[h=2]A Tale of Two Pensions – SG’s & UK’s[/h]
July 29th, 2014 |
Author: Contributions
[Editor's note: Excellent revelation by Chris K. A must-read for all Singaporeans who are concerned of his CPF funds]
The writer turns the big 55 sometime in early 2015 and very likely retired. Therefore, he faces two important decisions: what to do with his CPF and with his UK employee pension. His CPF is a no-brainer; withdraw every last permissible dollar and hope for the rest. It is with the UK pension that is of interest as a comparison to CPF.
Two Equal Pots
The writer had contributions into his CPF for 11 years and had the account for 33 years. He had contributions into his UK pension for 9 years and had the account for 17 years. The total amount of contributions was nearly the same but despite the much shorter term; the UK pension provided nearly the same accumulated amount as CPF down to $1,000. This is due to the superior investment performance of the UK pension despite a 25% valuation loss in 2008 and a 30% loss in currency depreciation. Does that mean he took excessive risks to overcome these losses? No, the portfolio mix was 70% listed equities funds, 30% high grade bond funds; roughly similar to GIC, nearly matching its 20 year S$ rate of return.
Superior Returns due to Flexibility
The superior performance of UK pension over CPF was due to flexibility. Once the account is set up by the employer, the writer decides what he invests, subject to the trustees’ investment criteria (e.g. no unlisted securities, no account churning). Unlike CPF, the UK pension was not coerced into investing in low returns government bonds. In reality, nobody put every single pound in government bonds and therein lays the truism about risk. One can avoid the risk of losing money in the markets by finding comfort in “risk free”, “guaranteed” government bonds but one cannot run away from risk altogether since those comfy government bonds have the risk that they may not account for the rise in both the cost and the standard of living.
UK Pension stricter on withdrawal
Under UK legislation until 2014, the earliest that one can withdraw from the pension account is age 55. Although the writer owns the monies in the pension account, the withdrawal is only 30% of the pension pot. This is “stricter” than CPF Minimum Sum but the remainder of pension pot can be used to purchase an annuity or continue to self-invest to generate an income if one is retired, or to continue growing the account if one is still in work. There is no outcry over the withdrawal limit because it is transparent and can be used to fund retirement at anytime.
Flexible Annuities
Even in the UK, the majority of people will find self-investing for retirement income a rather daunting task. As such, annuities are very important in pooling the risk of longevity and investments to provide a regular income to pension account holders. Another superiority over CPF is that one can buy an annuity anytime from age 55 onwards. Obviously the later one buys an annuity, the higher the income derived. Compare to CPF Life, one do not have to wait until 65 to draw an income and thus avoid the sad case of expiring before drawing a single dollar. UK annuity income is normally fixed – changes in life expectancy and investment rates are born by the annuity provider. In contrast, CPF reserves to the right to change CPF Life payout; therefore the risk of retirement income is shifted entirely to the CPF member.
From 2015 onwards, changes in UK legislation will keep the 30% withdrawal limit but allow subsequent annual withdrawals subject to the same 30% of the remaining balance. Annuity providers have responded by designing annuities that not only provide a regular income but with option of periodic withdrawals.
One size fits nobody
The government’s one size fit all approach is intellectually indolent; in the early years of a working life, a pension account should assume greater risk for higher return, e.g. more equities, less bonds and as one progresses towards the last stages of working life, the account should progressively shift to lower risk, e.g. less equities, more bonds. To be coerced into a low risk, low return mode throughout an entire working life is to cause enormous opportunity costs to CPF members. Besides, this inflexible approach towards annuities failed to account for the persistent rise in long term unemployment among older workers, aged 50 and above, who need an income in the absence of stabilisation programs.
[h=3]“The present tweaking of the system is really to obscure the monopoly the government has over retirement funding which serve its own finances and political agenda”[/h]Conclusion
The present tweaking of the system is really to obscure the monopoly the government has over retirement funding which serve its own finances and political agenda. The minimum sum ensure total amount of funds available for investments in GIC and Temasek remains enormous generating substantial discretionary spending through the Net Investment Return Contribution. The low rate of returns meant more excess returns are delivered to the NIRC and past reserves. The captive nature of long term savings meant interest rates are ridiculously low to the detriment of personal savings, generating even cheaper reserves for GIC and Temasek through issuance of SGS.
