ANALYSIS OF THE CENTRAL PROVIDENT FUND IN SINGAPORE: …jausttax.com.au/Articles_Free/JAT Volume 03, Issue 5... · 2018-08-30 · This article provides a critical evaluation of the

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SEPTEMBER/OCTOBER 2000 359

ANALYSIS OF THE CENTRAL PROVIDENT FUND IN SINGAPORE: SHOULD AUSTRALIA IMPROVE ON ITS

SUPERANNUATION GUARANTEE SCHEME? By Lang Thai

This article provides a critical evaluation of the Central Provident Fund in Singapore and compares it with the superannuation guarantee scheme in Australia. The author also discusses some major flaws in the Australian model and suggests reasons for allowing members to withdraw their accumulated benefits for use in purchasing homes.

1. INTRODUCTION

Until recently, many Australians have relied on social security benefits as a source of income for their retirement. With the rapidly aging population and increasing pressure on government revenue, it is expected that future governments will not have sufficient funds to provide such benefits to all retirees. Means-testing is already in place to restrict benefits only to those in greatest need.

In July 1992, the Federal Government attempted to deal with this problem by introducing a system of compulsory retirement savings known as the superannuation guarantee scheme ("SGS"). The main objective was to encourage private savings in order to ease the enormous pressure on the public pension and social security systems. Other objectives were to improve the living standard of retirees and to reduce poverty. The SGS was established by two pieces of legislation - the Superannuation Guarantee (Administration) Act 1992 (Cth) ("SGAA") and the Superannuation Guarantee Charge Act 1992 (Cth) ("SGCA"). Under the Acts, which came into force on 1 July 1992, employers are required to make contributions to

regulated superannuation funds1 on behalf of their employees, or pay the superannuation guarantee ("SG") charge.

Since then, many people have expressed doubts about the workability and the effectiveness of the SGS.2 For instance, in March 1999, the Editor of the Super Review conducted a survey to find out what Australians thought of superannuation. The three questions which were put to the interviewees were - What do you think of superannuation? What do you expect to receive from superannuation? Does the present system work?3

A registered nurse responded, "I don't think superannuation alone will be sufficient for my retirement. I think you would have to plan very carefully to survive on superannuation by itself".

A stockbroker responded, "Frankly, I have no faith in superannuation. Although in theory superannuation is a tax-effective way of saving for your retirement, the constant double dipping by our governments raises doubts about the sustainability of superannuation in the long term. The present system works today, but will it work tomorrow?

1 In the context of superannuation, the word "fund" is often used synonymously with "trust". 2 See for example, A Freiberg, "Bang Bang Maxwell's Silver Hammer? Superannuation Crime in the 1990s" (1996) 24 Australian Business Law Review 217. 3 Editorial, "The People Have Their Say" (1999) March Super Review 15.

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360 JOURNAL OF AUSTRALIAN TAXATION

A banker said, "I think the complexity of the current retirement income system is a barrier to people understanding superannuation - there have been countless legislative changes and much of the information provided is simply not in plain English. This makes it increasingly difficult for the average person to take a genuine interest in their superannuation."

A home maker said, "I trust the super funds but not the government's involvement in superannuation. Successive governments keep changing the legislation and greedily tax too much of our superannuation."

The concerns that many people have seem to relate to the volatility and complexity of taxation law in Australia. At present, there is a 15% tax on SG contributions, and if a member's annual income in 2000/2001 is $81,493 or more there is an additional surcharge of up to 15%. Furthermore, there is a 15% tax on the withdrawal of the benefits upon retirement. One commentator, David Knox,4 points out that the current taxation and superannuation systems do not encourage voluntary private savings; the superannuation system encourages lump sum payments if an employee/member makes a declaration to retire permanently.5 His main concern is that if superannuation benefits are taken as a lump sum, the person can dissipate that sum before he or she reaches the pension age, which is 65. He suggests that major reform is

urgently needed.

Since the introduction of the SGS, much attention has been given to reform the taxation component in the hope of improving and developing the scheme. There have been numerous articles and publications on taxation/superannuation reforms, yet there is an obvious lack of literature on reforms to superannuation law itself. Currently, compulsory contributions made by employers into superannuation funds on behalf of their employees cannot be used for any purpose other than for retirement or for severe financial hardship cases.6 Many members7 have no say in how and where they wish to have their accrued contributions invested - these decisions are made at the discretion of the trustees.8 In 1997, however, the Government proposed changes to this rule to allow employees a wider choice of superannuation funds. The proposal is expected to take effect in the near future.

In addition to amending the taxation component, there should also be a recognition that our superannuation law should be amended to reflect the fact that contributions made by employers on behalf of employees are actually employees' money, and that although they cannot withdraw the money as cash (because they are kept in the form of "preserved benefits" for their old age), at least they should have a right to decide how and where they wish to have their

4 D Knox, "Reform Our Super System and Lead the World" (1999) March Super Review 3. David Knox is director, Centre for Actuarial Studies, at the University of Melbourne, on the board of APRA and Vice-President of the Institute of Actuaries of Australia. 5 Since 1 July 1999, if a member was born before 30 June 1960 he can apply for the superannuation benefits to be paid out in full when he turns 55 - this rule remains unchanged. However, for those born between 1961 and 1964, their preservation age has been increased by 1 extra year respectively to a maximum preservation age of 60: r 6.01(2) of the Superannuation Industry (Supervision) Regulations 1993 ("SIS Regulations"); hence the period in which they are required to wait for their superannuation benefits has been lengthened. This effectively prolongs the release of the trust funds to the members. 6 Superannuation Industry (Supervision) Act 1993 (Cth) ("SIS Act"), s 62 provides a list of the "core" purposes and "ancillary" purposes within which the term "severe financial hardship" is strictly defined to exclude the temporary loss of employment. 7 The term "member" is used to mean employee/member and is synonymous with beneficiary. 8 An exception to this is if the employee has his/her own self-managed superannuation fund, in which case the employer would allow their superannuation contributions to be paid into it. This option, however, is ordinarily limited to an employer's more senior executives. (See s 17A of the SIS Act and 2000 Australian Master Tax Guide, 242-243 for further explanation.)

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money invested.

This article focuses on areas in which the SGS might be improved. A scheme could be established in the form of a savings-investment package. Members should be given some flexibility in deciding how and where their money is invested and accumulated for the purpose of preparing for retirement. To show how this might be done, part 2 of the article examines the structure of the Central Provident Fund ("CPF") in Singapore. There is much to be learnt from the Singapore model. Members can prepare for retirement by investing their savings through home ownership, through a comprehensive healthcare system and/or through a variety of other asset enhancement schemes. Part 3 provides a brief discussion of the SGS with particular emphasis on the payment of benefits and on the conditions of release. Part 4 discusses the conceptual limitations contained in the superannuation industry supervision ("SIS") legislation. It compares the differences between Singapore's CPF and Australia's SGS with suggestions for changes to the Australian model. The fraud issue is also considered.

2. THE CENTRAL PROVIDENT FUND IN SINGAPORE

The CPF was established by the Central Provident Fund Act (Chapter 36, 1999 Revised Ed) in 1955 ("CPF Act") for the purpose of

providing financial security for employees in retirement or when they are no longer able to work. Today, this scheme has evolved into a comprehensive social security savings system that provides its members with financial security in old age. In addition, CPF savings assist members to meet the needs of their families in healthcare, home ownership, family protection and asset enhancement. It forms a major part of Singapore's social security system. Since July 1995, the legislation now applies only to Singapore citizens and permanent residents, which means that foreigners who are working in Singapore are no longer entitled to the CPF benefits nor can they volunteer to top up their CPF balances from an account they previously held.

