CPF REFORMS AND OTHER MEASURES FOR A SECURE RETIREMENT

CPF REFORMS AND OTHER MEASURES FOR A SECURE RETIREMENT: Debate resumed.

6.15 pm

The Senior Parliamentary Secretary to the Minister for the Environment and Water Resources (Dr Amy Khor Lean Suan): Mr Deputy Speaker, Sir, this year REACH conducted an extensive feedback exercise for the changes announced in the Prime Minister's National Day Rally. In all, REACH received a total of 1,035 responses from new media - SMS, e-poll, and online discussions. We also got responses from 268 participants in the old fashioned way - at dialogue sessions as well as the e-townhall webchat. I can confirm that this is by far the most extensive feedback received by REACH on any NDR - which attests to the wide

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spread public interest to the changes announced by PM.

The overall reception to the key issues raised at the NDR is positive. In fact, 71% of the respondents in the e-poll expressed greater confidence in Singapore's future after listening to or reading PM's NDR message.

Nonetheless, the top three issues across all feedback platforms, and which garnered the most vigorous debate, are in descending order of interest level - the compulsory annuity scheme, the re-employment legislation and deferment of the CPF Minimum Sum draw-down age.

I am happy to note that the Government is taking into account the preliminary feedback which REACH and others have submitted on these three issues, even as it fine-tunes policy and implementation details.

From the additional input received as well as my own investigations, I wish to highlight several other issues relating to the key CPF changes, which the Government can further consider as it gears up to implement the proposed changes.

Compulsory annuity or longevity insurance

Sir, I support the intent of the compulsory annuity scheme to provide Singaporeans with at least a subsistence standard of living if we live beyond the expiry age of the Minimum Sum payout period.

At a recent dialogue session, one of my grassroots leader shared that he had opted to purchase an annuity when he reached the age of 55 and is now looking forward to the payout of about $700 per month from next year when he reaches 65 for the rest of his life. He remarked that he believes the annuity scheme is an excellent idea.

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In a poll I conducted with 33 participants on the REACH's e-townhall web chat, only two participants had reservations about the compulsory annuity scheme whilst the majority supported it. This however seems to be the exception rather than the rule and the very positive result occurred after we took pains to explain in detail the rationale of the scheme.

From the other feedback channels, over the past month, the naysayers outnumber the supporters. It is by far the most hotly debated issue among the slew of changes announced at the NDR.

Based on feedback to REACH, there are four main objections to the scheme. Let me call them the four "U's".

Unrealistic minimum age limit of 85

As the Minister has earlier noted, most people still do not believe they will live long enough to enjoy the annuity payout which only starts after the age of 85. It would seem that whilst many Singaporeans accept the inevitability of ageing, they have not seriously considered the possibility that they themselves may become octogenarians. But statistics show differently and, therefore, whatever their medical condition and state of health, the annuity will come in very useful for someone 85 or older.

A grassroots member of mine noted that it would be useful if the Government could let us know how many in our constituency have already lived past the age of 85 and how many more are likely to be above 85 in the next few years. Perhaps, taking a page from PM, we should organise grassroots or community outings to Sam Tan's or Lily Neo's wards to convince Singaporeans that this scenario is already happening and is fast becoming a reality in other wards too! There is a gap in understanding which public education can help to address.

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Uncertain payback

Members of this House are familiar with the kiasu Singaporean. Mr Deputy Speaker, Sir, the next objection is the " pau su " syndrome, "Won't I lose out if I die early since the money cannot be handed to my next-of-kin? You mean, my hard earned money will be taken away to benefit a very small pool of people who are fortunate enough to live beyond 85." They view this as a " pau su " (sure lose) proposition.

I surmise that many people hold this view because a large number of Singaporeans still do not buy insurance and are unfamiliar with the concept. Annuities are even less understood as it is reported that last year only 4.1% of CPF members who turned 55 bought annuities with their Minimum Sum. Again, Sir, there is a gap in understanding which calls for an educational campaign on the concept of an annuity, especially among heartlanders, and in a language that they can understand, which I am glad the Ministry will be doing over the next few months.

Perhaps, it would be simpler to explain to the public that whilst buying an annuity is not a " pau chiah " (sure win) proposition, it is also not a " pau su " case. Rather, it is " pau ho " which means "guaranteed good", because it gives more bang for the buck for the growing ranks of those who enjoy length of life, and who knows, you just could be one of them!

Uncompromising condition

It is uncompromising because it is compulsory. And many are unhappy with the compulsory nature of the scheme. They argue with great passion that CPF monies are their hard earned money and the Government has no business to

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dictate how they spend their own money.

