Home Affairs Uniformed Services Superannuation (Amendment) Bill

Mr Speaker, Sir, this Bill will strengthen our ability to safeguard and prudently invest the retirement benefit funds for our Home Affairs Uniformed Officers. Due to the physical requirements of service, our Home Affairs Officers face an earlier retirement than Singaporeans in other professions. It is right that we reward them for their service and ensure that they are not financially disadvantaged compared to their peers.

I will discuss two issues. First, I will suggest that we separate the role that the INVEST Fund plays as a retirement benefit from that of a good-performance bond. Second, I will suggest that, based on behavioural finance, we consider shaping the investment choices made by INVEST members to improve their retirement benefits.

The INVEST Fund is essentially a deferred compensation scheme. Such schemes typically serve two purposes. They protect the employees against their own tendency to fail to set aside funds for their own future, and, they serve as a good-performance bond, because the benefits only vest when employees serve faithfully over time.

Like many private sector deferred compensation schemes, INVEST funds vest over time, so longer service is rewarded with greater benefits. However, under sections 6 and 9 of the Act, even vested benefits from the INVEST Fund may be reduced or terminated if Officers are dismissed with cause or convicted of any crime or offense.

The public expects a high standard of behaviour from Uniformed Officers. But the question is whether we should ensure this by putting up the entire value of an Officer’s INVEST account as a good-performance bond.

I would argue that the judicial system is the more appropriate means of punishing errant behaviour in Uniformed Services Officers. Officers are already held to higher standards in the judicial system because of the trust reposed in them and the considerable powers they have which could be abused. If this standard is not high enough today, Parliament may increase criminal sanctions for public servants who abuse their trust by amending the relevant laws.

In contrast, the reduction or termination of INVEST benefits for errant Officers is an administrative punishment and not a judicial one. It forms an additional punishment for errant Officers that may also harm the financial security of their dependants further. I would suggest that at least a portion of the vested benefits from INVEST be protected from reduction or termination. This would follow best practices for deferred compensation in the private sector, where a portion of benefits vest permanently in the employee over time.

Nothing in this suggestion precludes the Government from recovering financial assets or penalties, as directed by the Courts, from the errant Officer's INVEST benefits. The point is that the judicial process should take its course. The administrative penalty of reducing or terminating INVEST benefits could be revised in line with private sector practices.

I will now turn to the investment choices made by Officers. Traditionally, retirement fund administrators have focused on ensuring that the fund's investment strategies are as robust as possible. I have reviewed the INVEST annual reports and I believe that this task has been carried out responsibly by the Board over the years. But a factor that is equally important is the role the retirement fund plays in helping members make the best investment choices possible. This is not straightforward because behavioural biases, limited information, and poor financial literacy, all can contribute to poor financial decision making.

Since 2010 Officers have been able to choose from three investment plans offered by INVEST, with progressively higher risk and return, namely, the Stable, Balanced and Dynamic Plans. The Dynamic Plan takes on the greatest risk with 70% of the funds invested in equities while the Stable Plan invests entirely in safe bonds and cash. The Balanced Plan is 40% equities and 60% bonds and cash.

The funds are invested with reputable global investment managers and expenses are low due to economies of scale. So, because of that, the returns are driven largely by the asset allocation strategies of each of these plans. The Balanced Plan returns about 4.5% per annum and the Dynamic Plan about 5% per annum.

However, the Stable Plan has experienced lower returns than that of the CPF Ordinary Account. Since 2010, the average annual return for the Stable Plan has been about 2% per annum compared to 2.5% for the CPF Ordinary Account. Over 10 years, that is a difference of about $600 in returns per $10,000 invested in the Stable Plan, compared to CPF. This low return is a necessary consequence of the fact that the Stable Plan invests entirely in safe bonds and cash.

My concern is if an Officer is not aware of these low expected returns of the Stable Plan, or is very risk averse, they are likely to have a much lower retirement benefit. I would suggest the Ministry explore whether Officers who are very risk averse may be allowed to transfer their INVEST funds, as they vest, to their CPF accounts.

