater diversification of pension funds industry should be
encouraged by permitting companies to set up pension plans and
by permitting those with large balances to join private pension
plans.
• There are broader social security reforms (such as developing
tax-financed redistributive tier, risk-pooling through national
health insurance with appropriate design to address moral hazard
issues) which are beyond the scope of this paper.
The Public Policy Programme, National University of Singapore
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Thank you
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