One of my younger residents even emailed to me pointing to those who feel that having toiled and contributed taxes when they are young, it would not be too much to ask for a handout from the State if one lives beyond 85 and has no money to live on. But this argument is flawed as the pool of funds is always finite. So there will be trade-offs - either there will be less tax money for other areas like education and health or, as the pool of octogenarians increases, the Government will have to impose higher taxes on the younger working population to support the seniors!

The less well-off are often the ones that are least prepared for retirement, and it is precisely this group that will benefit most from an annuity scheme. Hence, if the system is to cater to people who are less well- off and may not be able to plan for themselves, the amount to be withheld from the Minimum Sum at the age of 65 must be as low as possible.

Sir, whilst I agree that some flexibility, including opt-outs, should be injected into the system, these should be sparingly and judiciously allowed. I support an annuity scheme with limited opt-out as it ensures that it will have the largest possible risk pool and be able to enjoy the economies of scale needed to yield the lowest premium, thereby benefiting the maximum number of people.

Furthermore, a basic annuity scheme with no inheritance value should you die before the payout age would be the cheapest. So for the masses, we need to aim for a " ko pih, ko chi " (cheap and good) basic annuity. However, for those who prefer to have an annuity which their next-of-kin could inherit should they pass on before the minimum payout age limit or wish to draw down earlier, they could

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purchase a rider, which will allow for such outcomes. Exemptions could also be given, say, for those who have already bought an annuity but on a once-off transitionary provision.

All others should buy the basic annuity and any riders that may be offered under the scheme to achieve their desired outcomes. This will then minimise the moral hazard of private insurers cherry picking and where the rich, who have purchased their own annuities, can opt out anytime, thus leaving only the poor in the pool. To some extent, we already have experience of this in the ElderShield scheme, which is currently being reviewed.

Unattractive payouts

Some have noted, as my colleagues before me too, that the indicated payout of $250 or $300 per month is inadequate. In fact, feedback about the inadequacy of the ElderShield payouts, among others, is one of the reasons for its current revamp. Others have expressed reservations about such a scheme being run by private insurers. They feel that as private insurers are profit-oriented entities, the monthly payout would be less attractive as the insurers would have to factor in a decent profit and also take into account all costs incurred. Indeed, many people have asked that the compulsory annuity scheme be administered by the CPF Board instead of private insurers. Hence, I am pleased that the Minister agrees to address these concerns. The annuity scheme could be modelled after the MediShield concept which is implemented by the Health Ministry with private insurers. I understand that this arrangement has worked well for MediShield where the private insurers are required to integrate their enhancement plans with the basic MediShield as one single product. In the same way, the CPF Board could administer the basic annuity scheme,

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while any enhancement to the scheme is done by private insurers.

Deferment of minimum draw-down age and the re-employment legislation

There is coffeeshop talk that the changes to the CPF have been made for the sole purpose of delaying payment on the CPF accounts. Many people are upset that the promise to return them what is essentially their hard earned money at a certain time by the Government keeps getting deferred.

There are also those who are worried that they may end up in a catch-22 situation where they are unable to get re-employment and yet cannot draw down on their Minimum Sum. Sir, they are saying, in Hokkien, " Boh reid, boh kang ", that is, "No money, no job" - an untenable double jeopardy!

They have asked the Government to allow those who genuinely cannot get re-employed and need the Minimum Sum payout to start withdrawing earlier. More importantly, they feel that the Government must ensure that the re-employment legislation works before the deferment in the draw-down age starts. Many have thus suggested that the re-employment legislation should kick in earlier before 2012, to ensure its effectiveness before the draw-down age is progressively deferred from 2012. These are genuine concerns and practical difficulties on the ground that the Government should seriously consider. Indeed, I support the call to implement the re-employment legislation earlier to allay the concerns of workers.

Conclusion

Sir, over the six years that I have been an MP, I have increasingly seen more elderly residents in their 60s and older who are asking for financial and job

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assistance. They often say that they have depleted their CPF, have no other savings and their children are unable to support them. In fact, under the CDCs' job database, about 10% of the employees seeking employment are aged 60 and above.

Hence, I think it is timely that we take steps to start tackling these challenges now so that our children - yours and mine - and their children, are not left to shoulder the burden. No doubt, this set of measures will need to be refined over time to minimise any moral hazard and administrative failings, but it is a good start.

It must also be recognised that these changes are by themselves no panacea that will solve all our ageing woes. Other aspects such as devising an affordable healthcare system for the elderly, educating Singaporeans on financial planning and promoting healthy lifestyles and family values would also have to be addressed.

Sir, I support the Minister's Statement.