2.1 Rates of Contribution

Under s 7 of the CPF Act, CPF balances are accumulated by way of compulsory monthly contributions from both employers and employees. That is, both the employer and the employee must pay CPF contributions into the employee's CPF accounts for retirement purposes. The rates of contribution are set out in Sch 1 of the CPF Act, and are dependant on the age of the employee and the total gross salary package.

The new CPF contribution rates and the apportionment of the contributions into the three CPF accounts, current at 1 April 2000, are shown in Figure 1.9

9 The formulae for working out the rates of contribution are contained in the CPF Act, Sch 1. The table in Figure I has been extracted from CPF Board, News Release: Partial Restoration of CPF Contributions On 1 April 2000 [http://www.cpf.gov.sg].

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Figure 1: Contribution Rates (as a percentage of wages) for Employees who are Singapore Citizens*

Age Group (years)

Total contributions (%)

Employer contribution (%)

Employee contribution (%)

Ordinary Account (%)

Special Account (%)

Medisave Account (%)

35 years and below

32 12 20 24 2 6

Above 35 to 45 years

32 12 20 23 2 7


32 12 20 22 2 8


17 4.5 12.5 9 0 8


10 2.5 7.5 2 0 8

Above 65 years

7.5 2.5 5 0 0 7.5

* The above rates are only applicable for employees who are Singapore citizens. Employees who are permanent residents (PRs) during their first and second years of obtaining PR status have reduced rates of contributions.

The CPF contributions are calculated based on the employee's wages. The above rates are based on employee wages of between S$363 and S$6,00010 per month. Wages of less than S$363 per month are subject to reduced rates of contribution.11 For an employee whose salary income is more than S$72,000 per annum (that is, S$6,000 per month) and whose age is 55 or below, the maximum combined compulsory monthly contribution into the CPF is S$1,920, beyond which no CPF contribution is payable. This is the case provided the salary is derived

from one particular employment and the employee has no other sources of income. In addition, the salary received must fit within the definition of "ordinary wages" under the CPF Act.

Under s 2 of the CPF Act, "wages" is defined as remuneration in money due or given to an employee in respect of his employment. This includes overtime pay, allowances, cash awards, commission and bonuses. For the purpose of calculating CPF contributions, wages are

10 The exchange rate of S$1 is roughly equivalent to A$1. 11 CPF contributions are payable for part-time/casual employees whose wages exceed S$50 per month. CPF contributions are also payable for all school leavers or students working on a part time or temporary basis, except for the following groups: students working during their gazetted school holidays; tertiary students on full-time industrial attachment; and tertiary students employed under training program approved by their institutions. For further information on the contribution rates for monthly earnings of less than S$363, see [http://www.cpf.gov.sg/cpf_info].



classified as "ordinary wages" or "additional wages".

Ordinary wages are wages due or granted wholly and exclusively in respect of an employee's employment in that month and payable before the due date for payment of CPF contributions for that month. This includes allowances (for example, meal allowances and overtime payments). The maximum CPF amount payable on ordinary wages is S$1,920, based on ordinary wages of S$6,000 per month being the salary ceiling.

Additional wages are extra wages given to the employee for the month. Examples are annual bonuses, leave pay, incentive and other payments made at intervals of more than one month. The calculation of CPF contributions is rather complicated if additional wages are involved. In simple terms, however, total additional wages are still subject to the CPF contribution rates of 12% from the employer and 20% from the employee. There are two forms of additional wage ceiling:

1. for an employee whose total wages exceed $100,000 and total ordinary wages are less than or equal to $72,000, the additional wage ceiling is $100,000 minus total ordinary wages; and

2. for an employee whose total wages exceed $100,000 and total ordinary wages are more than $72,000, the additional wage ceiling is 40% of the total ordinary wages.

Both forms have different formulae for calculating the CPF contributions.12

On the other hand, if an employee is concurrently employed by more than one employer, each employer must pay CPF contributions on the wages given to the employee.

If the employee's combined monthly income is below S$6,000, CPF contributions are payable based on the normal rates as shown in the above table. If, however, the employee's combined monthly income exceeds the CPF salary ceiling of S$6,000, the employee can apply to the CPF Board to limit the total of their share of contributions on ordinary wages (but not additional wages) as follows:13

Figure 2

Age Limit on Ordinary Wages (Employees share)

55 years and below

20% of $6,000 = $SG1,200


12.5% of $6,000 = $SG750

Above 60 years to 65 years

7.5% of $6,000 = $SG450

Above 65 years

5% of $6,000 = $SG300

The CPF contributions are paid to the CPF Board, which is the trustee of the Fund as defined under s 6 of the CPF Act. Unlike the Australian model, the CPF Board is the only trustee who is empowered to regulate and control the trust fund. It is a government body established under the CPF Act. It requires all employers to make contributions (including the employee's share of the contributions) by the 14th day of every month. Failure to pay by the prescribed date is subject to a penalty interest at the rate of 1.5% per month or a fine of S$10,000 and/or imprisonment

12 See CPF Board, Employer's Handbook (1 April 2000) 28-29. 13 Note that the employers are required to continue paying their share of CPF contributions without limits.

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for a maximum term of 7 years.14 The sanctions imposed by the Act have ensured that the percentage of employers abusing the scheme is minimal.15

2.2 Three Separate CPF Accounts for Different Purposes

Pursuant to s 13 of the CPF Act, contributions are divided into three separate accounts with different rules and purposes:

Ordinary Account - savings in this account can be used for purchasing real property, for investments, for purchasing mortgage and property insurance, for financing tertiary education and for topping-up a parent's Retirement Account (see discussion at part 2.3 below).

Medisave Account - this account is used for hospital and medical expenses and certain approved medical insurance.16 Since 1 July 1999, the Medisave minimum sum has been increased to S$17,000, with the contribution ceiling at S$22,000. This means that for a member to be qualified for withdrawal of their CPF savings from the Ordinary Account for use in purchasing, for example, real property, the Medisave Account must first have a minimum amount of S$17,000 to cover unexpected health problems which may arise.

Special Account – savings in this account are

reserved for old age and special circumstances such as hardship.

It should be noted that on 1 January 1999, there was a 10% cut on the employer's part of CPF contributions. As a consequence, contributions into the Special Account were temporarily suspended, with a reduction in the contribution rate from 4% to 0%. At the same time, there was an increase in the contribution rate by 4% in the Ordinary Account to make up 80% of the contribution in the Ordinary Account. The temporary suspension was thought to be necessary in order to make it more affordable for some people to purchase property using CPF contributions from the Ordinary Account.17 The suspension was lifted on 1 April 2000. The Singaporean Government partially restored the employer's CPF contribution rate by 2% for all employees 55 years and below. Instead of allowing the extra cash to go into the Ordinary Account from which members can withdraw for immediate spending on items listed above, the restored 2% is allocated to the Special Account to assist members in building up their cash savings for old age.18

2.3 Retirement Account

There is also a Retirement Account which is only available to members over 55 years of age. Irrespective of whether members are still actively employed when they reach 55, they can automatically convert most of their CPF savings

14 CPF Act, ss 7(3) and 9. 15 The information is based on the CPF’s internet home page at [http://www.cpf.gov.sg/]. In addition, extensive research reveals that there is no major fraud cases committed by the employers in respect to the CPF contributions. 16 The CPF Scheme also applies to all self-employed persons earning a net trade income of more than S$2,400 a year. By contributing 6% to 8% (depending on the age of the person) to the Medisave Account, the self-employed are able to enjoy healthcare benefits as other employee members. Self-employed are exempt from contributing into the Ordinary and Special Accounts unless they voluntarily choose to by applying to the CPF Board. 17 CPF Board, News Release (3 February 1999). 18 As announced by the Minister for Finance, Dr Richard Hu, in his Year 2000 Budget Speech on 25 February 2000, the Special CPF Top-Up was introduced. It was a token of appreciation to Singaporeans who had accepted the CPF and the 10% "wage" cuts as part of the package to deal with the economic crisis. In line with this, the S$250 Special Top-up is given to all Singaporeans aged 21 and above as at 31 December 1999 who had made at least one CPF contribution in 1998 and 1999. By 1 April 2000, more than 1.5 million adult Singaporeans have received a special top-up of S5250 each from the Government (a total of $381.6 million).



into cash which can be withdrawn at any time provided they set aside a minimum sum to be preserved in the Retirement Account.19 The minimum sum is revised in July every year with a target of S$80,000 by 2003. The minimum sum for 1 July 1999 through to 30 June 2000 is S$60,000,20 with an increment of $5,000 on 1 July 2000, and thereafter, the same increment every year.21

It is not necessary for the minimum sum to be all in cash. A CPF member can choose to pledge a property up to the value of $40,000 against the minimum sum, with the balance to be paid in cash into the Retirement Account when the member reaches 55. The minimum sum in cash is to ensure that members have some cash for retirement without having to sell their homes. If there is a shortfall in the Retirement Account, the difference can be transferred from the Ordinary or Special Account.

