Speech at Second Reading of the CPF (Amendment) Bill

Mrs Josephine Teo, Minister for Manpower, Parliament

Introduction

1. Mr Speaker, I beg to move, "That the Bill be now read a Second time."
2. The CPF system has evolved to meet the changing needs of each generation of Singaporeans.
3. It started as a retirement savings scheme in July 1955, when many workers in small- and medium-sized companies did not receive retirement benefits from their employers. CPF helped them to have something for retirement. 
4. In 1968, in order to improve housing affordability, CPF usage was expanded to help members buy HDB flats. From 1981, CPF savings could also be used to buy private properties. This made home ownership a reality for over 90% of Singaporean households and helped them to share in Singapore’s growth. It also gave them an asset to rely on in retirement. 
5. In 1984, in order to meet rising healthcare needs, we created the MediSave Account. This helped Singaporeans cope with big healthcare expenses, such as hospitalisation. 
6. As life expectancy continued to rise, so did the risk of Singaporeans outliving their savings.
7. In 2009, we started to transition from the Minimum Sum Scheme, now known as the Retirement Sum Scheme, to the CPF LIFE annuity scheme. Members on CPF LIFE have the assurance of a constant stream of retirement income for as long as they live. 
8. The CPF system is a continuous work-in-progress. Its 3-in-1 feature is also unique. No other retirement system tries to help people fulfil three basic needs in retirement – housing, healthcare and day-to-day spending. Comparisons with other systems often neglect this important fact. There is also considerable complexity mainly because new rules have to co-exist with previous rules for earlier cohorts.
9. Be that as it may, CPF should continue to evolve to meet the changing needs of our people. 
10. This Bill is part of that evolution. It will amend the CPF Act in two broad areas. First, to cater to changes in employment practices. Second, to clarify and streamline the administration of the CPF Act.
11. With Speaker’s permission, I will also use this opportunity to respond to Mr Chong Kee Hiong’s supplementary question during Question Time, and update on changes we are making to the Retirement Sum Scheme in response to feedback from members. 

Providing workers and employers with more flexibility for future employment practices