6.27 pm

Mr Ong Ah Heng (Nee Soon Central): ( In Mandarin ): [For vernacular speech, please refer to Appendix A.] Mr Deputy Speaker, Sir, birth, ageing, illness and death are a natural process of life. But in this process, who should be held responsible and who should provide us with the basic necessities of life? Apart from the parents, the people will think that it is the responsibility of the Government. Our Government leaders also understand the mindset of our people. Therefore, our leaders always try to persuade the people not to overly rely on the Government. I think our Government has slightly changed its approach, that is,

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to ensure that the people buy longevity insurance when they are still young, during their golden age, maybe 20-30 years old and they start earning money, to make it compulsory for them to buy the longevity insurance. It is not really a bad idea, as this will ensure that these people who are in their 30s, 40s or 50s, or when they grow older, will be able to live comfortably.

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Mr Deputy Speaker, sometimes, when we are in the coffeeshop, some residents have asked me whether the Government is trying to delay giving us back our CPF monies. They said that by the time they can take back their CPF money, maybe it is time for them to go. I think we should understand this common worry that the people have, and the fear that they will not have a long life to enjoy their monies. But, on the other hand, I try my best to explain to them that having the money but not living long enough to enjoy it, is far better than having none at old age. If they had lived until a very old age, but they have no money, that is even more terrible because, at that time, if their children do not support them, then their life will be more meaningless. So, if they have money, although they cannot live long enough, it is still better than if they live long enough but have no money. Of course, not everyone will agree with this, but what I am trying to tell them is that it is a task for every individual, everybody must take care of his old age and be responsible for his retirement.

Mr Deputy Speaker, what I am worried about is that when they reach their 60s and 70s, they will have no work. What are they going to do? And who will help them? If they have grown-up children, they will have no problem as their children can earn enough money to help them financially. However, if their children belong to the low-income group, then some problems might arise. Therefore, I hope our Government will also consider the plight of this group of people.

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Secondly, as what has been raised by my colleagues earlier, why is the age set at 85? Is it because the insurance company is telling our Government that we should set at 85, but not 82 or 80? I am raising this because a lot of constituents have asked me this question. Because they cannot believe that they can live until 85 or beyond. This is especially so in my constituency because most of them are in the middle and lower-income groups. They believe that their life is pre-destined. Therefore, they have no confidence to live up to 85 or beyond. So, is it possible that the committee, led by Prof. Lim, consider lowering the Minimum Sum draw-down age, and to consider having a different payout at different ages, for instance, when they reach 85, they can get a higher payout, but if they draw out at 80 years old, they get a lower sum?

Mr Deputy Speaker, up to now, those middle and lower-income groups who have no work or income depend heavily on the subsidies from our constituencies, ComCare and CCC funds. They have asked us, "How long can I continue to draw on this fund and the subsidies?" And we have always explained to them that the Government will not transfer the responsibility to the people. In fact, under the CPF reform scheme, it is, just like what our Minister has said, that the Government has set aside about $120 million for this purpose. In addition, the Government will incur about $110 million every year on employment funds as well as the increased rate of return on CPF funds. So we explain this to them. Our Government would try to help them in various respects. But how long can the Government continue to help them? Nobody can give them a guaranteed answer.

So how are we going to answer them? The only answer we can give them is: only when the PAP is in power, we can guarantee that. But if the PAP is no longer in power, we cannot give them

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that guarantee. Just look around, a lot of leaders in the other countries just pocket the money of the nation. Therefore, we say that so long as the PAP is still in power, we can give them such a guarantee. Those people who do not support the Government say, "Oh, you are cheating us of our votes." But that is the case in reality. In other words, if the PAP is not in power, how can the people continue to expect higher returns from the CPF funds and all kinds of Workfare subsidies and to expect every month and every week, during the Budget session, they can get some subsidies and all kinds of financial help from the ComCare fund, etc? So when our Minister rolls out all these schemes, we hope that the new committee will consider all these points and maybe they should study the scheme further, and allow the people to be given the choice to choose whether they want to draw out at 85, 82 or 80, and how much they can get at 80, 82 or 85 years old.

Finally, I would like to praise our Manpower Minister Dr Ng Eng Hen for implementing such a good scheme which is widely acceptable, especially paying attention to those low-income groups with a monthly salary of about $800-$1,500. In fact, the additional 1% interest under the new CPF scheme will benefit all our people and I support and thank him for this new measure.

6.35 pm

Mr Inderjit Singh (Ang Mo Kio): Mr Deputy Speaker, Sir, retirement savings seems to be one of the most challenging issues that the Government continues to struggle with since the last 30 years or so. In 1984, or around that time, we thought that the Minimum Sum scheme would be enough to solve the problem, but it did not do so. In the past, we have been addressing the retirement savings on a piecemeal basis and I am therefore glad that the Prime Minister has finally decided

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to take a more holistic approach in solving this very difficult issue for Singaporeans.

