Announcement On The Revised Allocation Of CPF Contributions, Changes To The CPF Investment Scheme

29 Aug 2000

MINISTRY OF MANPOWER-

MINISTRY OF HEALTH

JOINT PRESS STATEMENT:

The Ministry of Manpower (MOM) and Ministry of Health (MOH) today announce changes to the following:

a. Target contribution level for the Special Account (SA);

b. Target contribution level for the Medisave Account (MA).

c. CPF Investment Scheme (CPFIS) in respect of the use of SA savings for investment, the Minimum Sum requirement, investment limits for stock and gold and profit withdrawal; and

d. Enhanced transfer of Ordinary Account (OA) savings to SA.

All the changes, except (b), will take effect from 1 January 2001.

I   TARGET CONTRIBUTION LEVELS FOR CPF ACCOUNTS

Prior to the CPF cut on 1 January 1999, the total CPF contribution by an employee (aged 55 and below) and his employer was 40% of the employee's salary¹. This remains the target CPF contribution level in the longer term². With the recovery in the economy, the Government's intention is to restore the employer's CPF contribution back to the 20 percentage points before the CPF cut.

However, the Government intends to make adjustments to the contribution rates to the SA and MA in the longer term. This will have consequential impact on the contribution rate to the Ordinary Account (OA).

Special Account

To enable CPF members to build up more cash savings for old age, the Inter-Ministerial Committee on the Ageing Population³ has recommended that the CPF contribution rates for the SA be stepped up with age as follows:

The Government has decided to adopt the recommended rates as the target levels for the SA. The stepped increase would correspond more closely to an individual's income and expenditure pattern over his working life, including his ability to pay for housing. Members above 55 years old will not be affected by this measure.

Medisave Account

Over the longer term, the MA contribution rate will also be adjusted upwards by 1 percentage point across the various age groups to between 7 and 9 percentage points as follows:

The adjustment in the MA contribution rate is to keep pace with higher patient expectations and cost of medical services. This will also apply to self-employed persons.

Ordinary Account

With these changes, the longer-term contribution rate for the OA will be adjusted accordingly. The target contribution levels of the various accounts are summarised at Annex I.

As the employer's CPF contribution rate is progressively restored, the various CPF accounts will be built up to their target levels in the following order of priority:

a.    SA;

b.    OA; and

c.    MA.

The Government is announcing the target contribution levels of the various CPF accounts well in advance so that CPF members can take into account the longer-term rates when planning for the use of their CPF savings, including their housing mortgages. However, the Government would like to assure Singaporeans that even at these levels, HDB flats will continue to remain affordable.

II   CHANGES TO THE CPF INVESTMENT SCHEME (CPFIS)

The following changes will be made to the CPFIS:

a.    CPF members will be allowed to invest their SA savings in lower-risk financial instruments that are suitable for retirement savings;

b.    There will be no need to set aside the Minimum Sum before CPF members can make investments;

c.    The investment limits for stock and gold investments will be revised; and

d.    Profit withdrawals for investments using SA savings will not be allowed. For investments using OA savings, profit withdrawal will be progressively phased out.

Allowing Special Account Savings for Investment

Currently, CPF members below 55 are not allowed to invest their SA⁴ funds . This is to ensure that the SA savings are not exposed to excessive risk as they are meant to provide CPF members with a basic standard of living during old age. However, the IMC on Ageing Population has recommended that SA savings in excess of Minimum Sum be allowed to be invested in retirement-related instruments to allow CPF members an opportunity to earn higher returns on these savings.

The basic principle that the SA savings should not be exposed to high investment risk remains valid as the SA savings represent the basic safety net of Singaporeans. However, the Government recognises that there is a risk/return trade-off and in line with the move for individuals to be responsible for their old-age security, the Government has decided that all the SA savings, including the amount that make up the Minimum Sum, can be allowed for investment in appropriate retirement-related financial instruments. To reduce the exposure of the SA savings to investment risk, only lower-risk instruments will be allowed, as elaborated below.

The products that are suitable for investment using SA savings include long-term bank deposits, deferred annuities, endowment insurance products, Singapore Government and statutory board bonds, and other bonds guaranteed by the Government and certain selected unit trusts and investment-linked insurance products (ILPs). The list of approved unit trusts and ILPs would be based on the lowest 3 tiers of the Risk Classification System adopted under the CPFIS, namely the Low Risk, Low to Medium Risk and Medium to High Risk products⁵. These comprise mainly money market, fixed income and balanced funds.