A) Self-employed

12. In 2017, MOM had set up a Tripartite Workgroup on self-employed persons (SEPs) to look into the concerns of SEPs, and make recommendations on how to address them. In both the Committee of Supply debates of 2018 and 2019, I gave updates on the Workgroup’s recommendations and their implementation. 
13. One recommendation was to help SEPs save for their retirement and healthcare needs through the CPF system.
14. Today, SEPs must make contributions to the MediSave Account. Unlike regular employees, there is no requirement for them to contribute to the Ordinary and Special Accounts.
15. Members know how MediSave Account balances can be very helpful. They can be used to pay for medical treatment and MediShield Life premiums, which helps with hospital bills. The converse is true: a depleted MediSave Account exposes the SEP to risks of not having the support for healthcare expenses when he or his family needs it most.
16. Currently, SEPs make their MediSave contributions every year, based on their earnings in the previous year. This approach of making yearly contributions for past years’ earnings can be improved.
17. Unlike regular employees, SEPs do not have a simple process to make small regular contributions as and when they earn income. When the time comes to make the out-of-pocket lump-sum contribution the following year, SEPs with cash flow constraints face difficulties. This happens more often than not. In any given year, about 60% of SEPs do not make their MediSave contributions in full in a lump sum. This is very significant – about 130 thousand.
18. As a result, some choose to pay via a 12-month instalment plan. Nonetheless, a significant number do not sign up for an instalment plan or have stopped paying their instalments.
19. The root cause of this may be that these SEPs have irregular income. Should they wish to get back into regular employment with more steady income, we have many schemes to help them do so. In fact, last year, more SEPs switched to regular employment. But for those who remain in self-employment, we should also find a way to help them avoid slipping back further. 
20. This is what the pilot is about – helping SEPs keep up with their MediSave contributions, to strengthen their protection against health shocks.
21. The first set of amendments will allow for a pilot "Contribute-as-you-Earn" (CAYE) scheme for a small group of about 6,000 SEPs who provide services directly to the Government and public sector agencies. 
22. As a service buyer, the Government can help SEPs directly transmit their contributions to their MediSave Account, and then pay the rest of the service fee to them.
23. The Government plans to start this pilot from 1 January 2020. Let me illustrate how CAYE works.
24. Take for example Sam, who is a 48-year-old self-employed soccer coach. A primary school engaged Sam to conduct a 2-hour soccer clinic. The primary school paid Sam $120 for the session, of which $20 was the expense that Sam incurred. Effectively, his income from this session was $100. 
25. Under the current contribution model, the school would have paid Sam the full service fee amount of $120. 
26. With CAYE, the school will help Sam make a contribution of $10 for the 2-hour soccer clinic. Why $10?
27. Sam has estimated that his income from this job is around $100, after taking out expenses. Based on his income in the previous year, the MediSave contribution payable is 10% of the income he earns, and not the total service fee, which can include expenses. At the same time that it contributes the $10 to Sam’s MediSave Account, the school pays out to Sam the balance $110 for this assignment.
28. We can expect Sam to take on various jobs throughout the year. Supposing his net trade income in total is $30,000. He would have to make a MediSave contribution of $3,000. Suppose also that $13,000 of his income came from work done from MOE. By the time the CPF statement arrives, the schools would have helped him contribute $1,300, or 10% of $13,000, throughout the year. So the remaining contribution is no longer $3,000 but a reduced amount of $1,700.
29. How does Sam benefit? I think we can see that his risk of not being able to make the contribution in full is now lower – $1,700 instead of $3,000. Like regular employees, he can make smaller and more regular contributions to his MediSave as and when he receives a payment. This is helpful as his income may be seasonal due to less work during the exam period. CAYE will also help Sam grow his MediSave monies. By contributing earlier, he will accrue more interest on his MediSave contributions.
30. Some SEPs are more comfortable with the current model of MediSave contributions and may prefer not to be on CAYE yet.
31. SEPs who have made their MediSave contributions in full or are keeping up via an instalment plan will be allowed to opt out of this pilot. SEPs can then set their CAYE contribution rate to zero. 
32. For SEPs who have not been keeping up with their MediSave contributions, we will continue to give them time to clear their back payments. But it is better that they make contributions through CAYE. This will help them keep up with the current MediSave obligations and prevent their obligations from snowballing. 
33. Let me make clear a number of things.
34. There is absolutely no change to the obligations of the self-employed for CPF contributions. Even after Parliament passes the amendment, the obligations are the same as before. The only change concerns how those contributions are made. Instead of a lump-sum payment once a year, small contributions will be made from SEPs’ income each time the income is earned.
35. As this pilot only involves SEPs who provide services to the Government, only a fraction will be affected. If they have in fact been up-to-date with their payments, they can also opt out of the pilot.
36. As part of our consultations for the Bill, we had in-depth discussions with NTUC and leaders of SEP associations. They have generally welcomed the introduction of CAYE and recognise its benefits.
37. However, they are also concerned with some of the SEPs who are already falling behind in payments. Specifically, Mr Ang Hin Kee and leaders from the National Instructors and Coaches Association (NICA), the Professional Photographers Association (Singapore) (PPAS) and the Singapore Association of Motion Picture Professionals (SAMPP) suggested that the Government provide some matching of the SEPs’ MediSave contributions when they participate in CAYE.
38. I have discussed with my colleagues and we agree this is a good suggestion. The Government will look into providing some support for SEPs participating in the CAYE pilot. 
39. Some members may ask if we can extend CAYE so that like regular employees, all of Sam’s contributions would have been made as and when he earned an income.
40. Let me emphasise CAYE is a pilot. We have not taken a decision on whether CAYE will be extended to include payments made to the SEPs by companies or intermediaries, such as for insurance and real estate agents. 
41. Some of the intermediaries have already indicated interest. They can see the benefit of helping their agents make MediSave payments as and when they earn an income. This is especially if the lump-sum payment happens to be required during a lull period the next year when the agent earns less income.
42. But let us try out CAYE first, see how well it works, and decide later if and how other SEPs can also benefit.