It is, however, unfortunate that we have not convinced all Singaporeans with the various schemes that have been announced or spoken about in the past few weeks. The annuity scheme or the longevity insurance scheme has been perceived negatively and it is a pity because we know that this is definitely the missing piece, as what the Minister for Manpower mentioned earlier on. The variable interest rate for part of the CPF savings is also an unpopular move.

Sir, the real issue is, and we all know this, that we want to ensure that Singaporeans have enough money to last them their entire retirement years, in fact, the entire lifetime. Where the differences of opinion lie are the extent to which it is believed that the Government should be responsible for helping Singaporeans.

Sir, our social compact has been on the basis that retirement must be provided for by the people out of their own savings. The contribution rate that was initially thought to be necessary to provide for people's retirement was set at 50% of the salary to be contributed equally by the employers and employees. This is something that the Government seems to have lost sight of, the 50%.

It is sad that we face a situation where only one out of three Singaporeans has enough to meet the Minimum Sum criteria upon reaching the age of 62. So, what went wrong with our CPF scheme? The answer is simple.

The CPF scheme was used to do too many things. Starting with the real objective of retirement savings when CPF was started, over the years, we made use of the same tool, the CPF, to do too many things, including promoting home ownership and as an economic stimulant.

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These goals have been pulling the scheme in different directions. Home ownership means less money for retirement savings. Using CPF as an economic tool and cutting employers' contributions to cut business cost similarly meant that there was less money accumulated for retirement savings.

I am not saying that these ends were not important. After all, we have today one of the highest home ownership rates in the world. We were also able to recover from the various recessions and the Asian economic crisis by cutting the CPF rates to stimulate the economy. But at the same time, life expectancies have gone up and people will need more, and not less, cash in their CPF. So a simple retirement savings tool became one that was pulled in different directions and in opposing directions at times. So the problem we are seeing today has been brewing for quite a while.

The real solution therefore is to either bump up the CPF savings or the contribution rates to CPF or create a national pension plan and also to reconvert the housing assets into liquid assets. The Prime Minister has therefore rightly envisioned a holistic approach, and I think the proposed plans, if fine-tuned correctly, will go a long way in addressing most of our retirement savings problems.

Let me first address the proposals for delaying the CPF withdrawals and boosting the Minimum Sum and annuities. Sir, by deferring withdrawals, we create a new problem for people who do not have the necessary Minimum Sum upon reaching the age of 55. They may, as a result, not have enough to see them to the next milestone, which is the age of 62, when they can draw on their Minimum Sum. This delaying will therefore only work if implemented hand-in-hand with the delaying of the retirement age and also protecting the employment of older Singaporeans. Allowing home owners to

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unlock the value of their homes will also help them during this period. And the proposed annuity scheme then provides for the much later years. So the overall ideas are therefore indeed holistic.

Let me first speak about the proposed annuity scheme. This has been the most negatively perceived thing among all the announcements made. The chief reasons for this are that it is forced, that the benefit may not necessarily accrue to the member (since he may not live past the age of 85), that it is too late to purchase it at the age of 55, and also that the Government is not contributing to this. I think we could have avoided this negative perception if the Government could have fine-tuned the scheme a little.

Effectively, what we really need is a national pension plan, as I mentioned. If we decide to create this national scheme through the annuity system, the contributions through CPF can start at a much earlier age, instead of age 55. In fact, they should start at a time when we start contributing to CPF. It therefore could be much broad-based so that even young people contribute to it. And the asset base will therefore be broader and there will be more time for the funds to be accumulated and grown and therefore there will be a higher payout for all. The amount of contributions will also be lower, and this will therefore be more affordable and every Singaporean will benefit in the later part of their years.

Sir, the suggestion to limit the payouts at the age of 85 and beyond is of course very unpopular, as many Members have said. Many people think that they will not live that long and so feel that it is taxing them when they are unlikely to benefit from it personally. Starting contributions earlier, as I have suggested, will enable us to structure a programme to provide an annuity from an age that is lower than 85, 70, 75 or 80. We can determine what

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that age is if we have a bigger sum to play around with.

At any cost, we want to avoid the impression being given, ie, that we are taxing everyone, especially the poorer Singaporeans for whom the contributions will be significant when not everyone may benefit.

Another big objection is that the families of members who do not live beyond 85 would have ended up paying but not benefiting anything. The scheme should therefore be modelled to return all or, at least, some part of the amount paid to family members, if they do not cross the age of 85 years. This amount, while small to the higher-income Singaporeans, is significant to the lower-income people and it will be important for their families.

Sir, we should also take the opportunity to cover even those who fall through the cracks. If we agree to make this into a national pension plan, we can make this plan a catch-all, so that it benefits and also covers those older Singaporeans who fall within the ad hoc employment category who have not been regular CPF contributors. These persons are presently a worry because they do not have enough savings generally.

