Published October 5, 2009

Firms say outdated rules drag on pension schemes

IRAS urged to review restrictions under section 5 of Income Tax Act

By GENEVIEVE CUA

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(SINGAPORE) Companies with corporate pension schemes approved by the Singapore tax authority are stuck in an ironic predicament.

Thanks to outdated regulations, their investment options are shrinking at a time when investment choices for cash and even the CPF Investment Scheme are proliferating.

A number of companies have put their name to a letter to the Inland Revenue Authority of Singapore, urging a review of investment restrictions governing onshore pension schemes under Section 5 of the Income Tax Act.

Section 5 schemes are stuck in a 'time warp', says David Richardson, director of PWC Asia Actuarial Services, as the allowed investment universe is tied to the old Trustees Act which was amended in 2004.

Under the old rules, investment funds for Section 5 plans must be approved by the Ministry of Law, which also specifies that they must be onshore-registered. At its peak, there were just over 200 approved funds. Many were feeder funds which were local structures set up by asset managers to feed into offshore-domiciled unit trusts. The latter were usually Dublin or Luxembourg funds.

Today, offshore funds are allowed to be marketed directly to Singapore investors, in an effort to achieve cost efficiency, and numerous feeder funds have closed. This has drastically reduced the investible universe for Section 5 schemes to just 55 unit trusts.

Yet another rub is that the Law Ministry has ceased to approve unit trusts for Section 5 schemes.

The letter to IRAS says: 'A number of the unit trusts currently available for Section 5 investment are really quite unsuitable since they are relatively small and their expense ratios are quite high. On the flipside, reputable fund houses such as Fidelity, which entered the Singapore market after 2004, are not able to offer its funds for Section 5 because the Ministry of Law approval ceased after December 2004.

'This means that the possible investment choices are very limited, and through time will become less and less. This, of course has a detrimental effect on the retirement savings of those companies with Section 5 schemes.'

The letter suggests two options. One is to alter the investment regulations around Section 5 schemes to follow those of the current Trustees Act. This allows trustees to invest in anything as long as they are prudent.

A second possibility is to follow the investment rules of the CPFIS which screens funds and fund managers. Funds have to show a three-year track record and comply with caps on expense ratios.