By Chris Kuan
In today's post, I like to delve further into the retirement proposition in respond to my old friend, the ex-TRE editor Richard Wan whose comment on my timeline was reposted by TOC.
Richard wrote (truncated),
"Chris, I think the key here is freedom of choice by the individuals and having each citizen taking responsibility of their own life. In that respect, the HK'S MPF system appears to be more "democratic" than our CPF. Like what you have said, MPF allows a member to choose an annuity programme provided by various approved 3rd parties and if an individual (e.g one who smokes 5 packs a day) thinks he is not going to live that long and wants to opt out any annuity, MPF allows for that. That is, MPF allows for consumer choices."
I absolutely agree with Richard: choice is good, allow us to be self reliant, makes us responsible for our own decision. Most of all choice introduce competition to the benefit of consumers. But there is a trouble with choice in a very peculiar Singapore way.
What is the trouble? The utter rubbish that is the Singapore annuity market. If Central Provident Fund (CPF) is remodeled to give members the choice to use their minimum sum (MS) at any point after 55 to purchase for themselves an annuity that best fit their particular circumstances, members will find there so few choices that it is as if they were not given a choice at all.
Nearly all the annuities are deferred annuities in which the drawdown date is pegged at 65. So far I have seen only 1 immediate annuity in which the drawdown takes place straightaway. Therefore there is hardly any difference to CPF LIFE in the timing of the income drawdown phase. But for those who need to receive an income because of the force of circumstances such as illness or joblessness, the choice is extremely limited even if you are allowed to use your MS to receive at income from 55 onwards.
By contrast, the UK annuity market provides lots of choices - for an example you can choose the drawdown date anytime between 55 and 70 (the later the drawdown date, the higher the drawdown), you can have it as joint life or single life, you can have it full life or term limited, you can have it inflation-indexed.
Then there is the issue of price in Singapore. Most annuities do not provide a higher rate of return than CPF LIFE - those that do, the difference is too small to compensate for the higher risk of default in a private annuity compared to government backed LIFE.
Why like-dat you ask? The retirement planning specialists I spoke to shrugged their shoulders and say it is the regulations of Monetary Authority of Singapore (MAS).
If that is indeed the case, one can see how things are stitched up to favour CPF and to prevent competition from a flexible annuity market. Do remember that you can go above your Minimum Sum to ensure a bigger drawdown so one can say the entire regulatory and market set-up has been rigged in favour of CPF so that you would want to leave more than your MS if you have the money.
But it goes further. Why are insurance companies unable to generate sufficiently high returns to make annuities attractive? The answer lies in how the government arranged the financial aspect of the economy. The capture of long term savings (up to 40% of wages) via CPF acts like a monopoly which suppressed the rate of return because the government need not compete for debt issuance. Therefore bond yields which is the main determinant of annuity rates are historically low.
Do remember Singapore's triple A credit rating imposed costs - low bond yields resulting in lousy rates of returns is one of them and that is at the cost of your retirement. If this is not enough, most of the high quality issuer of corporate debt are the Government-linked Companies (GLCs) who enjoyed issuing bonds at a high price (conversely low yield) because of the implicit guarantee conferred by being owned by Temasek Holdings.
So there you have it, given a choice to use your MS to arrange for retirement income through private annuities from 55 onwards actually leave you with no choice or very little of it. Which is the reason why many members go for the Enhanced Retirement Sum which is currently $241,500*. What a way for the government retain more of your CPF savings. Beyond the MS, it is all voluntary you see, no need for coercion.
Therefore in last week post I proposed as follows
- Make CPF LIFE flexible to allow members to receive an income at any point starting from age 55. This fits much better to the present employment patterns which are radically different from just 20 years ago,
- Introduce a means tested, inflation-indexed Basic State Pension of $600 a month, could be more, effective from age 65, funded from the constitution reserves spending rule. This will help reduce poverty in retirement and to supplement the retirement income of those forced to draw on their LIFE income early.
These objectives are achievable. To develop the annuity market to provide real choice like in the UK will require untangling large swathes of the political economy that may cause huge unintended consequences.
This edited post was first published as a Facebook post at Chris' personal page in response to an earlier posting he did.
*Levels of retirement sum to set aside in CPF retirement account