We can see that a well-funded, well-planned scheme will make people feel more secure about their retirement. It is crucial to the scheme's acceptability that it does not impose too high a burden on the public.

To keep the scheme affordable, it may therefore be necessary for the Government to step in as a contributor to support the scheme. I feel that the Government is more than capable to help fund such a scheme. We regularly give back to Singaporeans through schemes like the Progress Package or New Singapore Shares. These go to even those who do not need it every time we do it.

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For the important national objective of funding retirement of Singaporeans, we should therefore not shy away from using part of our surplus or even part of our reserves to fund the national pension scheme. We have generated a critical mass of reserves already, and the amount needed for contribution to the national pension plan will not leave a big dent to our overall reserves.

The current perception is that the Government will be taxing every Singaporean to support those who live beyond 85 years of age. I therefore feel that the Government should take some responsibility for funding the annuity scheme and not leave the full burden to Singaporeans alone. What I am asking is for the Government to co-pay or partially underwrite the scheme. It can be part of a new social compact for the future where every stakeholder contributes.

This shift in the social compact is necessary. After all, if we palm off the responsibility for old age to individuals, and leave it to the market, then the Government is saying that it has no role in this except to set up the system for them.

I am, therefore, quite happy to note that the Minister is willing to make this scheme flexible, and we eagerly await the details once they are announced and, hopefully, some of these issues will be addressed.

Sir, I now turn to the proposal to alter the interest rates payable on the CPF savings. I think the move to offer a higher interest rate on part of the savings is a good one that members will appreciate. I am, however, not convinced of the need to allow the interest rate on the remaining sums to float. This change will likely result in people actually earning less overall in interest than they do at present. Therefore, there is no good

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reason to inflict this on them at this stage. This is particularly for those who have much higher savings in their CPF.

The Government's argument is that in the long term, a time may come when the floating interest rates members earn on the remaining sums may be higher than what is currently being given by the CPF Board. However, I think that members may well be willing to trade off that possible future upside in returns for a guaranteed fixed rate that allows their savings to increase. That certainty would, I think, be more in line with the objective of a retirement fund than to think of getting much higher returns. I feel that the Government can afford to pay higher interest on all the CPF savings, in light of the recent data released by Temasek Holdings showing them earning an annualised return of 18% since inception. I believe that is about the range of data that they released.

The changes we are making to address retirement savings are critical. The Government cannot afford to lose any goodwill unnecessarily by creating doubts about the future returns on CPF savings. I just cannot see the need to introduce the variable interest rate system at this point of time. This will only undermine the credibility of the other restructuring measures that we are putting in place.

Sir, delaying retirement is a reality that we have to face, so it is good that we have chosen to bite the bullet early. The Government should lead the way by hiring older workers, as many Members have said. But for this to really work, we will need an effective legislation which will require employers to keep employing older workers.

We will definitely need to find a way to support the employers. They may want to keep their older staff, but it may not be viable for them to operate on thin margins. The Workfare Income Supple-

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ment changes announced today will therefore go a long way to help companies on the margin so that even if they need to rationalise their staff costs with their productivity by paying older workers a lower wage, it is still a viable option for them to keep these older workers.

Sir, in conclusion, I applaud the frank admission that we need to fix the issue of retirement savings. While there are concerns over some of the proposals, I think it is possible to fine-tune them. If done correctly, this Government and this House would have made a significant contribution towards the future of Singapore. All the announcements made by the Minister today and by the Prime Minister, the holistic approach that I have talked about will, I think, solve our problems once and for all, and we should all support these moves.

6.50 pm

Mr Liang Eng Hwa (Holland-Bukit Timah): Mr Deputy Speaker, Sir, I welcome the bold moves by the Government to push ahead with further reforms to improve our retirement adequacy and to encourage our people to work longer. Allow me to first focus on the changes to the CPF interest rate.

Under the CPF Act, the CPF Board pays a minimum interest of 2.5% per annum for the Ordinary Account (OA) when the CPF interest formula yields a lower rate, which is the case in the present situation. The formula is based on the 12-month fixed deposit and the month-end saving rates of the major local banks. The SMRA accounts would earn additional interests of 1.5% above the OA rate.

There has been extensive debate within and outside this House as to whether this is a fair return. CPF members would obviously want a higher

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return while the CPF Board would have to satisfy itself whether the interest paid is sustainable in the long run.

The 1% bonus interest for the first $60,000 in the CPF combined accounts is certainly welcomed. The targeted approach, with a cap of $60,000, makes sense as we want the extra budget resource to be channelled to the lower and middle-income Singaporeans.