There are three ways in which members can invest the minimum sum:

1. they can buy a life annuity from an approved insurance company;

2. they can deposit the minimum sum with an approved bank; or

3. they can leave it in the Retirement Account with the CPF Board.22

The minimum sum (plus interest if any) can only be paid out in the form of monthly retirement pensions from the age of 62. With the exception of a life annuity, which guarantees members an income for life, monthly payments from the CPF would only continue until the minimum sum and interest are exhausted.23 The minimum sum scheme appears to be administratively workable since the minimum sum is not subject to any taxation and the CPF Board is effectively there to ensure that the members invest their CPF savings wisely and appropriately. The whole scheme prepares members for a comfortable retirement.

2.4 What Can CPF Members Do With Their Money?

There is a wide range of investment choices available to CPF members in order to prepare for their retirement. They can use their CPF savings to purchase property24 and to pay for mortgage insurance, to invest in approved unit trusts,25 to finance their own tertiary education or their children's tertiary education through the CPF loan scheme,26 to purchase health insurance27 or life insurance,28 or to top up their parents' and/or

19 Note that prior to attaining the age of 55, members can also withdraw their CPF savings, provided the savings are used for certain approved purposes such as buying properties and paying for the mortgage insurance, investing in approved unit trusts, financing tertiary education, purchasing health and life insurances, and other commodities that are all associated with retirement plans. 20 Married couples can jointly set aside 1.5 times the Minimum Sum provided they nominate each other as the beneficiary for the balance of their Minimum Sums. 21 The figures have been arbitrarily chosen by the Government to take into account the inflation rates and some calculations have been carried out to ensure that the Minimum Sum is adequate to cover for the members' retirement from the age of 62 years through to 82, being the life expectancy predicted by the Singapore Government. Further information on this point can be found at [http://www.cpf.gov.sg/cpf_info/publication/minsum.asp]. 22 Similar to the Special Accounts, savings in the Retirement Accounts earn interest at 4% per annum. This is 1.5% higher than that for the Ordinary and Medisave Accounts. 23 CPF Board, (July 1999). 24 CPF Act, s 15. 25 It is interesting to note that prior to 1 January 1999, the total CPF contribution for employees up to the age of 55 years was 40%, with equal contribution from employers and employees. This policy was held for many years and it is not surprising to see that the economy in Singapore is growing rapidly over the past 30 years. 26 CPF Act, s 22. Note that repayment of the loan plus interest would start one year after their graduation or on leaving the course, whichever is earlier, and repayment can be in one lump sum or by instalments over 10 years. 27 CPF Act, s 16 and Pt VI. 28 CPF Act, Pt V.

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their spouses' Retirement Accounts through direct transfers of the CPF savings.29 Alternatively, members can simply keep their CPF savings with the CPF Board for their own retirement purposes, earning interest at the rate of 4% if the savings are transferred from the Ordinary Account and stored in the Special Account.30 The minimum statutory rate is 2.5% per annum according to s 6(4) of the CPF Act.

2.5 Use of CPF Savings for Purchasing Property

All of the existing savings in the Ordinary Account and future monthly contributions paid into the same account may be used to buy property in Singapore, or to pay the instalments on a housing loan as they fall due.

There are two housing schemes available to members. The "Residential Properties Scheme"31 covers all residential property in Singapore built on freehold land, such as private apartments, condominiums and landed property.32 The "Public Housing Scheme"33 allows members to purchase Housing Development Board ("HDB") flats.34 The rules for use of the CPF savings are similar under each scheme.

To purchase property in Singapore, members can use up all their CPF savings from the Ordinary Account to make a lump sum payment. If there is any shortfall, they can:

1. pay by cash; or

2. use their future monthly CPF contributions to pay off a housing loan from the HDB.35

If the CPF savings are sufficient to meet the purchase price and there is a surplus, members can use the surplus to pay for legal expenses,36 stamp duties and other related expenses. They can also use the surplus to pay for renovations to HDB flats.

Under s 17 of the CPF Act, the CPF Board may also allow funds to be transferred from the Special Account into the Ordinary Account for the purpose of assisting members to keep up with monthly repayments on their home loans. Ordinarily, this is possible provided a minimum prescribed sum is preserved for the purchase of an annuity or pension on retirement.37

On 1 January 1999, the Singaporean Government introduced two pieces of law which adversely affected many Singaporeans and permanent residents - the "CPF wage cut" and the "Bridging Loan Scheme".

The Government introduced a 10% cut to employer's CPF contributions affecting all levels of employees.38 In effect, employees have less money going into their CPF accounts. The CPF wage cut quickly affected many home owners who had previously relied only on their savings in

29 CPF Act, ss 18 and 19. 30 The current CPF interest rate for the contributions in the Ordinary and Medisave Accounts is 2.5% annually while the Special and the Retirement Accounts receive 4%. 31 CPF Board, Residential Properties Scheme (October 1998). 32 Landed properties in Singapore are extremely scarce and expensive because the country is densely populated and is restricted in space. These properties are beyond the reach of many ordinary residents. 33 CPF Board, Public Housing Scheme (March 1999). 34 Housing Development Board flats are commonly referred to as the "HDB flats". It is a flat that was originally owned by the Singapore Government, equivalent to the Australia's Housing Commission flat. Unlike the Australian flats, Singapore citizens and permanent residents are entitled to purchase these HDB flats. Ownership of property in Singapore, whether HDB flats or private apartments, indicates wealth and status as the cost of living in Singapore is high. The majority of Singapore residents (85% - 95%) live in HDB flats. 35 Similar to other lending institutions, HDB in most cases only approves a loan of up to 80% of the purchase price and the approval is subject to its credit assessment and the members' ability to repay. Its home loan interest rate is somewhat similar to that offered by other lending institutions, hence its interest rate is competitive. 36 Unlike Australia, the solicitor's fee for the purchase of a property can be excessively high as the fee is calculated from the ad valoram scale. 37 The Minimum Sum Scheme is discussed above under the heading of Retirement Account. 38 The cut has been partially restored by 2% since 1 April 2000.



the Ordinary Account to meet their monthly repayments on their mortgage and who suddenly found themselves unable to maintain that commitment. To remedy the problem and prevent the slowing down of the economy, the Government now allows CPF members to use savings in their Special Account to maintain their mortgage commitments.39 The withdrawal from the Special Account is subject to a maximum amount of S$360 per calendar month.40 Effectively, the Government has resorted to the application of s 17 of the CPF Act.

