ARE PENSION PLANS THE ANSWER TO ENHANCING CPF RETURNS?

THE Economic Review Committee (ERC) has suggested low-cost privately-managed pension plans for CPF members be set up as an additional option under the CPF Investment Scheme (CPFIS).

The aim is to enhance returns for CPF members by lowering investment costs as the current retail cost structure for unit trusts is seen as high.

The argument is that large pension plans may be able to enjoy lower institutional costs, which can be passed on members.

It is also hoped that private pension plan will help individuals to make better asset location decisions that will yield higher risk-adjusted returns.

The changes proposed by the ERC are aimed at helping CPF members to build up a nest-egg that will be enough to see them through their retirement years.

While the ERC's suggestions are well-intentioned, the form that the pension plans take, will determine if they are indeed a better route than the current one of allowing CPF members to invest in unit trusts.

Mr Shiv Taneja, senior analyst at Cerulli Associates, a London and Boston asset management consulting firm says that "just because the term pension is used doesn't mean that investment costs will be lower. Pensions comes in different forms and fashions".

"But the Government is moving in the right direction if it's talking about institutionalising pension plans," said Mr Taneja.

For private pension plans to enjoy institutional cost savings, they have to be sizeable.

As such, pension plans that are introduced here will have to work towards getting a significant share of CPF savings in order to enjoy a low-cost structure. But this may not be an easy task.

Aside from cost, another reason why the unit trust industry here is still relatively small is because many Singaporeans do not see the importance of retirement planning and taking a long-term view towards their investments.

The lukewarm response to the Supplementary Retirement Scheme introduced here last year, is a testimony to this.

It will, therefore be a challenge to change mindsets of Singaporeans and encourage them to invest their CPF savings on a long-term basis for gradual returns of six to eight per cent per annum.

This being the case, it may not be easy for pension plans to attract large amounts of CPF funds initially and may limit the ability of such pension plans to hand out sizeable institutional mandates to fund managers.

Industry players also say that capping costs is only one way to enhance returns for CPF members.

Unit trust may be more costly then large pension plans but lower costs do not necessarily translate to better returns.

Ultimately, it boils down to picking the right mix of assets, going with the right fund managers and investing in the right markets.

What is perhaps lacking in the current system is good advice to help retail investors make the right decisions for their retirement needs.

Part of the answer could lie in the coming Financial Advisers Act that aims to increase the supply of quality independent financial advisers in the market.

There are 203 unit trusts that CPF members can choose from. With pension plans, the investment choice may become limited.

In its recent recommendations, the ERC highlighted that pension plans elsewhere "make and execute investment decisions on members' behalf".

But some CPF members may be reluctant to leave decisions completely to pension fund managers and may want more choices and have a greater say in how their CPF funds are managed.

Mr Taneja says that there are limits to cost savings in the Singapore retirement planning market. Any pension plan that is created here is unlikely to replicate the kind of cost efficiencies found in developed markets like the US and UK.

This is because the size of these markets are huge compared with the CPF balances here.

In the US and UK for example, the size of the pension markets are US$7 trillion ($12.31 trillion) and 750 billion sterlings ($2.08 trillion) respectively.

Here, total assets in the CPFIS were $26 billion at the end of March, with another $64 billion unutilised and available for investments.

In the final analysis, the way to better returns for CPF savings may require more than just alternative lower choices like private pension plans.

A change in mindset is also required and CPF members need to be educated on the benefits of investing their funds on a long-term basis.

Industry players must also recognise the importance of offering good advice for retirement planning.