The Singapore Central Provident Fund model provides an interesting starting point for this discussion because it recognises that retirement savings may not always be the top priority for long-term savings when a country or a population within that country might have greater economic imperatives. The Singapore model allows individuals and their families to place as much attention on the journey as on the end-game of retirement income. This seems to be something that South African retirement fund members are pleading for.
The fact that the Singapore model has been put to the test since the early days of their independence in 1965 suggests that there is also something particularly robust about this model. But should the system necessarily be a role model for South Africa? Probably not, given its current form. To begin with, this is a 100% government-administered initiative. At this point in South Africa’s evolution there are too many other priorities on government’s plate to undertake a project this ambitious. Secondly, unemployment differences (2.5% for Singapore, 24%+ for South Africa, averaged over the last 20 years) and geopolitical differences create other challenges. A country can only function without social insurance or tax-financed redistribution when full employment is the effective operating model. South Africa doesn’t have that luxury.
But, if we could all agree that it is the spirit of what this model is trying to address that is powerful and not get caught up in trying to emulate the details of their programme, then we believe there’s much of the essence of their model that we could begin to capture through our private occupational funds.
Where welfare policies for the poor tend to focus on ‘income-for-consumption’, asset acquisition policies change the focus for families and communities from maintenance to capability building.
Perhaps the greatest innovation of the Central Provident Fund is the recognition that for individuals to really engage with a long-term savings plan, they need to be able to leverage their account resources at strategic points along their financial lifecycle.
Note the shift in focus as the economy evolved. At the outset in 1965, the most important focus for Singaporeans was on asset acquisition and social mobility. Now, as a fully developed economy, Singaporeans are channelling most of their savings into retirement.
The point here is that an economy constantly evolves. What might have been an appropriate structure at one point in a country’s evolution may not be appropriate in a later era. As such, its pension system needs to evolve to accommodate this constant dynamic of change. This too appears to be part of the DNA of the Central Provident Fund1.
How different is the Singapore situation from South Africa? Demographically, the number one problem in Singapore is immigration. This has been both a bane and a blessing. On the one hand, immigrants have helped fuel the entrepreneurial spirit that has been such an important contributor to Singapore’s growth rate. It also created a housing problem of seemingly insurmountable proportions soon after independence.
South Africa, by contrast, had apartheid. That had a crushing influence on any entrepreneurial drives that might have been in bud. More importantly, it meant that several generations representing the majority of our population were deprived of an opportunity to own and manage assets. This had serious consequences for the general financial capabilities of this population.
Like South Africans, Singaporeans also have a significant sandwich generation problem where newly qualified professionals entering the workforce find they must both care for their ageing parents and for their own children.
The point here is that an economy constantly evolves. What might have been an appropriate structure at one point in a country’s evolution may not be appropriate in a later era.
While neither country is saddled with a significant old age problem, South Africa has a different burden in the number of children still under age 15. This leaves South Africa with a significantly higher dependency ratio than Singapore, 53% against 37%2. The dependency ratio is an age-population ratio of those typically not in the labour force (the dependent part – both children under 15 and adults over 64) and those typically in the labour force (the productive part). It is used to measure the pressure on productive population.
South Africa has a significantly higher dependency ratio than Singapore, 53% against 37%.
Here’s what we’ve learned over the last few years from focusing on the issue of financial well-being in families in South Africa:
We can engage with this reality in the following ways:
In Benefits Barometer 2014: 'Key concept for engaging with our members' we talked about ‘just-in-time education’. What we now also know is that individuals only start to engage with their financial well-being when they either have an asset they want to acquire or an asset they risk losing. This suggests that the more we can link an individual’s savings to a tangible asset, the higher the likelihood of getting that individual to engage.
Ask an individual “What matters to you?” and the likelihood is that people will struggle with the answer. On top of that, ‘what matters?’ is likely to change for that individual every nanosecond. That’s where having a circumscribed set of options such as ones provided by a benefit platform can play a vital role. It asks the question: which of these set of circumscribed goals would you prioritise? It then sets up guard rails and rule-sets which govern what you can and cannot do within those parameters. People, for the most part, need this level of guidance, especially in a system they don’t fully understand and they expect to be able to trust the experts.
It’s also not enough to offer people options such as pension-backed housing loans. The real challenge for first-time asset owners is not so much the funding as it is learning how to manage the ongoing financial responsibility of owning an asset. Bottom line: people are looking for products and solutions that actually teach them how to get from point A to point B in their financial journeys.
It’s also not enough to offer people options such as pension-backed housing loans. The real challenge for first-time asset owners is not so much the funding as it is learning how to manage the ongoing financial responsibility of owning an asset.
Armed with these parameters and caveats, let’s ask the really interesting questions: How far could we possibly push our current employee benefits framework and how close could we come to capturing some of this success story? We think further than you might first imagine.
The great irony here is that after 50 years of successfully evolving this model for economic self-sufficiency, Singapore today is re-examining whether this model goes far enough to satisfy the needs of all its citizens. Suddenly unemployment relief is becoming more and more a concern. Recent recommendations from policymakers and the public have also pointed to providing tax-approved corporate pension funds, to incorporating financial counselling and finally to widening the inclusiveness of the system to freelancers and the self-employed. Singapore has reached a crossroad – it is now more ‘developed’ than ‘developing’ and the CPF must evolve to meet new challenges.
But South Africa is in a very different evolutionary space. We might be closer to the Singapore of the early 1970s. The question for us is this: If we want to develop a solution that speaks to our more immediate needs, could the experience of Singapore possibly hold the key?
1 Loke and Cramer, 2009
2 Loke and Cramer, 2009
3 Alexander Forbes Research & Product Development, 2015