The Government also simultaneously introduced the Bridging Loan Scheme on 1 January 1999.41 This is effectively a short term loan for a maximum period of 3 years offered by the Government at a concessional interest rate42 to help Singaporeans and permanent residents affected by the CPF wage cut. Its purpose is only to assist members in meeting any shortfall in monthly mortgage repayments arising from the cut if the savings in both their Ordinary and Special Accounts have been depleted. The loan is also subject to a maximum of S$360 per month. Other restrictions imposed on the Bridging Loan Scheme are that members must be below the age of 62, must not be a bankrupt, must prove that the property was purchased before 1 January 1999 and lastly, must prove that they are adversely affected by the CPF cut and that they are still employed. Repayment commences 3 years after the expiration of the loan period or when the member attains 63. The minimum amount repayable is S$100 per month over a maximum period of 10 years. 43

If members decide to sell their property, the requirement is that the principal amount withdrawn plus the accrued interest must be

returned to the CPF Ordinary Account and, if applicable, to the Special Account. This is to ensure that members have sufficient savings (whether in the form of cash or property) to provide and prepare for their retirement. There is no restriction on re-using the savings to purchase another property or to redeem another loan provided there is a lapse of one year from the date on which the sale contract was signed.

Under the two housing schemes, it is possible to have joint ownership. But it is important to note that the normal rules of survivorship do not apply with respect to CPF savings. Under normal circumstances, a husband and wife would have joint tenancy in the property and upon the death of one spouse, the surviving spouse would automatically acquire a full right to the property under the doctrine of survivorship. Under the CPF Act, however, the situation is slightly different - if two spouses jointly purchased a property using CPF savings, then upon the death of one spouse, the deceased's share of the property forms part of the estate and will be distributed in accordance with the law of testacy or intestacy, whichever is applicable. It is not necessary for the property to be sold and the proceeds to be refunded to the deceased member's account. Thus, effectively their joint ownership becomes what is known as an ownership in equal shares, which means that both spouses have implicitly "nominated" to have their shares of the property returned in proportion to their contributions from their separate CPF accounts.44

When savings are withdrawn from a member's CPF account for the purpose of purchasing a property, the CPF Act requires a charge to be created in favour of the CPF

39 CPF Board, Bridging Loan CPF Cut: Use of Special Account and Government Bridging Loan (March 1999) 1. 40 As discussed above, ordinarily the savings in the Special Account are reserved for retirement and for financial hardship. 41 CPF Board, above n 40, 5. 42 Currently 2.6% per annum. 43 CPF Board, above n 40. 44 This is governed under CPF Act, s 26. The same principle applies in the case of marriage breakdown (s 28) where joint ownership effectively becomes ownership in equal shares.

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Board.45 The charge remains valid for as long as there are outstanding balances to be refunded into the CPF account.46 Section 21 of the Act allows the Board to take a charge over the property to secure the repayment of money withdrawn from the Fund and to secure the payment of the minimum sum into the member's Retirement Account. Upon registration of the charge, s 21(4) ensures that the interest of the CPF Board ranks ahead of all other interests as if the Board is a prior registered mortgagee. In addition, the section allows the Board to exercise its power of sale if the member has a loan and has defaulted in the repayment, which is an extremely rare incident given the fact that members are now able to rely on savings in the Special Account and from the Government Bridging Loan Scheme,47 introduced on 1 January 1999. Essentially, the charge in favour of the CPF Board has a double purpose:

1. to ensure that members do not spend all their savings by selling the property without putting back the money they have previously with-drawn from the CPF account; and

2. to ensure that the loan will be fully repaid.

Since the CPF Board has an interest in the property in the form of a statutory charge, it is common that the Board would also insist on charge insurance.

Charge insurance is enforced under s 30 of the Act which contains the "Home Protection

Insurance Scheme",48 the purpose of which is to protect members and their dependants from losing their homes should members die or become incapacitated before the housing loans are repaid in full.49 Under s 30(2) of the Act, all members who are using CPF savings to pay housing loan instalments on their property are required to be insured under the Home Protection Scheme. The CPF savings can be used to make a one-time payment of the premium which is calculated based on the factors such as the outstanding housing loan on the property, the remaining repayment period and the age of the member. The maximum period of coverage is up to 60 years of age subject to the medical condition of the member.50 Thus, if a member dies or becomes permanently incapacitated during the period of cover, the CPF Board would pay the outstanding loan based on the amount insured and would effectively discharge the charge.51 Under s 30(4) of the CPF Act, the only exemption from the Home Protection Insurance Scheme is if the member already has a mortgage reducing insurance or an appropriate life insurance policy which is sufficient to cover the outstanding housing loan.

While both housing schemes are very similar in rules, one major difference is that unlike the Residential Properties Scheme, the Public Housing Scheme allows CPF savings to be used for upgrading52 HDB flats, with the exception of repairing, renovating or improving the flats.

45 The trustee of the CPF is commonly referred to as the CPF Board. Unlike the case in Australia where there are literally so many regulated superannuation funds with so many different trustees, the CPF in Singapore is essentially regulated by a government body known as the Board. 46 United Overseas Bank Ltd v Promotion & Sales Centre Pte Ltd & Ors (Central Provident Fund & Anor, claimants) [1996] 1 SLR 374. 47 CPF Board, above n 40. 48 CPF Board, Home Protection Scheme (March 1999). 49 Ibid 3. 50 CPF Act, s 31. 51 CPF Act, s 36(1). 52 Upgrading refers to an Upgrading Programme that is approved by the Housing Development Board, usually affecting a portion of the residents or all the residents living in a particular block of flats.



2.6 CPF Investment Scheme

Under this scheme, members can withdraw their CPF savings from the Ordinary Account to invest in instruments such as shares, unit trusts, government bonds, term deposits, cash management trusts, endowment insurance policies and gold. Figure 3 illustrates the percentage of savings that can be withdrawn from the CPF accounts for the purpose of investing in certain approved commodities. The allocation of percentages is current as at 1 December 1999.

Figure 3

Investible Instrument

Investment Limit

(% of savings

allowable)

Term deposits

Endowment insurance policies

Unit trusts

Cash management trusts

Singapore Government bonds

Statutory Board bonds

Bonds guaranteed by Singapore Government

100%

Shares, corporate bonds and loan Stocks

50%

Gold 10%

It should be noted that CPF Board approval is required for all forms of investments. Some form of security must also be executed in favour of the CPF Board in order to ensure that the savings are

maintained for retirement and not unwisely dissipated.53

Members who participate in the investment scheme must be at least 21 years of age, must not be undischarged bankrupts and must have set aside a minimum prescribed sum in their CPF accounts for their retirement. Irrespective of the outcome of the investments or the type of investments, the Minimum Sum requirement serves as a safety net to ensure that members have sufficient savings to support a modest standard of living during old age and that the savings are not eroded in the process of investment. The prescribed minimum sum is revised annually to take into account the effect of changes in the cost of living.

Since investments are subject to the Board's approva154 and are constantly being monitored, it is uncommon to see that members' invested savings would diminish. However, in the unlikely event that a loss is made, members are not required to remedy the loss. By the same token where a member subsequently disposes of the invested commodity, the proceeds from the sale minus the profits, if any, are required to be refunded to the CPF accounts. This is to ensure that members do not use their money for purposes other than for the purpose of accumulating their savings for retirement.

Although investments in government approved banks and companies are relatively safe, one often hears warnings and reminders given by the Singapore Government in an attempt to discourage the community from investing in intangible commodities. The Honourable Lee Hsien Loong sounded a note of warning in the following terms:

The public must learn to make investment deci-sions for themselves, and take responsibility for the outcomes, good or bad. Just because a stock is listed on the [Stock Exchange, Singapore], and CPF savings can be used to buy SES stocks, does not mean that all SES stocks are good invest-ments.55

53 CPF Board, CPF Investment Scheme Handbook (1999) 23-25. 54 For a list of the CPF Board's approved banks, insurance companies, and fund management companies, see ibid 23-25. 55 Deputy Prime Minister BG (NS) Lee Hsien Loong, SESDAQ's 10th Anniversary Dinner Speech (4 November 1997).