But can the Board pay more? It is timely in the midst of this debate that we examine the basis on which the Board pays the interests. This is also the subject of discussion in the dialogue sessions with my grassroots leaders and residents.

The Minister for Manpower has said earlier that the Ordinary Account is a withdrawal-on-demand account and therefore interest should be pegged to a fixed deposit and savings rate. It may well be a withdrawal-on-demand account for the purpose of CPFIS or for the purchase of property. But it is certainly not withdrawal-on-demand for members' other liquidity needs, such as to pay for a large unexpected expense, or can be tapped upon for GIRO payments. Members would only get to see their savings at the age of 55, after setting aside the Minimum Sum. Depending on the investment strategies of CPF, a significant portion of the funds would have been invested for a longer horizon, ie, greater than 12 months. Hence, for a compulsory savings scheme, it can be argued that to give up this flexibility and liquidity for their savings, members deserve more than a 1-year deposit or savings rate return. Moreover, savings rates tend to be much lower than the deposit rates, and I suspect it is the reason why the weighted rate has been staying below the 2.5% floor rate for many years. I suggest that the CPF also explore other benchmarks to peg the OA rate, such as the Singapore Interbank Offered Rate

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(SIBOR), which is a more transparent market benchmark.

I must, however, also credit the Government for keeping a floor rate of 2.5% for the OA, as this is of some intrinsic value to members, especially in times of low deposit rates. I hope that the Government will continue to keep the floor as a key pillar of the risk-free framework. It is essential for a national pension scheme to have that risk-free framework.

In all fairness, we should also recognise that the CPF savings earn a Government-guaranteed risk-free return while the returns from bank deposits tend to be of slightly lower ratings. The comparables would be the Treasury Bills or Singapore Government Securities, which do yield above the 2.5% from time to time.

We know the problem of tinkering with the CPF OA rates. Under the current scheme of things, the HDB concessionary loan is pegged to the CPF rate. Hence, a higher CPF OA rate would end up raising the HDB loan rates and thereby increasing the interest burden for the first-time HDB home buyers. So I am glad that Government has kept the HDB concessionary loan rate unchanged even with the additional 1% bonus interest. However, going forward, I hope that the Government can look at de-linking the two as the transfer pricing may be seen as unfair to one side.

Given this prospect that the OA rate is unlikely to rise much any further, CPF would need to facilitate and make CPFIS even less cumbersome so that members can have the option to seek higher returns elsewhere. It should be made simple and worthwhile even for members with small OA balances.

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As a national savings scheme, I feel that CPF could play a more active role to strengthen the financial security of the members. CPF should be more than a gate-keeper in screening investment products but also play a more direct role educating the public on investment risks, the principle of "no free lunch", the need to diversify, and the use of insurance to manage risk. I join the many who have called on the CPF to play the aggregator role to place the members' funds out for investments. Besides the benefits of economies of scale, CPF can value-add by offering its members various investment plans that offer different risk-return profiles. The members would then choose the investment plans based on their individual risk appetite and, thereafter, live with the outcomes.

For the SMRA, I welcome the Minister's announcement to peg the return to a 10-year bond rate plus 1%. From a comparable risk-return standpoint, many would agree that the minimum 4% that the CPF Board pays is attractive. Hence, I was initially a little disappointed that the Government has decided to do away with 4% or the 1.5% over CPF rate, and going forward would be pegged to a long-term bond yield. A colleague of mine actually said that the 4% is too good to last.

But having heard the Minister's announcement a while ago on the new peg, I think the new scheme looks fairly attractive as well. The 1% mark-up, added on to the 10-year bond yield to project a 30-year yield, looks reasonable, given the flat Singapore interest rate yield curve. The 10-year bond is also well traded and, using the one-year average daily yields for the computation, should smoothen out the volatility. As the bond market develops over the years, I hope the Government will also review the other tenures of the bond to be included in the benchmark, perhaps with different

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weightings. That would make the benchmark more representative. Having a floating benchmark is good as well, as the bond yield tends to move along with the inflation rate, so maintaining the purchasing power of the savings in the CPF.

Sir, I welcome the Minister's assurance also to hold the 4% floor for two years. All in all, I would say that the new scheme is still fairly generous. Unlike the OA funds where members withdraw at the age of 55 and can use the money at their own free will, funds from the SA, which are meant to take care of members' financial security from 65 to 85, should have a more steady return.

Fundamentally, I cannot disagree with the principle of pegging the returns of SA to a long-term bond yield. In terms of tenures, it is a better match, as the SA funds are also meant for long term. Both the CPF funds and Government bonds are also risk-free, and such market-determined returns are more sustainable to the Government in the long run.

