Singapore has rightly been held up as an example of how it is possible to create a competitive economy out of a small island state. But the hype is perhaps wearing a bit thin and the economy is certainly not so hot at the moment. A backlash has started amid accusations that the government has failed to recognise the new competitive pressures in the Asian region and has not moved quickly enough to liberalise key sectors of the economy.
The financial sector is one area where the government has taken gradual steps to deregulate, opening the domestic banking and insurance industries to greater foreign participation. Various initiatives have been launched to give fund managers greater access to domestic funds, develop the debt market and overhaul corporate governance. But as one fund manager comments, such moves are ‘never enough’.
Singapore has seen a slump in growth that has had wide ranging consequences. Its statutory pension system, the Central Provident Fund (CPF), was originally seen as a template for other Asian countries to follow, but is now seen as flawed, especially in the light of successful implementation of Hong Kong’s Mandatory Provident Scheme.
Whilst the idea of the CPF has been fine in theory, in practice, the investment restrictions and bias towards low yielding domestic bonds has resulted a funding shortfall and huge potential funding problems in the future. So gradually, the system is being liberalised to allow greater choice and, as important, a privatised supplementary pension market.
Nonetheless, the CPF has proved to be a tremendous asset to the nation. The CPF now manages S$92.2bn (E58bn) for a membership of 2.9m (out of a population of three million). The number of active employers in the scheme is 88,500. There are also around 30 private pay- as-you-go pension schemes in operation, although their numbers may be affected by the recent introduction of a supplementary retirement scheme. The net result of all this is that employers are now having to review their staff retirement schemes in view of the fiscal incentives that are bound up in the SRS.
The product offering system has been modified in recent years, to take into account the development of a domestic unit trust market, and more recently, to reflect the downturn in the global economy. The integration of domestic unit trusts and CPF funds, with a lifting of restrictions and recognition of foreign fund managers as eligible CPF managers, has not only broadened the assets of the unit trust market but has increased investment choice for CPF members.
Singapore is a concentrated environment for asset managers, with some large pools of assets up for grabs. The largest of these pools is the foreign reserves of the Singapore government, which are managed and supervised by the Government of Singapore Investment Corporation or GIC. Total assets of the GIC are not disclosed and foreign managers who gain mandates from GIC are bound by confidentiality agreements.
According to the last tally by IMAS, there are 215 asset managers in Singapore, pitching for GIC business, but there are just 31 unit trust managers offering a total of 265 funds with assets of around S$8bn. Foreign asset managers have found the CPF market to be a hard nut to crack, given the restrictive distribution mechanism and near cartel that exists around the domestic banks. Charlotte Yew, Jardine Fleming’s managing director in Singapore comments: “The problem we have is that distribution is so expensive, and as the market is a little too small, it is not a viable commercial proposition for us. Even if you forge an agreement with the banks, they will retain a natural propensity to promote their own funds. They want all the spread and a high trailer fee to sell third party funds.”
The negative growth in the Singapore economy has forced the government to introduce off-budget measures to help firms cut costs without jeopardising jobs. The most significant measure, originally a response to the Asian crisis of 1998, has been the cutting of employers’ CPF contribution rates. The rate is now back up to 16% and is up for review again mid-year, but it had been as low as 10% in 1999. The government is committed to raising the rate again, but at this stage it is by no means certain that the 20% rate will be reinstated this year. The employees’ contribution rate remained unchanged at 20%.
The most significant initiative in this sector in recent times has been the introduction of a supplementary retirement scheme (SRS). The SRS was introduced in April 2001 and was again the result of recommendations made by the IMC. Contributions are tax deductible up to a maximum of 15% of income (as with CPF, income is subject to a cap of S$6,000 monthly basic salary), with 35% allowance for foreigners, who do not benefit from the tax benefits available under the CPF. Only 50% of savings withdrawn at retirement (at age 62) will be subject to tax.
The government appointed four local banks as SRS operators who carry out all administrative procedures and determine investment policy (investment in real estate is the only class that is disallowed). Investment returns will roll up tax-free until withdrawal. Individuals will be free to enrol with the provider of their choice.
Unlike the CPF, members will be able to make withdrawals from their accounts at any time but in a move to encourage maximum saving for retirement, such withdrawals will be subject to income tax plus a 5% penalty, a significant reduction to the 10% originally proposed by the government.
Official statistics as at 31 December 2001 published by MOF show the total number of accounts opened so far is 11,890, with total gross contributions of S$157m. Dennis Lim of Franklin Templeton in Singapore suggests that improvements to the retirement savings business have not resulted in a level playing field: “This is a restrictive market, more so than in Hong Kong. The regulators are busy trying to re-write the rules to make it easier for the likes of ourselves, but the distributors are still too powerful; they make the rules and collect the fees. Investors and potential SRS clients lack the sophistication to seek out alternatives to the banks offerings.”
In 1999, the government removed tax exemptions for foreigners who contribute to the CPF. According to William M Mercer in Singapore, prior to 1 January 1999, 38% of companies contributed to the CPF in respect of foreign workers and of these over 54% will continue to do so. A further 22% of employers have compensated for the reduction by either paying a fixed monthly allowance, by increasing base salary or by implementing an alternative retirement plan (the first being the most popular option). Mercer’s Gary Hawker comments: “Employers will now have yet another reason to set up their own retirement scheme, as Inland Revenue approved schemes enjoy tax deductibility on employer contributions and tax-free build-up of scheme assets.”
Richard Newell is a consultant specialising in the Asia Pacific fund markets. He can be contacted at