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Similarly, the CPF Investment Scheme Handbook warns that: "Members are advised to exercise prudence when they invest their CPF savings."56

The CPF Board has published a brochure57 containing information about different investment strategies, different levels of risks involved and the expectation of returns. The brochure is claimed to be user-friendly and intended to assist people in understanding investment and CPF savings.58 In actual fact, however, the brochure contains complex terms and jargon followed by a series of convoluted descriptions, tables and graphs. This is probably designed to encourage people to invest their savings in areas they are more familiar with, such as real property. The CPF Board indicates that a greater proportion of members have consistently chosen real property and home ownership as their first choice of investment followed by investment in term deposits.59

2.7 Taxation Issues on CPF Contributions and Withdrawals

Whether or not employer contributions into the CPF are subject to taxation depends on the type of wages received by the employee. Generally, CPF contributions based on the ordinary wages of the employee are not regarded as taxable income and, hence, are exempt from tax. This rule is qualified by s l OC of the Income Tax Act (Chapter 134, Revised Ed, 1996). Section 10C(1) provides two situations in which the

excess contributions are deemed to be income60 accruing to an employee in the year in which the wages are paid:

1. employer's contributions in respect of ordinary or additional wages paid to the employee in that year and which are not obligatory under the CPF Act; or

2. employer's contributions in respect of that part of the additional wages which exceed 40% of the ordinary wages paid to the employee in that year.

In addition, under s 10C(2), where an employee's ordinary wages do not exceed $72,000 per annum:

1. if the employee's total wages are under $100,000, the excess contributions on addition-al wages which exceed 40% of ordinary wages will not be deemed income; and

2. if the employee's total wages exceed $100,000, only the excess contributions on additional wages made in relation to the employee's total wages above $100,000 will be deemed income.

With respect to withdrawals, the Singaporean Government has also been very generous to CPF members. Pursuant to s 13(1)(j) of the Income Tax Act (Chapter 134, Revised Ed, 1996), sums standing to the account of a member are tax exempt.61 Mandatory CPF contributions made for employees engaged in the employer's income-producing activities are deductible to the employers.62 Mandatory CPF contributions made

56 CPF Board, CPF Investment Scheme Handbook 1999, 21 57 CPF Board, CPF Investment Scheme: Risk Classification System (February 1999). 58 Ibid, 1. 59 The information in this section is taken from the CPF's internet home page at [http://www.cpf.gov.sg/statistics] 60 In Singapore, the highest marginal income tax rate for resident individuals for the 1998 to 2000 years of assessment is 28%, based on taxable income in excess of S$400,000. 61 The tax exemption under s 13(1)(j) does not apply to Singapore dividends received from investments made under the CPF Investment Scheme. 62 Income Tax Act (Chapter 134, Revised Ed, 1996), s 14(1)(e).



by employees themselves are allowable as a personal relief to them.63

Overall, the CPF scheme enforces a high level of savings on the community. Whilst requiring a minimum retirement sum to be preserved, it encourages the accumulation of savings through home ownership and other forms of asset enhancement such as approved bank deposits. CPF savings can be used for owner-occupied or investment property. The scheme is not targeted at particular disadvantaged groups and thus, there is no need to introduce measures to restrict access to the Fund. It is not restricted, for example, to people in financial hardship or to first home buyers. Nor is it restricted to a particular age group provided that the minimum age is 21 years.

The CPF Act allows withdrawals for a wide range of purposes. As discussed earlier, the scheme is designed to preserve the special status of retirement savings and insurance. If money has been withdrawn from a CPF account, members are expected to refund the money into the same account when the property or investment is sold. Money withdrawn for the purpose of financing tertiary education is also expected to be refunded some time after graduation or after the student has ceased to be a student. The Fund does not operate as a commercial lending institution. Its operation is simply to ensure that members save their money for retirement. Hence, this can only be successfully carried out by having the Board approving the release of member's savings only under certain controlled conditions and under the Board's terms. The statutory charge mechanism was therefore introduced in 1968 for this very core purpose.

Under s 6 of the CPF Act, the Board is said to be the trustee of the CPF. The Fund is centrally based and is strictly government sponsored.64 The Board has very wide statutory powers which

include the power to invest trust money in approved banks or in any of the investments authorised by law for the investment of trust money, the power to use trust money for the purchase of any property or for the construction of buildings for the Board's purposes or for commercial and residential letting.65 If the Board has a cash flow problem and is unable to release the sums demanded by members, s 6(5) allows the Board to dip into the Government's Consolidated Fund and create a charge in favour of the Government.66 It is interesting to note that the CPF in Singapore does not fit in with the traditional concept of trust law and yet there has not been any major challenge to the legislation since its establishment. This appears to indicate that the Board has worked well with members. Members have a choice of either making their own investment plans with Board approval or leaving their money with the Board, allowing it to invest on their behalf.67 Furthermore, unlike the Australian superannuation model, the CPF scheme is generally not subject to contribution taxation nor withdrawal taxation and so there is no threat of erosion or leakage.

2.8 Proposed Supplementary Retirement Scheme

The Singapore Government has recently proposed to introduce a Supplementary Retirement Scheme ("SRS"). It has invited feedback from the general public and the Scheme is expected to be implemented by 2001. The main objective of the SRS is to encourage supplementary savings for retirement over and above CPF savings. In addition to the compulsory CPF Scheme, members who contribute voluntarily into the private funds will expect to have more funds available for retirement.

As stated in the 2000 Budget Statement, contributions into the SRS will be voluntary and

63 Income Tax Act (Chapter 134, Revised Ed, 1996), s 39(2)(g). 64 CPF Act, ss 3 and 4. 65 CPF Act, s 6(2). 66 This has not occurred since the establishment of the CPF in 1955. 67 According to s 6(4) of the CPF Act, savings in the CPF accounts attract a minimum statutory interest of 2.5% per annum.

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can only be made by the employees. It is further proposed that the SRS contribution rate will be in the range of 5% to 15%. The contributors will be entitled to tax deductions at the time of contributions and any investment gains on SRS contributions will not be subject to capital gains tax. Withdrawal of SRS savings, however, will be subject to income tax. The Government is attempting to devise a tax formula that will encourage periodic withdrawals in lieu of lump sum withdrawals at retirement. Thus, retirees who choose periodic withdrawals may not have to pay taxes in reality as they will generally not have employment income. Even if they do have income, there will be various tax reliefs and rebates which will lower their tax liabilities.

It is proposed that withdrawals of SRS savings can only be made from the prevailing statutory retirement age (which is currently 62 years). With the exception of a person suffering from permanent incapacity, all other members who withdraw prematurely will be subject to a 10% penalty on the sum withdrawn (in addition to the tax payable). This is to discourage early withdrawals as the savings are meant for retirement.

It is submitted that the introduction of the SRS is not necessary, simply because the CPF Scheme already provides adequate support for those on retirement. The CPF law has undergone some radical changes in recent times. Rather than introducing the SRS to further complicate the entire retirement structure, perhaps the Government should consider restoring the 10% reduction in the CPF contribution. As discussed above, there was only a partial restoration of 2% on 1 April 2000. Overall, it seems simpler for employers from large organisations to bear the contributions and claim tax deductions than for poorer individuals to squeeze out every last penny to prepare for their retirement. It is

foreshadowed that low-income earners will be reluctant to participate in the SRS as many would feel that focusing on immediate needs is more important.

3. THE SUPERANNUATION GUARANTEE SCHEME IN AUSTRALIA

3.1 Outline of the SGS

Since the introduction of the SGS in July 1992, all employers are required to make SG contributions for each of their employees in each financial year. The rate of contributions required for 2000/2001 is 8% of the employee's salary. Employers who fail to comply with the requirement are liable to a SG charge, equivalent to the amount of the shortfall plus an interest component and an administrative charge. The SG charge is enforced by the Australian Taxation Office ("ATO"). The shortfall component of the charge is distributed by the ATO to a complying superannuation fund for the benefit of those employees in respect of whom the charge was paid. Employer SG contributions for the benefit of employees are generally tax deductible, but the SG charge is not.68 Thus, there is an incentive for employers to pay compulsory contributions on time and to comply with the legislation in order to avoid penalties.