B) Employees and employers

43. Employment practices are also changing and we need to ensure the CPF Act keeps pace. We are thus amending the CPF Act to be more responsive to the evolving needs of employers and employees. Let me explain.
44. Today, employers may structure wage components that are tied to certain contractual conditions. For example, a sign-on bonus with a minimum service period condition.
45. If the employee chooses to leave before that, he is required to return the sign-on bonus to his employer. This practice is allowed under the Employment Act. To restore both parties to their original positions, the employee also needs to return the CPF which his employer paid on the sign-on bonus. However, the CPF Act does not allow CPF Board to grant refunds for this repayable component.
46. Regulations prescribed under the amended CPF Act will give employees flexibility to apply for a refund for the CPF portion within one year of having to return the conditional wage. Employers may also apply for the refund, with the employee’s consent. Let me illustrate with an example.
47. Daniel receives a sign-on on bonus in January on the condition that he works for one year. He gets $4,000 in cash, and $1,850 in his CPF. If he leaves his job in March, he has to return $5,850 to his employer. Of which, $1,850 is in his CPF account.
48. Under today’s rules, Daniel would be out-of-pocket for the $1,850, as CPF Board is unable to refund this amount from Daniel’s CPF to pay back his employer. With this amendment, Daniel may apply to CPF Board to refund the $1,850 from his CPF account to his employer if he wishes. With Daniel’s consent, his employer may also apply directly to CPF Board for the refund.
49. Let me state for the record that we neither encourage nor discourage the practice of sign-on bonuses.
50. With the changes, regulations can be made to allow members and employers greater flexibility to accept and offer such payments, knowing they can obtain a refund of their CPF contributions if the payment has to be returned.

Amendments to clarify and streamline the administration of the CPF Act

51. The second and final set of amendments provide greater clarity and efficiency in the administration of the CPF Act. I will provide one example.
52. The Home Protection Scheme (HPS) is a mortgage insurance scheme. It protects CPF members and their families from the risk of losing their home if the breadwinner meets with an unforeseen event, like death.
53. When this happens, it understandably takes some time until the claim is paid. The grieving family will need time to report the claim. CPF Board will need time to process and make the claim payment to the mortgage bank or to HDB in the case of HDB loans. Meanwhile, the interest on the mortgage loan continues to accrue.
54. In practice, CPF Board has always paid the interest accrued on the outstanding loan all the way until the claim is paid. In other words, families have not needed to make further payments because of the time it took to report and process the claim. 
55. This amendment simply regularises this practice in the legislation.
56. This sums up the key amendments to the CPF Act.
57. Mr Speaker, I beg to move.

