I - The CPF: Pension Plan, Tax Shelter and Debt Instrument

Summary

The Central Provident Fund of Singapore (hereafter CPF), may be thought of as a very unusual institution for the working life accumulation of funds to provide a pension. As its most basic arrangements go, there is not much to distinguish its features from many other pension plans in the world. It provides a fully vested money purchase account accumulated as a fixed percentage of pay, with an employer and an employee share. Interest is credited at something resembling market rates at regular intervals. Account balances are reported periodically to the members. There is a “normal retirement age” at 55 in the plan.

CPF differs from many other pension plans by the proportion of income it absorbs, the income tax treatment of CPF savings, the exceptions to the arrangements to lock savings in until age 55, and the forms of access to the accumulation at that age. In a most significant way, CPF appears to have a role beyond that normally expected of a pension plan, as an instrument of government policy.

Singapore's savings rate, by world standards, is very high. Most of the savings arise in the public sector, but the compulsory personal savings collected by the CPF provide a considerable addition. The rate of contributions, now 25 per cent of pay by the employee and 10 per cent by the employer to a maximum total annual contribution of $27,300, was at 25 per cent until April 1986 for each employer and employee, with a total annual maximum of $39,000. Either of these magnitudes accumulated through a working life, and compounded at, say, 3 per cent over the inflation rate, should provide for a life annuity ample enough to pay for a comfortable retirement. Chapter Four provides many illustrations of the magnitudes. The accumulation of large sums by an individual is, of course, contingent on a stable lifetime record of contributions, hence of employment.