Comparing Pension Schemes

I did some googling in order to understand about the types of pension schemes around the world. It’s pretty complex. There are so many versions out there. I can’t put it all down here. So I’ll try my best to summarize it as much as possible.

They have employment based pensions, social and state pensions and disability pensions. Retirement plans can be classified as defined benefits or defined contribution plans. A defined benefit is a plan where workers will accrue their pension and upon retirement, the firm pays them a benefit.

Defined benefit plans may be funded or unfunded. In an unfunded pension, no assets are set aside by the employer. The arrangements are provided by the state and the benefits are paid directly from the worker’s contribution and taxes. This method of financing is known as pay as you go.

A funded plan on the other hand, contributions from the employer and from the workers are invested towards meeting the benefits. All plans must be funded in some way. And then after reading the rest of it online, I got lost in the mumbo jumbo stuff. I know it doesn’t apply to our CPF system.

Then my eyes fell on the part that says defined contribution plans. It’s a pension plan where employer set aside a certain proportion of a worker’s earnings in an investment account and the worker receives this savings and any accumulated investment earnings upon retirement. The contributions are paid into the worker’s account. The contributions are invested . On retirement the members account is used to provide retirement benefits and sometimes through the purpose of an annuity which then provides a regular income. I guess this may sound pretty close to our CPF system but the investment part may not be applicable.

In our CPF system, both the workers and employers will contribute a certain amount based on age and wages and this money will be distributed into 3 accounts namely the ordinary account, special account and medisave account.

The ordinary account may be used for housing loans, education loans and investments such as stocks and  unit trusts apart from retirement. This account only earns 2.5% of interest but this is still better than a bank account. Those who have enough to invest in a property might be able to maximize this value if they know how to.

The special account is purely for retirement purposes and will later be used to fund the retirement account which will then be used to pay for the CPF Life, an annuity. Although it’s possible to invest this amount, it is not encouraged as this account earns 4% of interest. IF you can find an investment that can give you a guarantee returns that is higher than 4%, then you probably have a very good eye for making investment decisions. Otherwise, just leave the money here.

The medisave account cannot be withdrawn at all. It is meant for funding certain medical bills and there are certain limits per year as well as based on the type of treatment. It can also be used to pay for the premium of certain health insurance. The most basic health insurance that anyone can have is the Medishield plan.

There are so many things to digest. This system is trying to take care of so many needs of workers. But what about those who are self employed? I understand that all self employed people have to make a compulsory contribution to their medisave account. The rest of the accounts will be voluntary. I guess that’s it for today. I shall write more as I go along. I’m not an expert in this area but I am learning as I go along.