The broader point is that the Officer's retirement benefit will largely depend on their investment plan choice. If they choose the higher risk Dynamic Plan early in their career they will on average obtain a larger retirement benefit. As they approach retirement age, they may wish to reduce risk by reallocating their investment to the Stable Plan. This is the standard advice given by financial planning experts.

There is just one problem. The international evidence suggests most members of retirement plans do not make active choices about their investment portfolio. Instead, many members make choices based on the default provided by the retirement plan administrator.

In a paper titled "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behaviour", published in the Quarterly Journal of Economics in 2001, Madrian and Shea studied the investment choices of employees in a large US corporation that introduced automatic enrolment in retirement plans.

They found that six out of 10 automatically enrolled employees simply followed the default asset allocation assigned by the retirement fund administrator. The default was a money market fund, that is safe but provides very low returns. This is unlikely to be the optimal choice of employees in general. This is shown by the fact that among employees who made an active choice to join the retirement plan – instead of being automatically enrolled – only 1% of active choosers actually decided to allocate everything to the money market fund. So, the default choice matters.

In short, six in 10 automatically enrolled employees were losing thousands of dollars in retirement benefits from investment strategies that were too conservative, not out of their choice, but because of their inattention.

In general, the research in behavioural finance suggests that retirement plan choices are far from optimal. They are made on the basis of little financial advice or planning, and can be significantly shaped by irrelevant factors ranging from peer effects, to advertising, to the way the retirement fund administrator presents choices to the member.

What are the lessons for us? I would suggest that the INVEST Fund structure the default investment choices in such a way as to meet the needs of the broad majority of officers. I am sure that this is already done. But we must keep up the good work. That is why I urge the Ministry to periodically review not just the investment strategies employed by the INVEST Fund, but also, the investment plan choices made by the officers, and the ways in which these are shaped by the fund administrators.

For example, one common strategy in the private retirement fund industry is to recommend a life-cycle fund. These funds automatically adjust the level of risk as the investor approaches payout age, so that a higher level of risk is taken early on to build assets, and a low level of risk is adopted later to secure the value of those assets.

I would also suggest that the Ministry make more information about INVEST publicly available, such as details on investment strategies and performance, investment plan choices available to and made by the officers and so on. This may be attractive to potential recruits to the Home Team, and will also help existing officers make more informed decisions. Mr Speaker, Sir, I support the Bill.

Mr Speaker, I stand in support of the Bill, which seeks to improve the management and governance of the INVEST Fund, by following best practices in the investment management industry. However, I do have a few questions for the Senior Parliamentary Secretary.

Singaporeans statistically have one of the longest life expectancies in the world, at 84.8 years old. However, on average, 10 of those years will be spent in poor health. With the combination of these two trends – increased life expectancies and extended periods of ill health – it is important that we ensure that our Home Team officers, many of whom have dedicated their lives to ensure law and order in Singapore, have sufficient retirement funds to see them through their silver years.

Today, Home Affairs uniformed officers are required to retire at 55 years old; and consequently, their contributions to their INVEST account will end. I understand that the Ministry is currently reviewing the retirement age of Home Affairs uniformed officers. Could the Senior Parliamentary Secretary provide an update on the review and will the age limit for officers’ contributions towards the INVEST Fund therefore increase in tandem with their retirement age?

In addition to aligning contributions to the INVEST Fund with any change to the retirement age, I would like to request the Ministry to review the mandatory closure of INVEST accounts for retired officers.

Mr Speaker, the INVEST Fund was created to help Home Affairs uniformed officers build up an adequate retirement fund, considering their earlier retirement age as compared to the normal retirement age in the Civil Service. With many officers opting to continue with a second career post-retirement, they may not have any immediate need to utilise their retirement funds. Could the Ministry therefore allow such officers with the flexibility to remain invested in the Fund and enjoy the returns from their sizeable accumulation of savings? Decoupling the closure of the INVEST account with an officer's employment in service will also allow the INVEST Fund managers to use the additional funds to grow its investments, thereby benefiting all its members.

