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Singaporeans may retire more comfortably if they could cost-effectively invest earlier in life in higher risk-return assets, according to research Singapore Exchange (SGX) commissioned.
Assuming investment costs were lowered, and individuals could more freely invest in equities and other higher risk-return assets with their Central Provident Fund (CPF) Special Account funds, the paper showed expected returns on retirement savings could improve almost 20% to 4.4% a year. As a result, the average Singaporean could receive 16% more each month, or S$2,421 in today’s money.
In the paper entitled “Retiring in Comfort”, management consultancy Oliver Wyman based its research on data on the CPF mandatory retirement savings scheme.
The paper also noted:
• Far more retirement savings in Singapore are held in fixed rate bank deposits than in many other countries. Only 12% of investible CPF savings are held in equities versus 50-70% in a range of other countries including US, UK, Hong Kong, Malaysia and Australia. S$74 billion of CPF funds eligible for investing are held in these fixed deposits.
• Of all the funds held under the CPF scheme, 97% were put into fixed deposits, property and insurance. Only the remaining 3% were put into equities, mutual funds, or unit trusts.
• The average Singaporean has a relatively short time-frame to invest CPF retirement savings. CPF rules require a CPF Special Account cash balance of at least S$40,000 before any investment of excess Special Account savings can be made. Most people only achieve this at age 40. In other retirement systems, investment into equities and other higher risk-return assets begins at an earlier stage.
The paper suggests options to replace the minimum CPF Special Account balance complemented with new safeguards to limit investment risks as individuals approach retirement. This will allow a longer investment period in equities to improve expected returns while prudently managing risks.
“The so-called retirement gap has become a hot topic in Singapore. What is troubling is that Singaporeans are holding a lot of cash at the risk of low yields. We need to learn to invest in suitable assets of potentially higher returns over the long term, so that we can look forward to a more secure future,” said David Gerald, president of Securities Investors Association (Singapore).
“This report is very timely given that an increasing portion of Singapore society will rely on retirement savings in future. IMAS supports any move to encourage retirement savers to prudently increase their exposure to markets particularly in their early years, in an effort to achieve a better retirement outcome. We also believe the savings industry has the capabilities to underpin such an initiative,” said Lester Gray, chairman of the Investment Management Association of Singapore.
“Singaporeans today have an opportunity to make their cash and CPF savings work harder and smarter for a more comfortable future. This paper aims to draw attention to this opportunity. We hope all stakeholders, the savings industry and all of us Singaporeans will enter a healthy discussion on the best way forward,” said Chew Sutat, Executive Vice President, SGX.
An SGX and Oliver Wyman paper on retirement savings
