Singapore's proposed supplementary retirement scheme (SRS) is in need of a major rethink if it is to be an effective way for Singaporeans to top up their retirement savings, says a leading actuary.
David Richardson, director of actuarial benefits and insurance of PricewaterhouseCoopers, has recently told a gathering of investment professionals that while a pension top-up scheme is needed, some features proposed by the government in the SRS may be regarded by the investment industry as unworkable.
The government announced in the budget earlier this year that a new pension scheme was being considered to supplement the present central provident fund (CPF) system that many pension experts have argued will not be able to provide adequate benefits to future retirees.
Under the new scheme, employees can make voluntary contributions up to a certain percentage of their salary. The contributions are tax exempted but the benefits are not and only can be withdrawn at retirement age. The investment accounts will be administered by SRS operators who are financial institutions approved by the Monetary Authority of Singapore (MAS). Expatriates are allowed to participate but employers are not.
According to Richardson, the proposed scheme can be improved on four fronts.
First, employers should be allowed to make contributions if they wish to. The contributions, if deducted from salary, will increase the employer's retention power with little impact on business costs. Also, for workers who do not have to pay tax because of their low income, any returns they may make from unit trusts are most likely to be tax-free. So there is little reason for them to put away extra money into the SRS, which not only taxes benefits but also restricts withdrawals until retirement age.
Second, benefits from the SRS should be tax-free or at the very least partially tax free. For Singapore's top earners, the total tax payable on benefits from the proposed scheme could be higher than that from unit trust investments made from after-tax salary because of the step tax system in Singapore on personal tax. Richardson argues it would be more reasonable to tax a portion of the benefits that is equal to the total contributions made. The rest should be tax-free.
Third, the proposed scheme should be merged with another trust system already in place. For employers who wish to make extra contributions for their employees, they can do so under the current rules of the Inland Revenue Authority of Singapore (IRAS). Employees are not allowed to make contributions to the IRAS scheme. Richardson suggests the two schemes should be merged so that the administration costs on running the investment account can be reduced.
Lastly, the SRS contribution rate should be set at 10% of the employee's salary. Under the CPF, the average income replacement rate is 35%, far short of the 66% that is deemed to be adequate worldwide. For foreign workers on an average salary, Richardson suggests their contribution limit should be higher because the CPF for them is less tax-effective than for locals.
The government says it has consulted industry practitioners regarding the new scheme and it is intended to be implemented in a few months' time.