The Higher Risk products, representing funds invested wholly or mainly in equities, would be not be allowed. Similarly, investments in individual stocks and gold will not be allowed to prevent the SA savings from being exposed to unhedged risks. The CPF Board would announce the list of approved products and other details at a later date.

Minimum Sum Requirement

With the liberalisation of the SA savings for investment, there will no longer be the need to set aside the Minimum Sum before a CPF member can invest under the CPFIS. In other words, CPF members can invest all their OA savings, including the amount that makes up the Minimum Sum, in professionally managed products⁶.

Investment Limit for Stock and Gold Investments

CPF members can currently invest up to 50% of his investible savings in stocks. The limit was set to ensure that CPF members do not invest a disproportionate amount of their OA savings in stocks. The investible savings is the total OA and SA savings, including the amounts withdrawn for housing, investment and education, after setting aside the Minimum Sum.

With the removal of the Minimum Sum requirement and the liberalisation of SA savings for investment, the investible savings will be re-defined as the total OA savings⁷ excluding the amounts withdrawn for housing. The new definition recognises that the individual stock limit should comprise only a limited percentage of a member's investments in financial assets.

The investment limit for stock will be set at 35% of the redefined investible savings. At this limit, the total amount of OA savings available for stock investment is about $19.7 billion, which is more than the amount currently available ($17.1 billion). About 64,000 CPFIS members, or about 15% of the existing CPFIS investors, would exceed the new limit. This is an increase of 35,500 members (8.1%) compared to the number of CPFIS investors who have already exceeded the current limit. Affected members will not be asked to sell their shares but they will not be able to make additional stock investment. These members can, however, continue to make new investments in professionally managed products.

The investment limits for gold will be set at 10% of the new investible savings.

Profit Withdrawal

In 1993, CPFIS members were allowed to withdraw the capital gains from their investments under the CPFIS (including special discounted shares bought with CPF savings), provided they make up any loss from previous investments besides refunding the principal withdrawn for investments and the accrued CPF interest⁸. This was to provide an incentive for members to invest their CPF savings.

While the withdrawal of net realised profits under the CPFIS has contributed to greater interest in investments by CPF members, it is not in line with CPF's objective of enhancing members' old-age savings. With profit withdrawal, even profitable investments could result in zero enhancement of a member's CPF savings. The Government has thus decided that profit withdrawals for investments using SA savings would not be allowed from the onset. For investments using OA savings, the profit withdrawal would be phased out in stages as follows:

Schedule of profit withdrawal

III   ENHANCED TRANSFER OF OA SAVINGS TO SA

For CPF members who do not want to invest their CPF savings but wish to earn a higher interest on their OA savings, they could currently transfer their OA savings to their SA, subject to a cap of $40,000 in their SA. Savings in the SA earns 1.5% point additional interest over the interest from the OA.

To further encourage members to build up cash savings for old age, CPF members will be allowed to top up their SA to the prevailing Minimum Sum, which is $65,000 currently and will be increased by $5,000 every July to reach $80,000 in year 2003.

CONCLUSION

With these changes, CPF members will have wider access to more investment options and can invest all their CPF savings to enhance their retirement funds. However, as with any investment, CPF members will have to exercise careful judgement and decide for themselves the amount of risk they are willing to take in their investment decision. If they take a long-term view and exercise prudence in their investments, it is likely to enhance their old-age savings to meet retirement needs.

¹ 20% each by the employee and employer.

² At this rate, a CPF member should be able to have a monthly retirement income of 20% - 40% of  his last take home pay (subject to a salary ceiling of $6,000 per month), after paying for a home which is commensurate with his income and setting aside enough savings for his medical needs in old age.

³ The IMC was set up in Oct 1998 and chaired by Minister Mah Bow Tan to study and drive a co-ordinated national approach to deal with the challenges of Singapore's ageing population. The IMC has completed its study and has released its report in Nov 99.

⁴ Upon reaching age 55, members can withdraw their savings in excess of the Minimum Sum from the SA and OA. They can then invest the Minimum Sum, which in most cases is made up of SA savings, in fixed deposits with an approved bank or buy approved annuities.

⁵ The current list of approved unit trusts and ILPs under the CPFIS is given at Annex II.

⁶ These include bank deposits, endowment insurance policies, Government and statutory board bonds, unit trusts and investment-linked products.

⁷ Including amounts withdrawn for investment and education.

⁸ This is achieved by not allowing members to withdraw capital gains after each sale but only at the end of one year, so that whatever gains made from sales during the period can be offset against outstanding losses before any surplus can be withdrawn.

⁹ CPF members are allowed up to 1 year from the close of the financial year to withdraw their CPFIS profits.