I would also like to seek a clarification on what would happen to the INVEST Fund monies for ex-officers who have had their service terminated. Under current regulations, officers may have their INVEST Fund monies forfeited if they are dismissed from service following a disciplinary proceeding. While I understand that the Ministry treats such dismissals very seriously, since the INVEST Fund is principally meant to function as a retirement fund, perhaps we could afford to be more lenient towards such officers who have already been punished by having their service terminated. One suggestion is to consider pro-rating their returns and put it into the officer's CPF Special Account rather than a complete forfeiture.

Mr Speaker, uniformed officers retiring at 55 years of age will have many more productive years ahead of them, and we should do more to help them successfully transit to second careers. I would like to know the placement success rate for the Ministry's Home Team Career Resource and Transition Office. And on a yearly basis, how many retired officers fail to embark on their second career six months after retirement?

Home Affairs uniformed officers are equipped with a wide variety of skillsets, have ample experience in handling difficult situations and would be valuable assets to any organisation. I believe that with the right support in place, many would go on to find a fulfilling second career. While I note that the Ministry has a five-year career transition roadmap to support retiring officers in their career transition, I would like to know if the Ministry has targeted programmes to help officers enter high growth segments such as cybersecurity and fintech? Perhaps the Police co-operatives would like to consider working together with the NTUC to do more to assist retiring officers with job placements in these high growth segments.

Mr Speaker, the proposed amendments to the Bill are timely as they serve to follow best practices in the investment management industry. But I believe that we can further improve the retirement adequacy of our Home Affairs uniformed officers by decoupling the closure of INVEST Fund accounts with their continued employment, to provide our retired officers with an option of benefiting from a longer investment period. We also need to provide better support to help them transit to a second career. With that, I support the Bill.

Mr Speaker, I thank the Members who have spoken on this Bill and for their support for the Bill.

Mr Melvin Yong asked about the progress of the review of Home Team uniformed officers' retirement age and whether the age limit for INVEST retirement contributions would be aligned with any change to the retirement age.

MHA is in the midst of the review which will be completed in the next few months. As part of this review, MHA is also studying related areas such as the age limit for INVEST retirement contributions and the INVEST vesting scale.

Mr Yong also asked whether MHA could decouple the closure of INVEST account from officers' employment so as to give officers the flexibility to remain invested.

The INVEST plan was established to help officers transit into their second career. As they have an earlier retirement age of 55 as compared to the rest of the Civil Service at 62 and also compared to the Civil Service's re-employment age of 67. This benefit ceases upon payment of the INVEST monies to officers at retirement. Keeping officers invested with the INVEST Fund when they are no longer in service would not be in line with this principle.

When INVEST monies are paid to officers, they can invest in other funds available in the market that best suit their needs at the point of retirement.

Mr Yong asked about the treatment of INVEST benefits of an officer who is dismissed from service. Assoc Prof Walter Theseira asked whether in such cases the officer's benefits could be protected from reduction or termination.

First, I think it is important to set out that the dismissal of an officer is not taken lightly and is usually based on serious misconduct, such as fraud, corruption or other egregious conduct. The dismissal process is a rigorous one provided for by law, such as the Public Service (Disciplinary Proceedings) Regulations and the Police Force Act. It includes an inquiry to consider thoroughly, objectively and fairly the grounds for dismissal.

The superannuation scheme is a benefit awarded to officers. This is over and above the market competitive salaries and the full CPF contributions. The superannuation benefits are fully funded by MHA; so, no funds are actually deducted from the officers' salary.

The superannuation benefits do not vest in the officers while they are in service. The award of the full benefit is contingent on the officer’s satisfactory conduct and completion of the term of service.

INVEST benefits paid to officers on retirement are exempted from tax.

Therefore, if an errant officer has behaved in a manner that is unbefitting of an officer of the Home Team and is dismissed as a result of his misconduct, the superannuation benefits, in part or in whole, can and should be forfeited. The process is fair and transparent, and the forfeiture or reduction of the benefit requires the concurrence of the Public Service Commission.

