19 October 2015

Singapore's CPF retirement savings systems slips in the MMGPI rankings

A slight drop in the index value of Singapore’s retirement savings system, the Central Provident Fund (CPF), has seen it slip from a B grade to C+ grade in the 2015 Melbourne Mercer Global Pension Index (MMGPI). Singapore’s overall score decreased from 65.9 in 2014 to 64.7 in 2015, moving it further away from an ‘A’ grade, which is given to pension systems that score above 80. Denmark and Netherlands are the only countries to achieve an A grade in the history of the index.

The drop in Singapore’s score is attributable to:

1) A change in calculation which reduced the level of pension assets as a percentage of GDP for Singapore. This calculation represents the amount of money set aside for retirement;

2) Most recent data from the Economic Intelligence Unit showing a decrease in the net household savings rate for Singapore;

3) The United Nations’ updated life expectancy figures in its World Population Prospects: The 2015 Revision report, showed a continued decline in mortality rates for Singapore.

“While Singapore’s retirement income system remains amongst the best in Asia, we are not the best globally. Improvement will be influenced by the legislative and regulatory environment,” said Neil Narale, Asia Retirement Leader for Mercer.

“However, Singapore is on the right track, having announced improvements to CPF in 2016, including increasing the wage limit, contributions and guaranteed investment returns for older members and introduction of the Silver Support Scheme to help low income retirees."

Now in its seventh year, the MMGPI measured 25 retirement income systems against more than 40 indicators under the sub-indices of adequacy, sustainability and integrity. The MMGPI is the world’s most comprehensive comparison of pension systems. It covers close to 60% of the world’s population and suggests how governments can provide adequate and sustainable benefits that protect their citizens against longevity risk, the risk of their ageing population outliving their savings, potentially one of the biggest economic and social risks facing many retirees today.

Author of the report and Senior Partner at Mercer Dr David Knox said, “Implementing the right reform to improve pension systems and provide financial security in retirement has never been more critical for both individuals and societies.

“The MMGPI is an important reference for policy makers around the world to learn from the most adequate and sustainable systems. We know there is no perfect system that can be applied universally, but there are many common features that can be shared for better outcomes.”

The 2015 MMGPI looked beyond the annual rankings to observe changes over the last seven years and assess which pension systems will continue to deliver and which ones are at risk.

“Our seven-year snapshot highlights the importance of measures such as adjusting the state pension age, increasing workforce participation amongst our ageing population, or funding additional contributions for future retirement income,” said Dr Knox.

All of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement from 2009 to 2015, with the average length rising from 16.6 years to 18.4 years.

Five countries – Australia, Germany, Japan, Singapore and the UK – have increased their pension age to offset the increase in life expectancies, but these are not enough to halt the increasing length of retirement.

The Index also looks at the average expected length of retirement in 20 years, and by this measure, three countries have witnessed a reduction. For Canada and the Netherlands this is due to a projected increase in the state pension age from 65 to 67 during the 20 years, while for the US, life expectancy has reduced slightly. The other eight countries showed an increase.

For the 16 countries that have been part of the MMGPI since the 2011 report, the average labour force participation rate for 55 to 64 year olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% per year.

However, averages can be misleading. The labour force participation rate at older ages actually went backwards in the US. In Brazil, India and China, it increased by less than 4%.

“Extending the years that individuals spend in the workforce is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” Dr Knox said.

“While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems.”

The sustainability of a pension fund cannot be assessed without reviewing the level of funds set aside today to pay future retirement benefits so that the expected pension are not a financial strain on the next generation.

There is an enormous variety in the level of pension assets held ranging from 1.8% of GDP in Indonesia and 6% of GDP in Austria to 160.6% of GDP in the Netherlands and 168.9% of GDP in Denmark.

“The diversity in pension assets held as a percentage of GDP recognises that some countries have very limited private pension arrangements whereas others have well-developed and mature pension systems. However, it is an important warning for all countries to prepare, prepare, prepare,” said Dr Knox.

The MMGPI notes that there is room for improvement in all countries’ retirement income systems. Suggested measures to improve Singapore’s system include:

· Reducing the barriers to establishing tax-approved group corporate retirement plans;

· Opening CPF to non-residents (who comprise more than one-third of the labour force);

· Increasing the labour force participation rate amongst older workers.

“Employers continue to be interested in either sponsoring a corporate retirement plan, or privately managing parts of the CPF investments. Policies that include employer participation would further increase Singapore’s grade in the future,” said Narale.

The Index looks objectively at both the publicly-funded and private components of a system, as well as personal assets and savings outside the pension system. It is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State government of Australia.