CPF scored a B in the Global Pension Index: Why didn't we score an A?

PHOTO: The Straits Times file

The Central Provident Fund (CPF) scored a B for their report card

According to the Melbourne Mercer Global Pension Index 2020, the Central Provident Fund (CPF) is given a grade B, similar to 2019.

This indicates that it is a sound structure with many good features.

However, there are also some areas for improvement that differentiate it from an A-grade system.

This puts us on the same grade as the pension systems of

  • Israel
  • Australia
  • Finland
  • Sweden
  • Norway
  • Canada
  • New Zealand
  • Germany
  • Switzerland
  • Chile
  • Ireland

The Netherlands and Denmark’s pension system topped the class once again with an A grade, indicating that they have a first-class and robust retirement income system.

“How can dis b allow?”

According to the Asian grading scale, scoring a B is bad!

Very much like how we constantly strive for an A grade in school, we take a look at what caused CPF to lose points against the rest of the pension systems.

But before, we get to that, we look at how is the Melbourne Mercer Global Pension Index determined.

Like any other exam, you need to know the syllabus (and do lots of ten-year series), before you can do well in the examination.

How is the Melbourne Mercer Global Pension Index determined?

To do well in an exam, we first need to know how we are being graded.

We take a look at how the factors that will affect the grading of pension funds.

Adequacy Sustainability Integrity
Indicators Benefits
System design
Government support
Home ownership
Growth Assets
Pension coverage
Total assets
Government debt
Economic growth
Operating costs
Weightage 40 per cent 35 per cent 25 per cent
Overall Value 100 per cent

What does the grading mean?

For every score, a country’s pension system will be given a grade.

Grade Score What does it mean?
A More than 80 First class and robust retirement income system that delivers good benefits, is sustainable, with high level of integrity.
B+ 75 to 80 A system with sound structure and many good features.

There are some areas for improvement that differentiates it from an A-grade system.
B 65 to 75
C+ 60 to 65 A system with some good features, but has major risks and/or shortcomings that need to be addressed.

Failure to address these shortcomings can hurt the effectiveness or long-term sustainability of the pension system.
C 50 to 60
D 35 to 50 System with some desirable features, but also major weakness and/pr omissions that need to be addressed.

Its efficacy and sustainability will be in doubt without these improvements.
E Less than 35 Poor system that may be in early stages of development or non-existent.

ALSO READ: The ultimate CPF guide 2021: Contributions, interest rates, minimum sums & calculators

CPF’s score

With the criteria stated above, Singapore’s pension system received a total score of 71.2.

Of which, we scored

  • 74.1 for adequacy
  • 59.9 for sustainability
  • 82.5 for integrity

Singapore’s pension system scored 70.8 in the year 2018.

Why did we not score an A?

For Singapore’s retirement income system to achieve a better score, here are what the experts believe we should be doing.

  • Opening CPF to non-residents
    (Given that non-residents take up quite a percentage of Singapore’s workforce)
  • Increasing the age to withdraw CPF , given that Singaporeans are living longer.
  • Reducing the barriers to establishing tax-approved group corporate retirement plans

Of the three suggestions, increasing the age to withdraw CPF is definitely something that will be unpopular amongst Singaporeans. There is a percentage of Singaporeans who continues to tap on the interest rate of CPF even when they turn 55.

The A grade pension systems

Curious about what contributes to Netherlands and Denmark having a first-class pension system, we take a look at to see if there is anything we can possibly learn from them!

The Dutch pension system

The Dutch pension system consists of three major pillars.

Pillar Description
General Old-Age Pensions Act (AOW) Paid to everyone living in Netherlands once they reached the eligible age
(currently 65 years old, 67 years old in the year 2024)

Residents of the Netherlands will build up their AOW pension at about 2 per cent yearly for 50 years until reaching eligible age.
Occupational Pensions Contributed by both employees and employers into a pension fund.

This pension fund can be industry-specific, company-specific or a fund for a group of people working in certain professions.

Private pension funds in the Netherlands are non-profit organizations. Due to the nature of these organisations being independent entities and not part of any company, its pension fund will not be affected if these companies get into financial difficulties.
Individual Private Pensions For self-employed or employees in sectors without a collective pension scheme, individuals can buy and manage pension products and make investments independently.

Some of these products include life insurance, stocks and real estate. Tax allowances will be given up to a certain level.

Source: www.pensioenfederatie.nl

The Denmark pension system

Denmark’s pension system is as complicated too.

It is probably the nature of all pension systems worldwide. There are simply too many grounds to cover with one system.

There are various pension schemes in Demark, namely

Pension Schemes in Denmark Description
State pension scheme People living in Denmark will be entitled to state pension upon reaching the eligible age.

For wage earners, the employer will ensure that part of your salary is contributed to a pension scheme.
ATP Livslang Pension
(ATP lifelong pension)
A statutory pension scheme for workers between 16 and 67 years of age, working at least nine hours per week.

ATP will be paid to you automatically upon reaching the eligible pension age.
Labour Market Pension Collectively agreed upon between various players in the labour market of a specific field.
Company Pension Agreed upon between the employer and employee.
Individual Pension Individuals can set this up with their bank or a pension fund

Will there ever be a perfect pension system?

Despite all the findings, it is important that we acknowledge that there is no one size fits all solution for every country’s pension system. Each country has its own system, economic, social and cultural circumstances to take into account.

On top of that, there are just simply too many permutations to have a blanket solution to everyone’s retirement plan.

ALSO READ: Govt to match CPF top-ups for half of those aged 55-70

What can we do?

In Singapore, we once compiled a minimum amount required for Singaporeans upon retiring, to meet their basic needs.

Demographic of household How much you need for basic needs
Single elderly household $1,379 per month
Coupled elderly household $2,351 per month
Single person

(aged 55 - 64 years old)
$1,721 per month

Also, despite Singaporeans living longer, we will only have our good health until an average of 73 years old, which indicates additional healthcare cost after that.

The mindset around retirement is that, while the CPF system is ranked seventh in the world, it will be really risky for us to rely on it solely for retirement.

In fact, if we take a look at the payout for CPF Life, it probably accounts for only a percentage of your last drawn salary at that stage.

Some of the suggestions that were brought up include:

  • Increasing the average retirement age
  • Increasing the savings rate

These changes may be necessary from a holistic point of view for every pension system, but it may be undesirable for an individual.

One possible way Singapore can do better is that if employers and government can work together to push out a more coordinated policy or message in saving up for retirement early.

Ultimately, it all boils down to each and every Singaporean. It is extremely important that we plan ahead for our retirement, on top of our reliant on our pension system.

The best time to do this is now!

This article was first published in Seedly.

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