Exemption from SG contributions is afforded under s 27 of the SGAA if:

the employee is aged 70 or over;

the employee performs work outside Australia;

the employee is not a permanent resident in Australia and falls into a certain overseas executive visa classification; or

the employee's wages are less than $450 per month.

68 Income Tax Assessment Act 1936 (Cth) ("ITAA36"), s 51(9).



Exemption also applies if, under s 19(4) of the SGAA, the employee chooses not to receive SG contributions because the accumulated superannuation benefits exceed the pension Reasonable Benefit Limits.69

The scheme requires SG contributions to be made to a complying superannuation fund for the benefit of employees. There are currently over 175,000 superannuation funds in Australia with total assets of around $340 billion,70 but not all of these funds are "complying" as required under ss 22 and 23 of the SGAA. A fund is a complying superannuation fund if it is a resident regulated superannuation fund71 which has received a notice from the Australian Prudential Regulation Authority72 ("APRA") (or from the Insurance and Superannuation Commission before 1 July 1998)73 stating that it is a complying superannuation fund under the Superannuation Industry (Supervision) Act 1993 (the "SIS Act").

Under s 19(2) to (4) of the SIS Act, a regulated superannuation fund is a fund which must have a corporate trustee. Alternatively, the fund's governing rules must provide that the sole or primary purpose of the fund is the provision of old-age pensions. Further, the trustee must give consent to APRA for the SIS Act to apply to the fund. Only then can APRA give notification declaring the fund to be a complying superannuation fund. In effect, this means that under the SIS Act only a regulated fund can be a "complying" fund. The main reason for insisting on contributions being made into complying superannuation funds is to ensure that the intended purpose of the SGS is maintained with

consistency and that employees' savings are preserved in accordance with the SIS Act, in particular, the "sole purpose" requirement under s 62. In addition, the requirement for APRA approval means that the APRA has power and control over the trustees. The imposition of heavy fines and penalties is intended to discourage trustees of complying superannuation funds from abusing their position.

Although SG contributions are compulsory and must be paid into a superannuation fund,74 it is not essential for all superannuation funds to become "complying". In fact, due to the limited power given under the Australian Constitution, it is not possible for the SIS legislation to insist that all superannuation funds become complying. To minimise the number of non-complying funds, the Government has introduced a concessional income tax treatment in favour of complying superannuation funds. A complying super-annuation fund is taxed at a concessional rate of 15%, while all other non-complying super-annuation funds are subject to the highest marginal tax rate of 47%.75 This is one of the mechanisms employed by the Government to compel funds to become complying and in turn be regulated by SIS legislation. Failure to elect to be a regulated fund would mean that the trustee of the fund has failed to act in the best interest of the members and may be subject to civil prosecutions initiated by the members. Either way, however, members of the fund may still expect to see their savings eroded over time because of the constant changes in the taxation laws and constant changes

69 For a more complete list of the exemptions from SG contributions, see also ss 27, 28 and 29 of the SGAA. 70 Australian Master Superannuation Guide 1989/99, para 1-000. 71 Under s 19(2) to (4) of the SIS Act, a regulated superannuation fund is a fund which has a corporate trustee, and the sole or the primary purpose of the fund is the provision of old-age pensions. Further, the trustee must give consent to APRA for the SIS legislation to apply to the fund. Only then can APRA give notification declaring such fund to be a complying superannuation fund. 72 APRA and ASIC are responsible for the regulation of superannuation entities (ie the regulated superannuation funds, the ADFs and the PSTs) from 1 July 1998. Both are conferred extensive regulatory and investigative powers for the administration of the SIS legislation and its Regulations. 73 The ISC has been replaced with APRA since 1 July 1998. 74 "Superannuation fund" is defined in s 10(1) of the SIS Act to mean an "indefinitely continuing fund" that is a provident, benefit, superannuation or retirement fund. An "indefinitely continuing fund" means that the fund must not be one which will terminate or be wound up after a specified period. 75 Income Tax Rates Act 1986 (Cth), s 26.

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in tax rates. Currently, eligible termination payments76 received by members at age 55 or above attract a nil tax rate on the first $100,696 of the taxed element of the post 30 June 1983 component, with the marginal tax rate of 15% on the balance.77.

3.2 Payment of Benefits

The circumstances in which benefits are payable to a member or a member's dependants are governed by the preservation rules set out in Pt 6, Sch 1 and 2 of the SIS Regulations.

Ordinarily, the benefits which are contributed to a superannuation fund or accrue in the fund on behalf of a member must be "preserved", that is, the benefits cannot be paid out to the member until the member satisfies a condition of release.78 These include where the member:

reaches a statutory age;

retires from the workforce;

dies;

becomes permanently incapacitated; or

suffers from severe financial hardship.

Under the SIS Regulations, there are three categories of benefit for the purposes of the preservation rules.79 Briefly, the first is the "preserved benefits" which are benefits that must be retained in the fund until a member attains the prescribed retirement age, which has recently

been increased to 60 for those who were born after 30 June 1964.80 Second, the "restricted non-preserved benefits" are benefits which are not preserved but which cannot be cashed until the member satisfies a condition of release (see discussion above). The last category is the "unrestricted non-preserved benefits" - these are benefits which can be cashed by the member at any time because a condition of release has previously been met and no further cashing restrictions apply to the benefits; that is the benefits are payable on demand by the member.

Furthermore, s 62 of the SIS Act contains a "sole purpose test" which requires the trustee to ensure the fund is maintained solely for one or more of the "core purposes" (or one or more "core purposes" and one or more "ancillary purposes"). The "core purposes" set out in s 62 include providing benefits to members on or after retirement or on or after attaining the prescribed age.81 Additional "core purposes" are to provide benefits to member's legal representative and/or dependants, in the event of the member's death before retirement or before attaining the age of 65. "Ancillary purposes" include the purposes of providing benefits to members on or after termination of employment with an employer who contributed to the fund at any time on or after cessation of work on account of ill-health. Additional "ancillary purposes" are to provide benefits to members in severe financial hardship or on compassionate grounds.

76 An "eligible termination payment" ("ETP") is defined exhaustively ins 27A(1) of the ITAA36. It includes superannuation fund payments, approved deposit fund payments, and payments of the superannuation guarantee shortfall component due to a person's permanent incapacity, invalidity or death. 77 See 2000 Australian Master Tax Guide, 447. 78 A list of the Conditions of Release is found in Sch 1 of the SIS Regulations. 79 SIS Regulations, rs 6.01 to 6.30A and Schs 1 and 2. 80 For people who were born before 30 June 1960, the preservation age will continue to be 55 and for those born between 1961 and 1964, their preservation age has been increased by 1 extra year respectively to a maximum preservation age of 60: SIS Regulations, r 6.01(2). This was introduced on 1 July 1999, effectively prolonging the release of trust funds to members. 81 The prescribed age is 65 according to SIS Regulations, r 13.18.



4. PROBLEMS ASSOCIATED WITH THE SGS AND SUGGESTIONS FOR REFORM

In contrast to the Singaporean model, there are fundamental limitations in the Australian SGS. Three major problems are:

1. members are unable to obtain access to super-annuation funds;

2. members are generally denied a right to demand a trustee's reasons for decisions and thus there may be a problem of potential fraud, corruption, theft or incompetent management within the funds;82 and

3. SG contributions and payment of benefits on retirement are subject to excessive taxation, resulting in the gradual erosion of member's accumulated benefits over time.