On the issue of compulsory annuities scheme, we have heard the strong ground reactions, as expressed by many Members in the House. Much has been said. Many Singaporeans take issue with the scheme being made compulsory. Are we too trigger-happy to make this scheme compulsory? For argument's sake, one may think that the MediShield coverage, for example, may be of a more immediate need and, therefore, have a stronger reason to be made compulsory than the annuities scheme which pays interest only after 85 years of age.

Perhaps, a more palatable way to implement this would be to repackage our 1% bonus interest for the $60,000 in such a way that, for example, the 0.25% of the 1% can be used to pay for the longevity insurance.

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I am glad that the Government is not rushing into the scheme and would form a committee to consult widely on the structure of the scheme, and that the compulsory annuities are for those who are now below 50 years old. Indeed, this is not something we need to turn around in a few months or even in a year. In the meantime, we should encourage more Singaporeans to voluntarily sign up, including many housewives and the self-employed, who may have no CPF or low CPF. We should allow top-ups from relative's CPF accounts to buy such annuities.

I do believe that a lifelong annuity is the way to tackle the longevity risks. One of my grassroots leaders likens it to a compulsory lottery. It is like buying Toto. You throw in the money into the pool and at the end of the day somebody would strike the number and take the money from the pool, which belongs to everyone else. In this case, the lucky number is 85, of course. He said that if you live beyond 85, it is as good as striking lottery and you get the payout. Of course, the chances of striking a lottery at 85 is a lot higher and increase by the year. So I would prefer to see the compulsory annuities as a hedge against the big unknown, ie, whether you will live beyond 85.

While many countries have already started annuities scheme and some, like Switzerland, are doing it as a compulsory scheme, the annuity concept is new in Singapore. Singaporeans need some time to better understand the concept and would need more details, such as the amount of the premium and the payout, to be convinced. I believe, over time, and with more details made known, many would see the benefit and even be prepared to buy more.

As a society, we should increasingly move towards allowing for choices and individuality where possible. We should

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try to keep as few things compulsory as possible. We already have a national compulsory savings scheme that takes care of our citizens' needs up to 85 years of age. Beyond 85, let us give education and persuasion a chance and at the same time strengthen the family values as a second line of support for a secure retirement.

I believe the significant airing of this issue of longevity risk, following PM's National Day Rally speech, has raised the awareness of the problems and would get Singaporeans better prepared for old age and better prepared to live longer.

6.56 pm

Mr Arthur Fong (West Coast): Mr Deputy Speaker, Sir, thank you for allowing me to participate in this important debate.

The issue of retirement planning is one that is close to my heart. In fact, in Clementi, it is a mature estate and this is a much talked about topic at coffeeshops and void decks in the division. It is apt that we should be thinking hard to help Singaporeans build their CPF nest-egg to ensure that they live their retirement years with dignity.

Sir, the CPF fine-tuning reflects a long-term assessment by our Government of the needs of Singaporeans. It is a far-sighted move because we know that there is an impending bubble building up. Let us face it - the data speaks for itself. The media published information that in 10 years' time, about 60,000 Singaporeans will turn 62 years old, almost double what it is today. About half, or 30,000, or perhaps, even more, will live beyond 85. With the Minimum Sum, you will have a steady income for 20 years. What less the Minimum Sum, the payout will run out earlier. So the scenario that presents itself is this. How to prevent

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Singaporeans from running out of cash during their retirement? Of course, family support is important but we are not going to have so many younger Singaporeans to take care of the older ones. One can only imagine the kind of pressure on the economic contributors and the Government of the day when our very own children and grandchildren will have to confront the enormity of supporting and caring for so many seniors 10-30 years down the road.

How would those seniors help care for themselves then? The question we ask ourselves could then be phrased as: what can we do today to help the retirees in 10-20 years' time lighten the load on a future working generation in caring for the aged in their time? This is a tough question and today, we have heard the steps proposed by the Minister. I know many of my colleagues here will remember the years during the Asian financial crisis, 9/11, SARS, but we have to roll with the punches. We have not been afraid to make tough decisions when we had to. Today, we are discussing further refinements to the CPF, and we should forge ahead.

Sir, the first thing that came up regularly during my conversations with my constituents was this. Many are still unclear about the terms of the refinement and I hope after today, they will be a little bit clearer. Let me give you an example. One resident, Mr Tan, in his early 50s, came to me mortified. He had heard about the CPF changes and he was very upset. Why? Because he thought he would not be able to withdraw from his CPF until 65. Worse still, for him, he thought the retirement age was to be reviewed with immediate effect.

Sir, I can tell you that he was much relieved when I assured him that our Government did not intend to do anything so drastic. He was happy to learn that the plans outlined will be put in place in a

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phased manner, that the retirement age has not changed, and that we will make employers provide re-employment opportunities available for those who work beyond 62, to 65, and then to 67. Mr Tan was most pleased that the Government did not have any intention of preventing him from withdrawing some money from his CPF when he reaches 55, as long as the Minimum Sum criterion is fulfilled.

