Published October 5, 2009

CPF concern spawns corporate pension plans

But firms head to Brunei to do so, citing favourable tax treatment, among others

By GENEVIEVE CUA

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(SINGAPORE) Concern over the adequacy of their employees' retirement savings is driving a number of employers here to set up corporate pension schemes.

The schemes typically supplement the contributions that the employers continue to make to employees' CPF accounts. Effectively, some employers actually contribute substantially more than the current CPF limits. This is particularly so for older workers, as unlike CPF limits which reduce contributions for those above 50, private corporate pensions do not impose any such limits.

Employers agree that the schemes are not only a good benefit for staff, they also lower staff turnover and enhance their reputations in Singapore's highly competitive labour market.

Some of the schemes are set up as onshore trusts under Section 5 of the Income Tax Act and approved by the Inland Revenue Authority of Singapore. But here is the rub: increasingly, companies are setting up pension trusts in Brunei, citing lower establishment and running costs; speed and ease of set-up; favourable tax treatment of benefits; and a far more flexible investment universe for the assets.

This suggests that Singapore's trust segment is losing out to its neighbour.

Employers told BT that current CPF contribution caps result in a woefully inadequate income replacement ratio in retirement. The latter refers to the proportion of income in retirement against the retiree's last drawn pay. Globally, the desired ratio is around 70 per cent. In Singapore based on the CPF alone, it could be as low as 20 or 25 per cent.

Betinna Lim, human resources director of Firmenich Asia, says that the firm's Section 5 scheme took three years of analysis before it was finally implemented in 2007. 'In my analysis, I saw that the benefit employees receive from the employer's CPF contribution would be cut by between 19 to 47 per cent as a result of the dwindling CPF rates and salary ceilings following the CPF reform in 2003. Seeing an adverse effect on the employees' retirement funds, it prompted me to implement a supplementary pension plan.'

She adds: 'Our employees are happy as we continue to contribute through this downturn. To ensure long-term sustainability for the company, the pension plan includes a provision for review where necessary.'

The firm employs about 250 in Singapore.

Schroders set up its Section 5 scheme in 1999. Its main purpose, says the firm's Singapore managing director Susan Soh, is 'to provide our staff with a sound financial retirement plan that would supplement the CPF scheme, since a majority of Singaporeans' CPF savings are locked into fixed assets like housing'.

She says that any savings from the CPF contribution cuts can be passed back to the employee through the retirement plan. 'As a global asset manager . . . we are also a major manager of pension plans for numerous companies globally. It's only logical that we have in place a similar plan for our employees as well.'

Schroders manages about US$186 billion in assets.

Director of PWC Asia Actuarial Services David Richardson has long argued that Singapore needs a 'second pillar' of retirement savings, comprising voluntary employer contributions. The first pillar is the CPF; the third pillar is mainly employee contributions under the Supplementary Retirement Scheme (SRS). Employers are now allowed to contribute to SRS subject to contribution limits. Their contributions are tax-deductible.

'There is a need for a scheme on top of the CPF because that's really a housing scheme with what's left over for retirement. That's insufficient for the average person. Life expectancy after 62 is about 30 years and children aren't available to pay for parents. You can have a voluntary scheme like the SRS, but few save on a voluntary basis.'

On a cumulative basis, there is roughly $1.72 billion as at end-2008 sitting in the SRS, a rise of about 20 per cent from $1.44 billion in 2007. About 25 per cent of the funds are sitting in cash, and 32 per cent in insurance products. Unit trusts' share is about 14 per cent. SRS contributions are subject to caps similar to the CPF. While contributions are tax deductible, half of the benefits in retirement are potentially taxable, although this can be mitigated by spacing out the withdrawals over 10 years.

Mr Richardson says that employers - mostly multinationals - prefer to set up their own schemes, rather than make contributions to the SRS. This is partly because companies can impose a vesting schedule on their own schemes to encourage long-term service. SRS, on the other hand, vests immediately.

He says that there are at least 20 or so corporate pension schemes by companies in a range of industries including finance, shipping and services. An increasing number are opting to set up their trust funds in Brunei.

'There are a number of defects in Section 5 as it is currently practised. First of all, no one knows anything about it. It's a one-liner in tax books. Most companies don't know it exists.'

Approval time for a Section 5 scheme could take six to nine months, he says. Investment restrictions are unwieldy and stuck in a 'time warp' (see accompanying article). BT understands that the scheme is being reviewed by IRAS.

But the worst disadvantage, he argues, is that benefits paid out of a Section 5 scheme to retirees are taxable. 'You can mitigate it by spreading it out like an annuity, but it shouldn't be taxable.'

In contrast, payouts from an offshore pension trust are not taxable. In Singapore, investment income and capital gains are not subject to tax.

In addition, Section 5 plans are costlier to maintain. IRAS requires an annual actuarial certification, as plans must comply with a formula that imposes a cap on future benefits. 'An offshore plan wins all the time in terms of costs. In Brunei, no discussion is needed with the regulator.'

Yet another benefit for employees is that employers can negotiate for lower fees for fund management services. While the CPF has imposed caps on fees, fees of CPF-included funds are still relatively high. Funds picked for SRS investments are also subject to high retail fees.