Just how dead are private pensions in Singapore?

The Singaporean government postponed the introduction of private pension plans late last year after a year of failing to make the square peg of distribution costs fit into the round hole of providing choice to investors using CPF money to invest in investment products.

Now it seems PPPs are not just on hold; they are dead.

The idea was that Singaporeans can achieve better returns by investing more of their Central Provident Fund money into a private pension system with ultra-low costs. Mercer Investment Consulting was hired to come up with ideas. The problem was scale: Singapore's small population couldn't support any investor choice if fees were so low, especially since PPPs wouldn't be compulsory. Currently, CPF members can invest their money into a wide selection of authorized unit trusts, but they must go via retail distribution channels (primarily consumer banks), which is costly.

In a recent speech by Ng Eng-Hen, Minister of Manpower, he says PPPs have been "shelved" and the government will consider other options.

For some in the investment industry, this is a matter of semantics; PPPs aren't dead, they're just being tinkered with. "It will just re-emerge in another format," says a fund house executive.

What Ng actually said was this:

"The CPF Board will study ways in which we can enhance members' savings through better returns... when it comes to increasing returns through investments, potentially higher returns come with higher risks. The risk and returns come as a package and are indeed indivisible. This is why we decided to shelve plans for the possible role of privately managed pension plans for CPF members, after we sought feedback from industry and public. The general consensus was that many members would underestimate their risks and make unwise investment decisions. We are now studying other possibilities to increase returns for CPF savings within risk levels which members should tolerate and for which the majority can benefit in the longer term. The framework cannot be a quick way to make a fortune. This would be a financially imprudent way of managing our pension funds."

He also said members must work longer and put aside more money for retirement. With more people taking longer to finish their education before working, and longer life expectancies, people are working less, and are even more reliant upon family support.

While some fund managers think PPPs will resurface under a different guise, most now believe that the idea is a dead letter. Instead, fund managers are blaming distributor fees for the low uptake in investments via CPF monies and are calling for the government to put a cap on these.

Greg Seow, CEO at DBS Asset Management and chairman of the Investment Management Association of Singapore, says total annual costs of investing in unit trusts are higher in Singapore than in the United States, the United Kingdom or Australia. Total annual costs in Singapore average 3%, including an annual wrap fee of 1% and total expense ratios of 2%. That's about 50% higher than in other markets.

Of course, in Singapore, most funds are sold by banks that charge a front-end load of 3-5%, whereas the wrap fees reflect annual advisory payments. Seow would like to see Singapore move in a similar direction, in which investors pay annual fees for advice instead of up-front charges.

He thinks this high cost is why so few CPF funds end up in unit trusts. Of the CPF pie of S$190 billion ($117 billion), members put 58% of it into property and 29% into cash, and only 13%, or S$24 billion ($15 billion) into insurance and investments.

Of that S$24 billion, members put 63% into insurance and another 27% into securities. Only 2.5%, or S$2.5 billion ($1.5 billion) is actually invested in unit trusts. "Members are asset rich but cash poor," he says, which is a problem for an aging society.

The picture gets worse: according to Shiv Taneja at Cerulli Associates in Singapore, the portion of CPF assets in CPF-authorized unit trusts (such unit trusts are open to the cash market) fell from 22% to 17% in 2003, a trend he expects to have continued in 2004. "The mutual funds structure is not working as a long-term savings vehicle," he says.

IMAS argues that the problem isn't the fund managers: over the past seven to 10 years, about 75% of funds outperformed cash, net fees. The problem is high front-end loads and fund expenses, which the government has estimated eat up 45% of returns in CPF-authorized unit trusts.

IMAS is calling for the government to put a cap on these fees in lieu of introducing PPPs, and points to the UK's stakeholder plans as an example. In theory competitors such as independent financial advisors will force charges to fall, but fund managers are sceptical they'll see this happen any time soon - too late for CPF members.

But the problem isn't that clear-cut. In Britain, distributors haven't been able to make money as a result, and stakeholder plans have disappointed in terms of asset gathering.

Moreover, distributors are quick to point out that it costs money to sell funds, which must be 'sold' and are not 'bought' by the Singapore public.

Other fund managers argue that if one Singaporean bank stops selling CPF-authorized products as a result, it leaves a bigger pie for the others. But the lack of scale means this correcting mechanism may not be enough.

Moreover, while high distribution costs surely have dissuaded many potential investors, the funds industry hasn't credibly proven it can beat the 4% annual returns promised by the CPF. "Investors get a higher rate for doing nothing," Taneja says.

Some fund managers believe the only way out of this impasse is for the government to act boldly and, instead of relying on the choice of the retail market, set up a few lifestyle managers, do away with front-end loads, and make them 'opt-out' features instead of 'opt-in' (i.e. make these a default option rather than a special feature for CPF members). It would be up to the CPF to hire the managers and handle the asset allocation.

Other managers go further and say corporatize the system, à la Hong Kong's MPF regime.

Singapore's government is now scouring the world for new ideas. But PPPs are probably more than being postponed; they aren't going to happen. Unfortuantely, few are optimistic that the government will go for a bold solution either. Will capping distributors' fees prove the halfway house? If so, it may just end up trading the problem of expensive distribution for the problem of apathetic distribution.