The flexible UK employment pension is a good alternative to give citizens the freedom to manage their retirement savings according to age, needs, preferences and aspirations and is a good compromise to address both their concerns of not getting back their monies and the concern over adequacy. But it is this flexibility that is a threat to the government’s monopoly.
Chris K
* Chris K holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.
[Editor's note: Excellent revelation by Chris K. A must-read for all Singaporeans who are concerned of his CPF funds]
Two Equal Pots
The writer had contributions into his CPF for 11 years and had the account for 33 years. He had contributions into his UK pension for 9 years and had the account for 17 years. The total amount of contributions was nearly the same but despite the much shorter term; the UK pension provided nearly the same accumulated amount as CPF down to $1,000. This is due to the superior investment performance of the UK pension despite a 25% valuation loss in 2008 and a 30% loss in currency depreciation. Does that mean he took excessive risks to overcome these losses? No, the portfolio mix was 70% listed equities funds, 30% high grade bond funds; roughly similar to GIC, nearly matching its 20 year S$ rate of return.
Superior Returns due to Flexibility
The superior performance of UK pension over CPF was due to flexibility. Once the account is set up by the employer, the writer decides what he invests, subject to the trustees’ investment criteria (e.g. no unlisted securities, no account churning). Unlike CPF, the UK pension was not coerced into investing in low returns government bonds. In reality, nobody put every single pound in government bonds and therein lays the truism about risk. One can avoid the risk of losing money in the markets by finding comfort in “risk free”, “guaranteed” government bonds but one cannot run away from risk altogether since those comfy government bonds have the risk that they may not account for the rise in both the cost and the standard of living.
UK Pension stricter on withdrawal
Under UK legislation until 2014, the earliest that one can withdraw from the pension account is age 55. Although the writer owns the monies in the pension account, the withdrawal is only 30% of the pension pot. This is “stricter” than CPF Minimum Sum but the remainder of pension pot can be used to purchase an annuity or continue to self-invest to generate an income if one is retired, or to continue growing the account if one is still in work. There is no outcry over the withdrawal limit because it is transparent and can be used to fund retirement at anytime.
Flexible Annuities
Even in the UK, the majority of people will find self-investing for retirement income a rather daunting task. As such, annuities are very important in pooling the risk of longevity and investments to provide a regular income to pension account holders. Another superiority over CPF is that one can buy an annuity anytime from age 55 onwards. Obviously the later one buys an annuity, the higher the income derived. Compare to CPF Life, one do not have to wait until 65 to draw an income and thus avoid the sad case of expiring before drawing a single dollar. UK annuity income is normally fixed – changes in life expectancy and investment rates are born by the annuity provider. In contrast, CPF reserves to the right to change CPF Life payout; therefore the risk of retirement income is shifted entirely to the CPF member.
From 2015 onwards, changes in UK legislation will keep the 30% withdrawal limit but allow subsequent annual withdrawals subject to the same 30% of the remaining balance. Annuity providers have responded by designing annuities that not only provide a regular income but with option of periodic withdrawals.
One size fits nobody
The government’s one size fit all approach is intellectually indolent; in the early years of a working life, a pension account should assume greater risk for higher return, e.g. more equities, less bonds and as one progresses towards the last stages of working life, the account should progressively shift to lower risk, e.g. less equities, more bonds. To be coerced into a low risk, low return mode throughout an entire working life is to cause enormous opportunity costs to CPF members. Besides, this inflexible approach towards annuities failed to account for the persistent rise in long term unemployment among older workers, aged 50 and above, who need an income in the absence of stabilisation programs.
[h=3]“The present tweaking of the system is really to obscure the monopoly the government has over retirement funding which serve its own finances and political agenda”[/h]Conclusion
The present tweaking of the system is really to obscure the monopoly the government has over retirement funding which serve its own finances and political agenda. The minimum sum ensure total amount of funds available for investments in GIC and Temasek remains enormous generating substantial discretionary spending through the Net Investment Return Contribution. The low rate of returns meant more excess returns are delivered to the NIRC and past reserves. The captive nature of long term savings meant interest rates are ridiculously low to the detriment of personal savings, generating even cheaper reserves for GIC and Temasek through issuance of SGS.
The flexible UK employment pension is a good alternative to give citizens the freedom to manage their retirement savings according to age, needs, preferences and aspirations and is a good compromise to address both their concerns of not getting back their monies and the concern over adequacy. But it is this flexibility that is a threat to the government’s monopoly.
Chris K
* Chris K holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.