4.1 Members are Unable to Access Trust Funds

Under the present law, members are precluded from taking active steps to invest their money accumulated in superannuation funds. The SG contributions made by an employer are preserved until the employee retires, dies, becomes permanently incapacitated or is in severe financial hardship. Further, s 65 of the SIS Act prohibits a trustee of a regulated superannuation fund from lending or giving financial assistance to a member or the relative of a member of that fund.83 This in effect prevents the member from making full use of the accumulated benefits at a time when additional cash may be needed to assist the member in, for example, paying a

deposit for purchase of a home.

Submissions have been put forward by a range of interested groups84 through the Senate Select Committee in an attempt to encourage the Government to broaden the superannuation structure so as to allow members of the funds to use their savings for purchasing homes. One suggestion is that members should be allowed to make one withdrawal up to a maximum of $10,000 to be used as a deposit on a home subject to maintaining at least 25% of the accumulated benefits in the fund with no obligation on the fund member to repay any amount.85 Another suggestion is that members should be allowed to withdraw a sum in the form of a loan of up to a maximum of 75% of the accumulated benefits, with the amount to be repaid over a period of 25 years.86 The third suggestion is to permit a lending institution to take a lien over the member's superannuation benefit as a form of security. Thus, the borrower would be able to purchase a home with little or no deposit and there would be no need to withdraw any superannuation benefits unless there is a problem and the property is sold at a shortfall.87 The suggestions made to the Senate Select Committee seem to be somewhat similar to the Singapore model in that the members are permitted to use part of their savings to purchase a home and in turn the CPF Board can take a statutory charge over the property to ensure the member refunds the money if the property is sold. These suggestions for change to the Australian scheme were made in 1994 and yet none has been implemented.

82 Examples of problems associated with fraud, corruption and misappropriation are improper registration and use of fund assets, misappropriation of assets, improper loans to interested parties, failure to pay benefits and conflict of interest. For further examples, see K Chapman, Superannuation and Insurance Fraud, Working Paper presented to the National Crime Authority Management of Serious White Collar Crime Investigations Course, NSW (1994) 4. 83 Interestingly, s 67 of the SIS Act allows the trustee of a regulated superannuation fund to borrow money up to a maximum of 10% of the value of the assets of the fund to cover the settlement of the securities transactions and yet members of the fund are not permitted to take out their own money for the settlement of a purchase property. 84 Senate Select Committee on Superannuation, Super for Housing, 12th Report (May 1994) Appendix C, 89. The interested groups include economists, building organizations, insurers, consumer groups, unions, individuals and the superannuation funds. 85 Ibid, 24. 86 Ibid, 25. 87 Ibid, 27.

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The Government should recognise that the affordability of a home by low and middle income earners is increasingly difficult given that property prices have gone up rapidly in recent times. Purchasing a home can be seen as part of saving for retirement. It should be recognised that members can accumulate savings through home ownership. For example, upon retirement when a member has a cash flow problem and cannot access the public social security system, the member may elect to sell the existing home and use the proceeds to purchase a smaller home which is more suited for retirement purposes, with the surplus to be used to cover their daily expenses. Although the current SG contribution rate by employers is only 8% (lower than the current rate in Singapore88) this should not be seen as a reason not to adopt the Singaporean model.

4.2 Superannuation Fraud, Corruption and Theft

The superannuation industry is primarily regulated by the SIS legislation. It is made up of a complex web of relationships between numerous participants each of whom has a role to play in the prevention of fraud, corruption and theft. The most important participants are the trustees who play a central role in the management of the funds.89 The employer/ contributors and employee/beneficiaries can do little to detect fraud, corruption and theft other than to maintain a vigilance in relation to the

general state of the fund and the timeliness and adequacy of the information that is provided to them. This is expected of them under s 101 of the SIS Act. 90

The SIS Act establishes a prudential framework within which superannuation funds must operate and which is designed to minimise fraud, corruption and misadventure. In relation to the role of the trustee, the most significant provisions include those which:

require equal member and employer representation on trustee boards for funds with more than five members; 91

prohibit the lending of money or the giving of financial assistance to members;92

require trustees to formulate and give effect to an investment strategy and controls;93

restrict loans or investments in employer sponsors; 94

protect the trustee from direction from any other person including an employer;95

prohibit the borrowing of funds other than for short term cash flow purposes and payment of benefits;96

require investments to be at arm's length;97

require investments to be for the sole purpose of providing benefits to members on

88 See CPF Board. CPF Contribution Table Since 1 January 1999 (March 1999). 89 Other participants who also have an important role to play in the prevention of fraud are the contributors and beneficiaries, employer/sponsors, custodians, investment managers and advisers, administrators, auditors, actuaries, APRA, ASIC, ATO and other law enforcement agencies. 90 Section 101 of the SIS Act allows members and beneficiaries to make inquiries into, or complaints about, the management of the fund or the trustee's decision relating to the payment of benefits. 91 SIS Act, Pt 9. 92 SIS Act, s 65. 93 SIS Act, Pt 6, in particular s 52 and SIS Regulations, r 4.09. 94 SIS Act, ss 69 to 85. 95 SIS Act, ss 58 to 60. 96 SIS Act, s 67. 97 SIS Act, s 109.



retirement;98

prohibit certain convicted persons and bankrupts from holding office and provide a mechanism for the appointment and removal of trustees; 99

require annual audits of accounts and statements and provision of copies to the parties concerned;100 and

require proper keeping of accounting records.101

Freiberg102 has identified two major problems in relation to the role of trustees. One relates to the relative experience, knowledge and skill of trustees. It should be noted that no formal qualifications are required to become a trustee and many trustees, especially employee members who are now required by statute to make up half the board, may lack relevant experience and skill to be able to supervise the activities of the fund. The second problem relates to the way in which the assets of the fund are held. His view stems from the "Maxwell-type" fraud103 which took place almost ten years ago in England.

There are currently over 175,000 superannuation funds with total assets of about $365 billion.104 Further, there are at least 15 different types of funds105 recognised by the superannuation industry. These figures are alarmingly high given the fact that the SGS has only been introduced in 1992. Unless some serious and urgent action is taken to control the rapid growth in the number of funds, the size of each fund and the liquidity of assets, it is potentially possible for the whole superannuation scheme to blow out of proportion. The "Maxwell-type" fraud has not yet occurred in Australia, but some action should be taken to prevent such a problem occurring.106

The appointment of a trustee is generally required to be approved by APRA. This, however, does not solve the fraud problem. Section 101 of the SIS Act allows members and beneficiaries to make inquiries and lodge complaints about the management of a fund or a trustee's decision relating to the payment of benefits. In practice, however, the courts are reluctant to entertain a member's claim without sufficient evidence documenting the claim. The trustee, on the other hand, has very wide

98 SIS Act, s 62 and SIS Regulations, Schs 1 and 2. 99 SIS Act, ss 107, 108, 118. 120 to 121. 100 SIS Act, Pt 13. 101 SIS Act, ss 103 to 106 and SIS Regulations, Pt 2. 102 A Freiberg, above n 2. 103 The "Maxwell type" fraud is about a British media tycoon, Robert Maxwell, who allegedly stole over A$900 million from the pension funds of two of his public companies and transferred the sum into many of the 400 privately-owned companies in which he had major controls. He was the chairman of the board of trustees of the pension funds and the assets were managed by a company which was ultimately owned by his family. He was effectively employer, trustee and investment manager. The fraud was discovered only after his death and when the scheme collapsed. Many shareholders and over 30,000 members of his pension funds suffered severe financial losses. For further discussion on this, see PJM Klumpes, "Maxwell and the Accountability of Superannuation Schemes in Australia: A Critical Review of Law Reform" (1993) 21 Australian Business Law Review 194; "The Maxwell Scandal" (1992) June Superfunds 37; "Maxwell Meltdown" The Economist (7 December 1991) 15; "Lessons from Maxwell" The Economist (14 December 1991) 16; "Protecting Pensions" The Economist (14 December 1992) 15. 104 APRA, Media Release, Superannuation Trends - September 1998. The figure was correct as at 22 December 1998. See also LP Leow and S Murphy, Australian Master Superannuation Guide 1998/99, 1 105 Australian Superannuation Practice (CCH loose leaf services) paras 1-180 to 1-220. 106 PJM Klumpes, "Maxwell and the Accountability of Superannuation Schemes in Australia: A Critical Review of Law Reform" (1993) 21 Australian Business Law Review 194, 197. See also A Freiberg, above n 2, for a list of the relatively important fraud cases which have been documented in the press.

