More ways to avoid eating dog-food in retirement

Recognizing that the bulk of Singaporeans' supposed retirement savings have gone into their flat, the Singapore Government is now allowing more ways to allow Singaporeans to monetize their biggest assets.

From the Straits Times:

Rules on subletting HDB flats have been relaxed further to allow even those who have lived in them for just five years to rent them out.

And it does not matter whether they have paid up their home loan or not.

The previous rules specified that those with outstanding HDB loans would have to wait 10 years to do so, and five if they have paid up.

A new rule is in place for those who have bought their HDB homes without any subsidy or grant from the Government: They can do the same if they have lived there for just three years.

The changes, effective immediately, mean that about 650,000 of the more than 800,000 HDB homes dotting the island can be put on the rental market.

HDB rules on subletting have been gradually relaxed over the years to let people monetise what is, for most, their single most valuable asset.

It appears that it is targeted mainly towards the elderly, but wouldn't most elderly folks have already spent more than 10 years in their HDB flats? And what would you do if you had to be homeless in order to monetize your flat?

Mah Bow Tan suggests that you move in with your kids......

National Development Minister Mah Bow Tan, who announced the changes in Parliament yesterday, noted that the elderly stood to benefit.

They could move in with their children while earning rental income from their flat, said Mr Mah.

He also listed other ways for the elderly to monetise their flats.

They could downgrade to a studio apartment, rent out a room in their existing flat, or pledge their property for a regular stream of income in what is known as a reverse mortgage.

He lists other options as well, but they all have high transaction costs.

1. Downgrade to studio apartment - involves all the closing costs and real estate commissions involved in buying and selling a flat
2. Rent out a room in their existing flat - invite a stranger into your house
3. Reverse mortgage - high fees and costs, payable to the bank....

The more cynical amongst us could argue that it would also provide some cheap housing for the coming additions to Singapore's population....

More on the ugly Honda car

So the website has finally gone "live". Surprise Surprise, there are no logos or advertising plastered all over the website. zilch. nada. If you follow a few links, you can find a link to the sponsors page on the Honda F1 website.

You can make one of many pledges to change a small part of your lifestyle in order to benefit the environment. I already do most of these, so I am going to turn up my thermostat 1C in summer (reduce air-con consumption), and turn it down 1C in winter (reduce the heating bills).

You get your name, country and pledge put in microprint on the car. You also get to pledge $XX of donations to a charity - although my take on this is that talk is just talk. Kind of like the billions of dollars of tsunami aid pledged that never reached the victims. They should have created a list of environmental charities, and allowed visitors to actually donate using credit cards, Paypal or Google CheckOut.

Anyway, what are you waiting for? Hop over and make a pledge!

Why has the CPF failed as a retirement vehicle for Singaporeans?

As I've read (as part of the Singaporean diaspora, I've found it harder to experience) with some dismay over the past months at the difficulties facing retired/retiring Singaporeans, I've often wondered why the CPF, which ostensibly aims to secure Singaporeans' retirements has not achieved this goal.

The Central Provident Fund Board says in its Mission and Vision statement:

Mission

“To enable Singaporeans to save for a secure retirement.”

Vision

“A world-class social security organisation providing the best national savings scheme for Singaporeans to enjoy a secure retirement.”

Even a cursory glance through the CPF website, and a quick search of the literature indicates that the CPF doesn't function simply as a retirement savings vehicle for Singaporeans, but as a public and economic tool by the Singapore Government.

...CPF has also been used to accelerate national growth....

The CPF has been used as a social and economic tool to:

• Encourage a greater sense of belonging to the fledging nation by building up greater home ownership
  
• Stimulate the economy
• Approved Investment Scheme (1986) was the first of many schemes to allow Singaporeans to invest their savings into the securities market
• Manipulation of the CPF contribution rate as a means of macro-economic stabilization

With all these differing (and underlying) objectives at hand, it is not surprising that the CPF has not been able to function as efficiently as it could have, if it had existed solely as a retirement funding vehicle.


