2013-07-23-奥纬咨询-Retiring_in_Comfort_33页_581kb

Summary of "Retiring in Comfort" (SGX and Oliver Wyman, July 2013)

Core Content

This paper explores the potential for improving retirement savings in Singapore through alternative asset allocation strategies within the Central Provident Fund (CPF). It outlines the current retirement savings landscape and identifies key areas for improvement to enhance the expected retirement income.

Main Points

1. Retirement Savings Challenge in Singapore

• Singaporeans face the challenge of ensuring a desirable lifestyle post-retirement without over-reliance on external support.
• Historically, many relied on children for financial support, but this model is becoming less sustainable due to demographic shifts.
• The CPF is a central mechanism for retirement savings, with mandatory contributions from employers and employees.

2. Current CPF Asset Allocation

• The CPF system has four accounts: Ordinary Account (OA), Special Account (SA), Retirement Account (RA), and Medical Account (MA).
• The current asset allocation of CPF balances is heavily skewed towards low-risk investments such as deposits, with a minimal allocation to equities and bonds.
• The average Singaporean can only begin investing in higher risk-return assets once they reach a minimum balance threshold (S$40,000 in SA), which is typically around age 40.

3. Alternative Asset Allocation Strategy

• A lifecycle asset allocation approach is proposed, where investments shift from higher risk-return assets (e.g., equities) during the early and middle years of retirement saving, and gradually de-risk towards safer assets (e.g., deposits) as retirement approaches.
• This approach aims to benefit from higher long-term returns on equities while minimizing market exposure at retirement.

4. Simulation Results

• Under the status quo, the average Singaporean can expect an income replacement ratio of around 68%.
• With the alternative asset allocation, the income replacement ratio could increase to 79%.
• The simulation shows that the expected retirement income could increase by about 3% with the alternative strategy, but this is limited by high investment costs and a short investment period in equities.

5. Impact of Investment Costs

• Current investment costs for CPF-eligible unit trusts range from 1.0% to 1.95% annually.
• These costs significantly erode potential returns, with up to 20% of returns potentially lost over time.
• Reducing investment costs to the range of 0.3% to 1.0% could increase the uplift in expected retirement income from 3% to 6%.

6. Minimum Balance Restrictions

• The current minimum balance requirement (S$40,000 in SA) prevents early investment in higher risk-return assets.
• Removing this restriction and allowing earlier investment could increase the expected retirement income by up to 16% when combined with lower investment costs and alternative allocation.

7. Risks of Higher Risk-Return Strategy

• A higher risk-return strategy may not be suitable for everyone, especially those who may need to withdraw funds unexpectedly.
• In a worst-case downside scenario, such as a global depression or war, expected retirement income could drop by up to 12% compared to the status quo.

8. Enablers for Higher Returns

• Alternative Asset Allocation: Creating lifecycle funds that automatically adjust the risk profile over time could help individuals invest in higher risk-return assets without deep expertise.
• Reduced Investment Costs: Lowering fees through economies of scale and simplified investment products could improve net returns.
• Relaxing Minimum Balance Requirements: Allowing earlier investment in the Special Account could extend the investment period in higher return assets, reducing the impact of market volatility.

Key Information

• Current Income Replacement Ratio: 68% (under the status quo).
• Proposed Income Replacement Ratio: 79% (with alternative asset allocation and reduced costs).
• Minimum Balance Threshold: S$40,000 in SA.
• Investment Costs: Currently between 1.0% and 1.95% annually, potentially reducing to 0.3% to 1.0%.
• Alternative Asset Allocation Profile: Higher allocation to equities and bonds in early retirement saving years, gradually shifting to deposits as retirement approaches.
• Risks: Potential for a 12% drop in retirement income in extreme market downturns.
• Lifecycle Funds: Could be a key solution to enable easier and cheaper access to higher risk-return investments.

Conclusion

The paper emphasizes the importance of reforming the CPF investment strategy to better support Singaporeans in achieving a more comfortable retirement. It suggests a collective effort to introduce lifecycle funds, reduce investment costs, and relax minimum balance requirements to enable a more effective and sustainable retirement savings system. While these changes could significantly improve retirement income, they also come with risks that need to be carefully managed.