Since 1992, when the compulsory superannuation system was introduced by the Keating government, the debate about the adequacy and operation of retirement savings has continued unabated. Back then there were very few SMSFs in existence and those that did exist were mainly administered by large Australian Prudential Regulation Authority-regulated funds. Investments were restricted for the sole purpose of retirement for the member and restricted from any assets from which the member would likely derive personal enjoyment.
While the latest round of proposed changes has generated its own storm of protest, and some dismay at the impact on existing superannuants, especially those who have set up future pension funding, some of our Asian neighbours have managed to take a more enlightened view on the purpose of retirement savings, providing food for thought on the potential opportunities here in Australia.
Singapore has had a compulsory superannuation system since 1968. All retirement funds are overseen by a government body, the Central Provident Fund, known locally as the CPF. What stands out about the Singaporean system is the allowance for borrowings from the superannuation funds for assets such as personal housing, investment properties, shares, tertiary education and health fund contributions. These all require the approval of the CPF board for the funds to be released.
The investment in the family home can be approved on the basis the loan is repaid with interest to the fund. The fund retains a mortgage over the property or asset and has a right (if necessary) to take possession and sell the property. Upon the asset being sold, the original funds borrowed plus interest must be repaid to the fund in full. Funds can be used to purchase more than one property, such as an investment property, but some restrictions apply.
The CPF usually requires the loan to have mortgage insurance, ensuring the retirement funds are preserved. There is currently a required deposit rate of about 25 per cent first and loan-to-value ratios (LVR) are applied. The property can be jointly owned between two people, but the CPF will hold a first-ranking charge over the property. This protects the intention of the funds in circumstances such as where the property is jointly owned between spouses and one spouse passes away, that the remaining spouse is not forced to sell and it can continue as part of their CPF investment.
Members of the CPF can borrow to fund tertiary education for themselves or their children, but the funds are required to be paid back soon after the education is completed.
Originally the contribution rate to superannuation in Singapore was 40 per cent, being a 20 per cent compulsory contribution each from employee and employer, until the global financial crisis. As a measure of support for employers during the financial crisis, their contribution was reduced to 17 per cent, but in January a scale of joint contributions that varies by age categories was introduced. Employees up to the age of 55 contribute 17 per cent of salary, matched by 20 per cent from their employer. Joint contributions drop in five-year brackets to the lowest rate for over 65s of 12.5 per cent, made up of 5 per cent employee contribution and 7.5 per cent employer contribution. Both employer and employee contributions are deductible from tax.
The current total contributions of 37 per cent are applied across three accounts: the Ordinary Account, the Special Account and the Medisave Account. The borrowings generally are taken from the Ordinary Account for investments and can also be used to top up a person’s parents’ retirement funds. These allocations change as you get older, so by the time you are over 65 the greatest proportion is allocated to the Medisave Account, given the greater use of the medical system by more senior members.
Unlike Singapore, our superannuation is not centrally administered and trustees may or may not have the expertise to make the decision on investments. Perhaps if the funds here were available for non-retirement purposes as in Singapore and approvals for such purchases made by a central body first, and mortgage insurance was required with a maximum LVR, then the sole purpose test would still be satisfied and the objective of protecting the member funds for retirement would still be met. Coupled with a lower marginal tax rate of 22 per cent, and lower company tax rates, the Singaporean system certainly has much to admire as a more complete approach to retirement savings.