Poor investment Returns

As Professor Mukul Asher of the Public Policy Programme at NUS estimates in his 2004 paper ("Retirement Financing in Singapore"), the compounded annual real returns on CPF Member balances, at 2.1% p.a., has been significantly lagging Singapore's real GDP (8.2%) and wage (6.1%) growth.

Considering that the CPF member funds are used to purchase relatively illiquid Singapore Government bonds, which, since the Singapore Government has consistently run a surplus, are turned over to the Singapore Government Investment Corporation (GIC) and Temasek Holdings for investment overseas, amounts to an implicit (and regressive) tax on the population. In effect, Singaporeans are getting returns of bonds, with potentially the risk of private equity and hedge funds.

But you ask, what about the CPF Investment Scheme (CPFIS), which allows members to invest in approved assets such as unit trusts, shares and insurance. There has been a generally low participation rate in this scheme - only 15% of members chose to invest in equities. With the low financial knowledge of most Singaporeans, the rate of return on the SA and OA accounts has been negative.

The unit trusts offered by the CPF (and generally in Singapore) generally suffer from extremely high expense ratios and sales loads. The CPF does not appear to have used its pricing power to negotiate lower expense ratios for its members. This might be a corollary of the impetus to build Singapore up as a financial centre by attracting fund management firms to Singapore with these higher returns.

From planning my own retirement, most (80%) of actively managed funds in the US manage to underperform their benchmark indices, and that the biggest driver of long-term returns is investment costs and asset allocation.

The low uptake of the CPFIS might also be attributable to the sheer and bewildering choice of funds and stocks available to CPF members. Studies of the 401k program (a defined contribution program in the US where employees can defer part of their income into investment choices offered by their employers) show that if employees are presented with too many choices, they often make the choice of not choosing at all.

Thus most Singaporeans choose to invest their CPF balances at a low return, and those who try to invest are either faced with high investment costs, and/or make poor investment choices.

High rate of "savings" but not into investment assets

Professor Asher estimates that 75% of CPF contributions over the years have been withdrawn over the years, primarily to for housing and real estate investments. This means that a large proportion of Singaporeans' forced savings are not going into investment assets that will be financing their retirement. Most financial planners do not treat the primary residence (in the case of Singaporeans, this will be their HDB flat) as a financial asset. The equity in a primary residence can be tapped to provide retirement income (e.g., reverse mortgages, downsizing the flat, etc) but the transaction costs of doing so are high.

Ugly but interesting

Honda has just unveiled an interesting new concept for the livery of its RA107 car for the 2007 Formula One season. No logos, just a big detailed photo of the Earth.

To help raise awareness of the environmental issues facing the planet, the RA107 F1 car will simply feature a huge image of earth, in place of the advertising and sponsor logos which have featured and dominated all other F1 cars for decades.

Considering that Formula One teams get a large (80-85%, according to the BBC) proportion of their income from sponsorship dollars, this is a bold move. There has been some speculation on the web that this move has been forced by Honda's inability to secure a main sponsor.

The concept is simple. Anyone can have their name placed on the paintwork of the car by making a donation to an environmental charity, and pledging to make a lifestyle change to benefit the environment by visiting www.myearthdream.com . Your name will then appear somewhere on the paintwork, and there will supposedly be an online magnifying glass to zoom in on your name. The website isn't working as yet, but will be functional tomorrow. We'll see....

My suspicion is that this is a shrewd move by Honda for several reasons:

• Enhances their current marketing slogan of The Power of Dreams, along with their brand values of environmental consciousness (such as their hybrid, natural gas, and fuel cell vehicles)
  
• Effective viral marketing, with the launch of their new livery attracting significant attention and buzz on web forums
• Potentially new model for advertising and fund-raising, particularly for F1. Instead of giving sponsors exposure to 300mm television viewers per race, the exposure is generated through advertising on www.myearthdream.com, the URL advertised on the rear wing, and mostly through viral marketing as well
• Its echoes the million-pixel ad , when a schoolboy generated a million dollars of advertising by selling ad-space for $1 a pixel here.
  

More to come when the website finally goes live. Mere speculation for now. It sure is fugly!