Mr Yong asked whether there are programmes to help officers enter high-growth job sectors, such as cybersecurity and fintech and the percentage of retired officers who found a second career within six months of retirement.

MHA’s career transition programmes are broad-based as retiring officers have diverse career interests. The various initiatives to help retiring officers prepare for a second career include course subsidies and time-off to learn new skills to enhance employability.

MHA has also recently launched a career transition resource portal to provide officers with information on the different industries, job opportunities, career events and workshops. MHA offers one-on-one career coaching sessions to officers to guide them on their career transition journey.

We actively engage prospective employers to source for suitable opportunities for our retiring officers and organise regular job networking sessions.

We also facilitate officers' career transition by enabling them to take up a job attachment in a company prior to their retirement to try out the job. This will help both the officer and the prospective employer to assess the fit before formal employment.

Based on our survey of our retired officers, of those who had actively looked for jobs, more than 50% were able to find new employment within six months of their retirement. About 85% did so within a year. For retired officers who are looking for employment, they can continue to tap on our career transition resources.

Assoc Prof Theseira compared the Stable Plan returns with returns from the CPF Ordinary Account.

This is not a like-for-like comparison and, hence, it is not an appropriate comparison, as they are, in fact, separate schemes with different objectives.

In terms of returns, CPF Ordinary Account has a guaranteed floor of 2.5%, and this is a special arrangement guaranteed by the Singapore Government. All CPF accounts, including Special, Retirement Accounts, are subject to CPF rules on withdrawal and use of funds.

In contrast, INVEST offers several options and the returns of these options are subject to market conditions.

Assoc Prof Theseira asked whether officers who have low risk appetite may be allowed to transfer their INVEST Funds as they vest to their CPF accounts.

CPF and INVEST have different structures, rules and entitlement terms. In the case of CPF, members can use their CPF savings in their Ordinary Accounts for housing investments and education, subject to the terms and conditions. Usage of funds is not contingent on the change in employment or specific rules set by the employer.

In contrast, the INVEST monies are paid to the officer only upon satisfaction of conditions, such as satisfactory conduct and completion of service.

Officers can choose from three INVEST plans during service. Upon retirement, officers can top up their CPF accounts with INVEST monies subject to CPF limits and rules, or they can choose to invest in other financial products available in the market.

Assoc Prof Theseira asked the Ministry to periodically review the investment strategies and investment plan choices by officers and to structure the default investment choices in such a way as to meet the needs of the majority of the officers.

Under the INVEST Plan, there are three investment options, namely, the Stable, Balanced and Dynamic Plans and officers can choose from the three Plans to suit their personal circumstances, financial needs and appetites towards risk.

Each Plan has its own risk return objectives and the Plans' performance is communicated to officers. As their circumstances change, officers can change Plan over the course of their career.

MHA conducts reviews on investment choices as part of on-going studies on industry best practices. MHA has been reviewing a life-cycle plan and is considering whether to introduce it as a new investment plan option for officers. Advice is being sought from external consultants, the INVEST Board of Trustees and the Investment Committee of the Board, and they include members with relevant industry experience.

Assoc Prof Theseira asked the Ministry to make more information about INVEST publicly available as it may be attractive to potential recruits to the Home Team and to help existing officers make informed choices.

The current recruitment process informs all potential recruits about INVEST and the information is also available on Home Team departments' websites.

Officers are kept informed on the investment plans via several platforms, such as on-boarding briefings, semi-annual Statement of Accounts, e-newsletters and investment deck are published on MHA's Intranet which includes an investment choice guide and the historical performance of the plans.

Mr Speaker, I believe I have covered all the points raised by the Members.

*Question put, and agreed to.*

*Bill accordingly read a Second time and committed to a Committee of the whole House.*

*The House immediately resolved itself into a Committee on the Bill. – [Mr Amrin Amin].*

*Bill considered in Committee; reported without amendment; read a Third time and passed.*