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A comparison of CPF with other provident funds

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I was looking at some of the other provident fund pension schemes for other countries on Wikipedia and it seems that among those listed, Singapore’s CPF pales in comparison with the rest. Singapore’s CPF has the highest mandatory contribution rate and provides the lowest return (annual interest accrued where relevant). For this, I looked at the four listed countries’ provident funds in Wikipedia, namely Singapore, India, Hong Kong and Malaysia. There may well be more provident funds, but for some reason Wikipedia only has four listed. These four schemes would be examined in detail below.

Let’s start with Malaysia. Malaysia’s provident fund is titled Employees’ Provident Fund (EPF). It’s a mandatory retirement plan whose contribution rate stands at 11% from the employee’s monthly payroll and 12% from the employer for a total of 23%.

As noted by Wikipedia, EPF is legally obligated to provide only a 2.5% return rate annually, but it has been more generous than that:

1983 to 1987

1988 to 1994

1995

1996

1997 to 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

8.5% 8.0% 7.5% 7.7% 6.7% 6.84% 6.00% 5.00% 4.25% 4.50% 4.75% 5.00% 5.15% 5.80% 4.50%

One may notice a gradual reduction in the dividend rate (M’sian counterpart of interest rate in Singapore’s CPF) throughout the years, but even at its lowest it gives a return of 4.5%, a rate which is higher than CPF’s for the SMRA account of 4% and 2.5% for the OA.

Unlike Singapore’s CPF where a Minimum Sum of money (currently S$117,000 and increasing and separately S$32,000 for the Medisave Minimum Sum) has to be retained in addition to a compulsory annuity scheme upon reaching 62 years of age, Malaysia’s EPF allows its depositors to withdraw up to 30% of their money upon reaching 50, and everything by 55 years of age.

Now that’s for Malaysia. Next up is India’s Employees’ Provident Fund Organisation (EPFO).

India’s EPFO has a defined 12% contribution rate (compare this to CPF’s 34.5% contribution rate) from both employees and employers in total. For the year of 2008, the annual interest rate on an individual’s EPFO account was a generous 8.5% (!). Some numbers from earlier years:

Years

Interest rate

1998-1999

12%

1999-2000

11%

2000-2001

10.25%

2001-2002

9.50%

Compare this with CPF’s 2.5% for the OA and a variable interest rate (currently 3.61%) for the SMRA account. Of course any fair comparison of interest rates would involve taking the inflation rate in the country into account ie. real interest rate. This will be done in future if I have sufficient time.

Here’s a opinionated analysis of India’s EPF interest rates dated from Jul 2004.

Like Malaysia’s EPF, India’s EPFO depositors are able to withdraw the full amount in their accounts when they hit 55 years of age. No Minimum Sum, no compulsory annuity. Employees are also allowed to withdraw all their money in the following cases:

  • A member who has not attained the age of 55 year at the time of termination of service.
  • A member is retired on account of permanent and total disablement due to bodily or mental infirmity.
  • On migration from India for permanent settlement abroad or for taking employment abroad.
  • In the case of mass or individual retrenchment.

In the case of “termination of service” stated above, this refers to early retirement ie. termination of all employment services. India’s EPFO also allows an early withdrawal of up to 90% of their account when they reach 54 years old.

Finally we have Hong Kong’s Mandatory Provident Fund (MPF). HK’s mandatory pension plan resembles the 401(k) pension plan of the United States more than any of the other three. This will be explained in greater detail.

The contribution rate is 10%, with 5% each from both employer and employee, unless one earns less than HK$5000 a month, in which case the employee does not have to contribute, so total contribution stands at 5%. Those earning above HK$20,000 a month have their contributions from both employers and employees are capped at HK$1000 each. Employees may choose to invest more of their savings than stipulated should they wish to do so.

Those employed in the catering and construction industries have a more complicated defined contribution rate. Refer to here for details.

As explained above, HK’s pension plan consists of MPF schemes which are chosen by the employer. Once the employer has selected a suitable MPF scheme for the employee, the employee is free to choose which investment funds available in that scheme he would prefer to invest in. All schemes and funds have to be approved by the Hong Kong government.

Here’s a quoted portion from a 2002 paper by libertarian think-tank CATO:

The MPF system is basically a forced retirement saving program. Investment funds, called MPF schemes, are set up by private companies to invest the savings. All MPF schemes must be established under trust arrangement and governed by Hong Kong law. The trust arrangement means that scheme assets will be held separately from the assets of the trustees or the investment managers. This safeguards the interest of the scheme members from unnecessary financial risks.