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discretionary powers and is not under a duty to give reasons for its decision. Bryson J107 in Vidovic v Email Superannuation Pty Ltd108 made some very valid comments about superannuation deeds in the following terms:

It is very common for superannuation entitle-ments to be regulated by Trust deeds in which significant decisions are left to be determined not according to the objective facts but according to discretionary decisions of Trustees which are open to review only in a limited way and often, as in the present case, are further shielded by provisions declaring that the exercise of the dis-cretion is absolute and uncontrolled.109

It is commonly understood that the four grounds on which a trustee's performance may be challenged are these:

1. the trustee has not exercised its discretion in good faith;

2. the discretion exercised was not based on real and genuine considerations;

3. the discretion was not exercised in accordance with the purposes for which it was conferred; and

4. where the trustee has disclosed reasons for the exercise of the discretion and those reasons are not sound.110

Section 52 of the SIS Act supplements the general trust law duties by requiring certain additional covenants to be included in superannuation trust deeds. The provision, however, makes no reference to any duty on the part of the trustees to give reasons for a decision made. Thus, under the existing superannuation law, a member who wishes to take legal action against a trustee for an incorrect decision may

face extreme difficulties in collecting evidence. Through frustration, there is a possibility that the timid member may decide to surrender the claim. The effect is that many of the member's claims, however small, are not heard. Unless the covenant provision in the SIS legislation is broadened to include a duty to give reasons, superannuation fraud and bad investment decisions by trustees are likely to remain undetected and fund members will continue to experience vulnerability.

It was noted earlier that the CPF in Singapore is centrally based and government sponsored. The Board is the trustee of the CPF and has taken care of all the members' accumulated benefits for nearly 45 years without any major complaints. Given the fact that there are numerous superannuation funds currently operating in Australia, it is unrealistic to expect the Government to take over the control of the funds and be fully and solely responsible since the costs for restructuring the entire scheme are unimaginable. Perhaps an alternative method to minimise superannuation fraud would be to implement a mechanism for consolidating funds in order to bring them down to a number that is manageable.

In the 1997 Budget, the Australian Government proposed the so-called "Choice of Superannuation Funds". The proposal was by way of introducing the Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998 to amend the existing SGAA. If this Bill is passed by Parliament, employees will be given a minimum choice of four eligible funds to which their

107 See RP Meagher and WMC Gummow, Jacob's Law of Trust (4th ed) 301 and Parkes Management Ltd v Perpetual Trustee Co Ltd (1977) 3 ACLR 303, 311 (per Hope JA). 108 Supreme Court of NSW (Unreported, 3 March 1995) (per Bryson J). 109 This was agreed upon by Gallop A/CJ in John Paul Minehan v AGL Employees Superannuation Pty Ltd (1998) SCACT 114. 110 Karger v Paul [1984] VR 161, 163-166 (per McGarvie J) applied by Hodgson J in Chammas v Harwood Nominees Ptv Ltd [1993] 7 ANZ Insurance Cases 61,175, 77,995 and 77,999 and by McLelland J in Rapa v Patience and Ors (Unreported, 4 April 1985).



employer's superannuation contributions can be paid into111 or they will be able to accept any eligible choice funds nominated by the employer for superannuation contributions.112 At the time of writing, the Bill has not been passed by Parliament and no new commencement date has been announced.113 Some academics have suggested114 that the Choice of Funds rules are intended to increase competition and efficiency in the superannuation industry and thus expected to lead to improved returns on superannuation savings and to reduce fund charges. It is submitted that the Choice of Fund rules, however, are not likely to resolve the current fraud problem. The number of superannuation funds has grown so rapidly that it has become increasingly difficult to detect frauds and embezzlements. As discussed, trustees of the funds need not be professional in the area nor do they need to pass certain tests or take oaths. Elements from the CPF scheme should be adopted to provide better protection for Australian members.115 They should be given an option to make their own prudent investments from the accumulated benefits subject to the approval of, for example, APRA. This will reduce the total assets in the funds and in turn reduce the possibility of fraud, corruption and misappropriation.

5. CONCLUSION

This article has explored two types of retirement savings plans - the CPF in Singapore and Australia's SGS. The latter was introduced in 1992 through complicated legislation relating largely to charges and administration in the event of an employer failing to pay the SG contributions. The legislation operates in conjunction with the SIS legislation.

The CPF scheme allows members to purchase real property, housing and mortgage insurance and even shares and other financial interests in approved Singapore-based companies. Although these purchases are subject to certain prescribed rules such as the preservation of S$40,000 in the Retirement Account, the creation of a statutory charge in favour of the CPF Board and compulsory reimbursement for amounts previously withdrawn if a monetary gain is made from the resale, the scheme remains a popular mechanism for accumulating savings for retirement. The scheme also allows members to withdraw their savings for temporary hardship purposes. CPF contributions and the withdrawal of accumulated savings are not subject to taxation.

In contrast with the Singapore model, the SGS in Australia is relatively new. This paper has identified several limitations in the Australian superannuation legislation. The SGS does not permit members to cash accumulated benefits during their working lives other than on their retirement or in circumstances where members have become permanently incapacitated or are suffering from severe financial hardship. The scheme does not allow members to engage in any form of investments, not even in purchasing a home for retirement purposes, other than in the form prescribed by the trustee of the particular superannuation fund. The superannuation legislation fails to recognise that members can actually accumulate savings through home ownership.

It has been found that with so many superannuation funds currently operating, compounded by a very large pool of assets being held by different trustees, fraud, corruption and

111 Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998 (Cth), s 32P. 112 Ibid, s 32R. 113 The choice of fund requirements were initially proposed to come into full operation by 1 July 2000, but the Australian Government has decided to postpone the commencement date until further notice. 114 See for example, Woellner, Barkoczy and Murphy, 2000 Australian Taxation Law, 1289. 115 The Choice of Superannuation Funds (Consumer Protection) Bill 1999 is being mooted by the Government. It contains consumer protection measures which are intended to supplement the Choice of Fund rules. The Bill is yet to be passed by Parliament.

L THAI ________________________________________________________________________________


embezzlement occurring within the superannuation industry is possible. This is the most significant and serious limitation in the SIS legislation. There is currently no proper and uniform system of co-ordination amongst the ATO, ASIC and APRA. It seems ironic to think that the Government, on the one hand, is helping ordinary Australians save for retirement, and on the other hand, is imposing heavy taxes on SG

contributions and on the withdrawal of benefits.

It is submitted that the Government should seriously consider the Singapore model. The Government should consider allowing members to make their own investments so that the large pool of assets would not be so concentrated as to attract various criminal activities.

Lang Thai is an Assistant Lecturer in the Department of Business Law and Taxation at Monash University. She holds LLB, LLM, BSc and Grad Dip Ed degrees. Prior to joining Monash University, she practised with Wong Partnership, a major Singapore law firm.

Documents

ANALYSIS OF THE CENTRAL PROVIDENT FUND IN SINGAPORE: …jausttax.com.au/Articles_Free/JAT Volume 03, Issue 5... · 2018-08-30 · This article provides a critical evaluation of the