We started this research series in July 2011 with the aim of identifying and proposing logical, scientific and rational solutions to the retirement savings and investment problems that many Asian nations, including Singapore, face. We believe that innovative and thoughtful applied research, presented in a form that is accessible to the lay person, can make a difference to the lives of many in the region. Our thought leadership pieces and the student-built Real Retirement Fund Calculator have been presented at various academic and industry forums around the world, and have been featured in leading Singapore newspapers such as The Business Times, The Edge and The Straits Times. Since the Series’ launch we have published 6 thought leadership papers on Retirement Finance, coupled with numerous presentations at various forums, conferences and events around the world, particularly in Singapore, Hong Kong, China and the United States.
"On the Role of the State in Pension Plans and How Best to Achieve It", Laurent Lassalvy, 2011
In this paper, the author explores the state’s role in the pension system and how best to achieve the public objective. A purely private pension system would not take into account externalities; so it is optimal for the state to ensure that all senior citizens receive a basic living pension. This can be achieved with a public pension life annuity paying a fixed percentage of per capita consumption (Merton (1983)). There should be a self-funded public pension fund, financed by compulsory contributions set at a level ensuring sufficient disposable income for all workers. All additional pension contributions, investments, and distributions could be managed by the private sector. As a corollary, we propose the government issues consumption-indexed bonds to reduce the public pension fund’s asset-liability mismatch, and improve the annuity price discovery process. Implications arising from home ownership and health care needs are also discussed; however the latter is too volatile and unpredictable to be handled within the public pension system. Rather, as is practiced in many countries, including Singapore via its Medisave/MediShield program, it should be financed and implemented through a separate, basic health care insurance scheme.
A version of this working paper is published in Life-cycle Investing: Financial Education and Consumer Protection (CFA Institute), Zvi Bodie, Laurence B. Siegel and Lisa Stanton (Editors), The Research Foundation of Chartered Financial Analysts (CFA) Institute Publications Series, Chapter 6, 139-161, November 2012.
In this paper the authors explore how small countries such as Malaysia, Singapore, and Taiwan, can offer their aging populations the means to protect their retirement income against inflation without the governments directly issuing inflation-protected bonds. While inflation swaps are a well known means by which to attain this, the authors also show how an inflation index-replication strategy is also feasible. With this ability to provide inflation-adjusted returns, governments, pension funds, and other institutions can begin to offer a broad suite of inflation-indexed products, ranging from retirement annuities to inflation-linked insurance policies. This will improve the functioning of national pension systems, and hence the welfare of retirees. The added benefit of such structures is that they allow governments to broadly replicate their local Consumer Price Index (CPI) returns without disrupting their traditional financing structures. Given the potential of reinsuring national default risks across borders via currency and credit default swap facilities at the federal level, there is also a unique role for the government in this process as the reinsurer of last resort.
How senior citizens are able to make ends meet is too important an issue for society, especially for the population-ageing nations, to be left to the full discretion of each household. Indeed, governments the world over are usually involved in the retirement savings and benefits process of their citizenry, be it through state pension systems, compulsory savings programmes or via tax incentives. Society benefits if all senior citizens receive a basic living pension. A joint commentary by Prof Joseph Cherian, CAMRI director, and Laurent Lassalvy, visiting consultant researcher at CAMRI.
“The Real Retirement Life Income Fund: An Inflation Protected, Dignified Standard of Living for all Singaporeans”, Divya Mandloi, Rohit Singh and Clarissa Turner, November 2011
This paper proposes the Real Retirement Life Income (RRI) Fund, a sovereign-managed, individually-funded, social safety net retirement scheme for Singapore. The RRI Fund invests monthly and lump sum contributions directly into inflation-protected securities and ensures a guaranteed, safety-net level of real cash flows from retirement to death, which is sufficient to maintain a dignified standard of living for all Singaporeans. A financial calculator called the RRI Fund Calculator has been developed in tandem with this analysis so as to calculate the required monthly contributions for households based on their current capabilities and preferences. The RRI Fund Calculator is designed to minimise assumptions and ambiguity, whilst providing the flexibility required to cater for individual circumstances. The Calculator uses current and estimated real cash flows for a household to estimate the real monthly contribution that will ensure a level of real income in retirement that will allow for a dignified standard of living. The real discount rates are obtained based on market expectations of the real term structure, thus providing a certain hedge against inflation. At the same time, instead of assuming a flat term structure based on historical data, the real term structure used in the RRI Fund Calculator is obtained from market inflation-indexed bond rates.
"Planning for a dignified life after retirement", Divya Mandloi, Rohit Singh and Clarissa Turner, The Business Times, 12 December 2011
Retirement planning is difficult due to its long-term nature and high degree of uncertainty. Longevity and inflation are two key risks. In addressing some of the challenges in planning retirement, a team of NUS MBA students propose a potential solution through their Real Retirement Income Fund and RRI Fund calculator. Their research project was sponsored as part of CAMRI’s Life-cycle Saving and Investing in Asia Research Series.