Sir, I hope that we can have a comprehensive plan to communicate to Singaporeans about the details of the CPF refinement. Given that many who are retiring in the next few years are still some of the lower educated seniors, the fine-tuning should be simple to understand. Otherwise, we will have many more unhappy Singaporeans. When the intent is certainly good, why let Singaporeans begin to doubt the sincerity of this Government?

Secondly, on the increase in the rate of return and the tying of the returns for all accounts, other than the OA, to the long-term bond yield. The increase of the 1% on the rate of return is indeed welcome news for many Singaporeans. Many insurance and financial industry professionals have engaged with the media to work out the sums to demonstrate what the impact will be for Singaporeans as a result of the rate increase. For those who have this amount, the better returns will more than pay for their annuity premiums due when they reach the DDA. This needs to be communicated better. While many Singaporeans will no doubt benefit from this gracious move, it should be noted that some lower income Singaporeans do not have $60,000 in the combined accounts within the CPF. For many Singaporeans, after using their CPF funds to pay for housing, they are left with little in their CPF OAs. For this group who are the ones who need it most, how can we help them enjoy the benefits of this rate increase so that they can have a larger retirement nest-egg?

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Sir, this is a thorny issue. A significant proportion of Singaporeans - the sick, poor or unemployed - they are the ones who are possibly left out by the increase in the rate of return proposal, while the rest of Singaporeans generally feel that they can take care of themselves. On linking the rate of return for the Special Account, Retirement Account and Medisave to a long-term bond rate, this is probably where the most concern has surfaced from the ground. These accounts currently enjoy a 4% rate of return. In the current environment, with the low interest rates, we have heard from the Minister that in the short-term, we may not be able to provide a rate of return to match this. Sir, I am happy to hear that the SMRA will be pegged to the 10-year SGS plus 1%. I am happy not just because the Minister had given us the reasons, citing the 30-year and the 10-year rate differential, but due to the current interest rate situation. The current 10-year bond yield is actually at 2.73%. The positive impact on the retirement income is therefore going to be lower if the interest rate environment persists. In fact, some quarters suggest to the media that it may not be a short-term blip, but lower than 4% returns may prove to be much more enduring. This will directly impact the size of the nest-egg available for retirement. We may have a bigger retirement problem than before. So I am therefore making a call to the Minister to consider a permanent floor of, say, 3.5% after the two years instead of leaving it at 2.5%. In the long run, if the interest rate environment changes, then we may see better returns. But a sense of uncertainty still prevails. Many Singaporeans are not convinced that this is a better move because they do not have a decent guaranteed rate of return.

On the upside, of course, when the bond returns are higher than the floor limits set, then let it be a bonus for the CPF members. So pegging the 10-year SGS plus 1% shows that the Government

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is aware of the interest rate environment and will also silence those who think this tweaking exercise also reduces the borrowing cost from the CPF pool. Instead, it will show the sincerity and the refinement would be that much more palatable.

We are doing all we can to keep Singaporeans employed between the critical age of 55 and 62 years and, subsequently, more workers to work beyond 62. The additional years of employment will add significantly to the retirement funds. However, I hope that we can still help those who are not able to work. For some, the proposed compulsory annuity is causing some unhappiness because they do not have the funds for the premiums in the first place. They feel that they are being forced to plan for the future when their needs are simply put much more immediate. It is here and now not having enough for today, something that Dr Lim Wee Kiak, my hon. colleague, had addressed in his speech earlier. To compound the unhappiness, many do not adequately understand what risk-pooling means and why it should be a part of it. Why should their premiums benefit others if they pass on before they reach 85, or that they only live maybe a year or two past 85? Will not those funds they use to pay the premiums better serve their immediate families when they die? This type of concern is the hardest to address and I hope that we can think of ways to allow some - the terminally ill or those adequately covered - to opt out of the annuity scheme. It looks like more time will need to be spent on getting Singaporeans to buy into this compulsory annuity plan. And I hope that we could work with more insurers to come up with perhaps riders that kick in only at 85.

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Sir, these are the main concerns that have come up as a response to the refinements proposed by the Government. The CPF refinements are necessary. By doing this, we are preserving our social compact between the Government and the people. However, during the process of refining the CPF, perhaps some small adjustments to take in the feedback of Singaporeans can be done. I am confident that with these refinements, we will be in better shape to stem the retirement needs of Singaporeans in 10-20 years' time. It is our responsibility to do this now. Failing to do so, failing to plan forward, will tantamount to squandering away all the achievements that this Government and the people of Singapore have obtained these many years.

Sir, I support the reforms to the CPF.