Review of Retirement Sum Scheme payout rules

58. Mr Speaker, may I seek your permission to respond to the supplementary question raised by Mr Chong Kee Hiong earlier during Question Time, on the review of the Retirement Sum Scheme?
59. Thank you. I will take this opportunity to briefly talk about changes we are making to the Retirement Sum Scheme (RSS) in response to feedback from members. I had shared in a written Parliamentary reply in October that MOM and CPF Board were reviewing the RSS payout rules. We have completed the review.
60. The RSS is still the main CPF retirement income scheme today. Most members aged 65 and above today receive their retirement payouts through the RSS. More members will start receiving their retirement payouts through CPF LIFE from 2023 onwards, when the first cohort of mandatory CPF LIFE members reaches their payout eligibility age. Members will be automatically included in CPF LIFE if they have at least $60,000 in their Retirement Account at age 65. CPF LIFE will provide them with payouts for as long as they live.
61. On the other hand, RSS payouts are designed to last up to 20 years from the payout eligibility age. This takes into account the base interest rate earned on Retirement Account savings, which is now 4%. We call this the “base payout”.
62. In 2008, the Government introduced Extra Interest and again in 2016, the Additional Extra Interest. This benefitted all members and especially those with lower balances. It was deliberately designed as a progressive move.
63. All this extra interest earned from age 55 is used to stretch the payouts beyond the usual 20 years, up to age 95 at most, to protect members from outliving their RSS payouts. So, the base payouts would have lasted up to 20 years, but with the extra interest, they last longer, can be up to 95 for some members. 
64. We have received feedback from some members who felt that the RSS payout duration of up to age 95 was too long.
65. Designing payouts to last up to age 95 will cover the longevity risk of up to 4 in 5 members. In other words, only 1 in 5 members is expected to outlive his RSS payout. While this approach is fundamentally sound, it does mean that for the members who had remaining balances in their Retirement Accounts when they passed on, their RSS payouts could have been slightly higher.
66. We will change the RSS payout rules to address members’ feedback on long payout duration. 
67. The key change we will make is to design RSS payouts such that they will last to age 90 at most, instead of age 95. The base payout will continue to last up to 20 years. 
68. Today, all of the Extra Interest and Additional Extra Interest that a member earns from age 55 goes towards extending his RSS payouts beyond 20 years. We will adjust this. Extra interest earned from age 55 until the member starts his payouts will now be used to increase his payout amount.
69. Extra interest earned after the member starts his payouts will continue to extend his payout duration. Moreover, the extension will go to age 90 at most, instead of age 95. Particularly for RSS members whose payouts were originally projected to end past age 90, these changes will increase their payout amounts. Let me illustrate with an example.
70. Let’s say Mr Tan is aged 65 today and starting his RSS payouts. Based on his Retirement Account savings and the current RSS payout rules, he will receive a payout of about $470 for 30 years. His payout duration comprises 20 years of base payouts, and an extension of 10 years from the extra interest earned on his savings. In other words, his payouts will end when he is age 95. Under the new RSS payout rules, his payout will increase from $470 to $520. However, the payouts will end at age 90.
71. The new RSS payout rules will continue providing longevity risk protection for up to 2 in 3 members. In other words, the majority of members on the RSS will still receive payouts for as long as they are expected to live. For those who prefer a longer payout duration, they have the option of joining CPF LIFE before age 80. This will guarantee that they receive payouts for as long as they live.
72. Allow me to also add, for avoidance of doubt, that there is no change to payout eligibility ages or withdrawal rules for RSS members. If you are 65 today, you can start to get your payouts. This remains the same. 
73. I would also like to be very clear that members who are currently receiving payouts will either get the same or higher payouts as a result of the changes to payout rules. No one will see a reduction in the payouts they are currently receiving.
74. Separately, we will adjust the RSS payout computation so that when members defer their payouts, or make a top-up, they will generally see an increase in their payout amount.
75. The changes to how RSS payouts are computed will take effect in 2020. All RSS members who turn 65 from 1 July 2020 will be on the new payout rules.
76. Let me repeat that there is no change to when they can start their payouts, only how those payouts are computed.
77. As per usual practice, members will receive a letter six months before their 65th birthday. This letter will inform them that they can choose to start their payouts from 65 if they wish. 
78. As for older RSS members who have already chosen to start their payouts under the current rules, we will apply the new payout rules to them from 1 Jan 2020 if the resulting payout amount is higher than their current payout. Around 60,000 members will see their payouts increase as a result. 
79. To communicate the change clearly to RSS members who have started their payouts, CPF Board will send a one-time letter. Relevant RSS members who are receiving their payouts will receive this letter, which will inform them whether and how they are affected. 
80. To conclude, the changes will see RSS payout duration last to age 90 at most. All RSS members who are currently receiving payouts will get either higher payouts or the same payouts. 

Conclusion 

81. Let me conclude. 
82. Mr Speaker, the CPF Amendment Bill provides workers and employers with more flexibility. In particular, flexibility to adapt to future employment practices. It also clarifies the administration of the CPF Act. Together with the changes to the RSS payout rules, we are making CPF processes more member-centric. 
83. This is not a one-off task. We will continue to update the CPF system to better serve the changing needs of its members. 
84. Thank you.