"Marshmallows and markets: Could guarantees make pensions more appealing?", The Economist, 3 November 2012
A November 2012 Economist article which encourages the role of the government in shifting the risk currently born by investors when saving for their (inflation-adjusted or real) retirement needs so as to secure a dignified standard of living. The article suggests this would be attained by offering “an (almost surely) guaranteed pension where investors would buy inflation index-linked government bonds so their savings will be protected against inflation, unless the government defaults.” Note: Related to this article, an inflation-indexed retirement life annuity, which we propose should be issued by the CPF - let us call it "CPF (REAL) LIFE" - is one such suggestion that CAMRI has proffered in the past that the CPF and other Asian national pension plan sponsors should be offering. Please see the above CAMRI Life-cycle Saving and Investing in Asia Research Series articles for details.
"Consumer Behaviors in Financial Markets", Sumit Agarwal, August 2010
In light of the recent meltdown in the subprime mortgage market and the subsequent financial crisis of 2007-2008, there is a growing concern that U.S. consumers are ill-prepared to make sound decisions in an increasingly complex financial environment. We find that younger and older borrowers are more prone to make financial mistakes. We also observe that there are significant variations across demographic groups. For example, as the number of goals increases, we find an increase in the number of financial instruments. We also find aggressive growth individuals tend to have more insurance policies, suggesting that the insurance policies may not be as conservative as they initially look. This subject is important as it applies to Asian consumers’ saving and investing behaviour, which also coincides with CAMRI’s Life-Cycle Saving and Investing in Asia Research Series. Note: Professor Sumit Agarwal was named Research Director at CAMRI in May 2012. In this newly-created role at CAMRI, Professor Agarwal will head research activities at CAMRI generally, with a particular emphasis on research involving Consumer Lifecycle Finance.
Inflation indexing missing in CPF Life
Commentary from Prof Joseph Cherian, Director at CAMRI, on why government inflation-indexed bonds are a necessity, well-designed reverse mortgages are helpful to retirees, and how CPF Life (an extant life retirement annuity) can be improved further with an inflation-indexing feature.
The Straits Times (Tuesday, 2 April 2013)
A savings strategy from Singapore
Features a full-length interview in New York with Prof Joseph Cherian, Director at CAMRI, on how inflation-linked bonds and inflation-linked annuities can help both US and Asian retirement savers have a more worry-free, secure and comfortable life in retirement.
Wall Street Journal MarketWatch (Tuesday, 16 April 2013)
Smart Finance Blog
In a complex financial world how do small investors and households make sound financial decisions? In this blog, Associate Professor Sumit Agarwal (Research Director at CAMRI) aims to unravel the complexity, offering clarity, comment, analysis and advice for consumers and policy-makers alike.
"Rethinking the Asset Allocation Approach for Plan Sponsors", Pranay Gupta and Sven Skallsjo, January 2013
Most plan sponsors formulate a single long term asset allocation for their assets, and then spend a great deal of effort to select a number of active managers within each silo of asset class or style. This process, they hope, combines their top down asset class return expectations (beta) with alpha from a diversified set of external active managers. This structure however ignores the fact that the single most important decision responsible for the risk and performance of the plan is the asset allocation decision, which remains as an undiversified single decision, is in many cases outsourced or done with minimal internal resources, and is the primary cause of many plans having funding gaps. Authors argue that the traditional plan sponsor asset allocation process needs to be redesigned, with the maximum amount of effort being directed to this compared to other activities. This paper proposes that a multi-strategy structure should be implemented for plan sponsor asset allocation, using a range of approaches. Different views and methodologies will therefore reduce the plan’s exposure to a single point of failure, and provide diversification where it’s needed most.
It Figures: Your home, your nest egg?
This episode examined whether the purchase of HDB flats and the appreciation of prices would pay off in one's silver years, given that Singapore has one of the highest home-ownership rates in the world. Features comments from Prof Joseph Cherian (Director, CAMRI).
Channel NewsAsia (Tuesday, 3 September 2013)
How much does it cost to retire?
A radio interview with Joseph Cherian, Director of CAMRI, on Business FM 89.9 in Malaysia. The interview covered financial planning for seniors, the importance of saving for retirement from an early age, and the retirement savings situation in Malaysia and Singapore. Other topics discussed included financial literacy for seniors/retirees and the role of government in national social security savings schemes, especially in ensuring that citizens invest appropriately & safely for retirement over their lifecycle.
The Bigger Picture Program, Business FM 89.9 (Thursday, 26 September 2013)
TalkBack: Retirement savings and how CPF can serve Singaporeans better
An interview with Prof Joseph Cherian (Director, CAMRI) on the factors to consider when saving for retirement and how the CPF system can be enhanced. Prof Cherian also fielded questions from listeners.
938Live (Wednesday, 28 May 2014)
- CPF: The hot button issues (Channel NewsAsia)
- How to improve the CPF: Experts’ take (Straits Times)
- Raise withdrawal age for the young, gradually (Straits Times)
- Reduce amounts allowed for buying property (Straits Times)
- Talkback: ‘Live’ interview on CPF (938Live)
- 专家：避免添困惑 若提供更多公积金高回报选项 应简单明了 (Lianhe Zaobao)
- Singapore Tonight: 'Live' interview on CPF (Channel NewsAsia)
- Is ‘generous’ use of CPF funds a threat to retirement adequacy? (Today)