Investment Funds

Investment managers are appointed by the trustees of MPF schemes to make long-term investment of scheme assets. Each scheme typically offers a couple of investment funds to its members. One of the funds must be a Capital Preservation Fund, which is basically a money market fund. There are strict guidelines on the types of assets in the investment funds.

Employers are mandated to choose at least one scheme for their employees.6 Employers therefore indirectly choose the investment managers. Employees can choose their own investment portfolio out of the funds provided by the scheme chosen by their employers.

Such a pension program carries the same risks as the 401(k) plan especially since Hong Kongers, unlike Americans, do not have guaranteed minimum returns or any defined benefits plan such as Social Security. Hence there are no cited interest rates on MPF accounts. Like 401(k) accounts, Hong Kong’s MPF accounts were badly hit by last year’s financial downturn. However, note that compared to CPF, Hong Kong’s MPF has the lowest mandated contribution rate of 10%, so the employee has limited exposure to financial risks.

Finally we come to withdrawal of benefits. Hong Kong law only allows employees to withdraw all their savings when they hit the age of 65 barring special considerations such the following:

  • early retirement at the age 60; or
  • permanent departure from Hong Kong; or
  • total incapacity; or
  • death (note that the MPF will be regarded as part of the member’s estate and can be claimed by the personal representative of estate); or
  • small balance account of less than $5,000, no contributions made to a scheme for 12 months, and declared not to become employed or self-employed within the foreseeable future.

Unlike Singapore’s CPF, there is no required Minimum Sum or compulsory annuities. Asia Sentinel has a good comparison between Singapore’s CPF and Hong Kong’s MPF here (dated from 2007). Among other things, it notes that CPF’s measly rate of 2.5% is barely above (if at all) the annual inflation rate:

The interest supplement is tacit acknowledgement of how far the forced savers have been subsidizing the borrowers – the Singapore government and ultimately US and other consumers who are being financed by Singapore’s savings excess. The current normal interest rate on CPF balances is 2.5 percent — barely above the rate of inflation. Indeed, for years, the interest rate has been about nil in real terms. It is noteworthy that while the giant state investment corporation Temasek boasts double-digit returns on investments, Singapore’s forced savers have been receiving a quarter of that amount.

The first consequence of this is that savings have not in practice earned anything, so balances are now far from adequate to sustain a reasonable standard of life for low-income retirees despite the fact that contributions to the CPF are 36 percent of income and were once as high as 40 percent.

Indeed, from what has been written above it’s a mystery as to why CPF provides such a low return rate of 2.5% especially given that its mandatory contribution rate of 34.5% is the highest of the four provident funds. To make things worse, the interest rate on the CPF SMRA accounts will no longer be a fixed 4% but allowed to vary after 1st Oct 2009. More specifically the interest rate on that account would be pegged to the 10-year SGS yield + 1%. Currently that rate stands at 3.61%. Here are the historical yields for the 10-year SGS yield. It’s not terribly high, to say the least. Note that in order to achieve 4% as it currently stands, the yield has to exceed at least 3%.

10 year SGS yield

Here’s one which also includes the period from 2007 till early 2009:

SGS 10 year bond yield

Here’s a tabulated summary of the above:

Country

Contribution Rate

Interest rate

Partial Withdrawal

Full Withdrawal

Minimum Sum/

Mandatory annuity?

Employer

Employee

Total

Age

Allowed amount

Age

Malaysia

12%

11%

23%

4.5% (as of 2008)

50

30%

55

No

India

Not stated

Not stated

12%

8.5% (as of 2008)

54

90%

55

No

Hong Kong

5%

5%

10%

N/A (returns depend on performance

of investment funds)

N/A

Not allowed

65

No

Singapore

14.5%

20%

34.5%

2.5% (OA) and 4% (SMRA)

variable rate for SMRA after 1st Oct 09

55

Everything except Min. Sum + Medisave Min. Sum

N/A (not possible to withdraw

everything due to CPF Life)

Yes

I leave it to the reader to judge if this means more good years to come.

Written by defennder

June 15, 2009 at 12:05 AM

Posted in Singapore affairs

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  1. […] of similar pension funds of other countries? This was a question which I sought to answer back in 2009. Back then I promised readers (mostly consisting of myself) that I would update the post with real […]


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