Pensions, housing, and healthcare viewed in conjunction in Singapore

Published on: 3 January 2024

The best pension system in the world. That is what we have in the Netherlands, according to the annually published Mercer CFA Institute Global Pension Index, which includes 47 countries. So are other countries doing poorly? In the “Pensions Abroad” series, we delve into the systems of distant and less distant countries. For this installment, we head to the land of the mythical Merlion, Marina Bay and the Raffles hotel: Singapore.

Singapore occupies the 7th spot in the Mercer rankings, and with a B+ rating, the country is in the same group as Finland and Australia. The differences between Singaporeans’ pension system and ours are considerable. Whereas the Dutch pension mainly consists of the state pension, pension accrued through the employer and supplementary schemes, in Singapore there is an integrated solution. More specifically, a solution that combines care, pensions and housing. The goal is for participants to retire comfortably, have basic health insurance and be homeowners. Consequently, one of the striking results of this system is that 9 out of 10 Singaporeans own their own homes.

The party that runs all this for more than 4.2 million participants in Singapore is the Central Provident Fund Board (CPFB). The CPFB has a legal monopoly for the market, making it, as you would consider it in the Netherlands, the first and the second pillars. But, as mentioned, they do more than that.

No choice

Participation in the CPFB is mandatory for all employed Singaporeans and “permanent residents”. Until the age of 55, participants contribute 37 percent of their salary; after that, it gradually decreases. Of that 37 percent, 17 percent points is borne by the employee and 20 percent is coughed up by the employer. The contributions are divided among several accounts: for the person's pension, for the home and for health care costs. The distribution of the contributions across these accounts is done according to a fixed, graduated scale. Participants have no choice in this, although in some cases there is limited investment freedom for participants who have saved enough and want to take over responsibility for investments. At age 55, a special account is added into which the pension is deposited monthly. In addition, the government can pay subsidies into your account and there is tax space to make your own deposits. The latter is of interest to the self-employed, among others. Their numbers are also increasing in Singapore, which also raises concerns about adequate pension accrual.

 

Low housing costs

Being able to be responsible for your own financial situation requires flexibility. That is the philosophy in Singapore. Reducing housing costs is an emphatic part of a good standard of living after retirement. Integrated home-retirement solutions are also available, such as reverse mortgages and options to live smaller and use the excess value for higher retirement income. Pensions, housing and healthcare are thus viewed holistically in Singapore. Another result of the system - besides the high percentage of home ownership - is that the replacement ratios (retirement income compared to pre-retirement income) are much lower in Singapore than in the Netherlands. In the Netherlands, the net replacement ratio is above 85 percent, where in Singapore it is more like 60 percent. Precisely because of that home ownership, retirees in Singapore often have relatively low housing costs, so that replacement ratio may also be lower. It is also noteworthy that the contributions, returns on investments and benefits are all untaxed.

 

At-risk groups

The CPFB pension plan can be described as a defined contribution plan with defined benefit elements: each participant has their own assets, but risks are shared and there are subsidies for risk groups such as lower-income and older participants. The basic benefit a participant can expect to receive in the Singapore pension system is about €600, but it can rise to about €1,400 if more is deposited (keeping in mind that Singapore has for years been among the most expensive cities in the world, while Amsterdam, for example, ranked 28th in 2023). The participant can opt for an unchanged pension benefit, a benefit with a fixed annual increase of 2 percent or a benefit with a fixed decrease. The participant can also delay the retirement date by one year, which causes the retirement benefit to increase by 7 percent.

 

In the accounts, a participant earns a guaranteed return between 2.5 and 5 percent. The CPFB can guarantee this return because the Singapore government issues special bonds intended for the CPFB. The amount of the guaranteed return depends on which account the deposit is deposited into. In total, the CPFB, through a fund manager working for the government, invests more than 350 billion euros. This makes it one of the 10 biggest pension funds in the world.

Taking over social housing

Through the health insurance account, a participant insures himself and immediate family for medical expenses. This greatly reduces the risk that the participant will have to make an out-of-pocket contribution in the event of hospitalization. There is also universal health insurance and disability insurance. The philosophy of the Singapore governments has always been that every Singaporean should be able to own a part of the country. For this reason, there has been a strong commitment to social housing that the resident can take over from the government.

Singapore’s (integrated) system is unique and scores relatively well on sustainability, but it is not without its challenges. For example, the population is aging rapidly. There is also a greater role for family support in social welfare, but a trend toward smaller families has begun. Changes in the labor market (the rise of digital platform workers and the self-employed) put further pressure on long-term livelihood security.

Vulnerable

The CPFB system puts emphasis on a participant who works and contributes to the CPFB through the employer, similar to the second pillar in the Netherlands. Participants who do not work - for example, because they provide informal care - are thus vulnerable and ways are being sought to further support them.

Singapore’s pension system: facts & figures

 

Rating in the Mercer CFA Institute Global Pension index 2023: B-Grade (B+, “A system with a solid structure and many good features, but has a number of areas for improvement that keep it from being in the A-grade category.”).

Setup:                                                                Integrated system, combining care, pensions and housing.

Funding:                                                           Capital-backed

Adequacy (Mercer rankings):                   8th     

Maintainability (Mercer rankings):        8th

Integrity (Mercer rankings):                    19th

 

                                              0.5            0.75              1             1.5            2              3                                                                                                                                                   

                                                                                             

Net pension                     30.8       46.2         61.6       92.4      85.9      71.2

Net replacement ratio     60.1       60.7         61.6       62.8     44.1   25.0

Total net pension assets 11.8       11.9         12.1       12.3      8.6        4.9

at the time of retirement

 

Explanation of chart:

The column under “1” reflects the situation for someone with the average net income. The column under 0.5 reflects the situation for someone with half the average net income, etc.

Net pension: the net pension a person receives as a percentage of net average income. 

Net replacement ratio: the net pension a person is left with, expressed as a percentage of the individual's total earnings.

Total net pension assets: value of expected benefits as multiples of net annual income.