Central Provident Fund: Pension Schemes for Employees in Singapore

Central Provident Fund: Pension Schemes for Employees in Singapore

Central Provident Fund? Ever heard of these three words? You may have come across it while registering your company in ACRA, but we are sure you aren’t entirely sure what it is and what it stands for? That’s why we have come up with a short but concise guide to help you, understand what a CPF is.

What is a Central Provident Fund?

The Central Provident Fund is Singapore’s very own pension system, and its the oldest national pension scheme in the continent of Asia. It is a centralised system that shoulders the three basic needs of any Singaporean: housing, medical care and retirement. It is the statutory authority for all pension schemes in Singapore, initially built for the purpose of the retirement of the employees of the private sector. For the past five decades continuous amendments have been done to the system, and now it has become a multi-purpose fund made up of a variety of schemes for Singaporeans, and non-Singaporean’s alike working in the country.

There are four significant schemes in the Central Provident Fund: retirement scheme, healthcare, home purchase and ownership and even insurance schemes. These all add up to provide the basic needs of everyone living in Singapore. This means that by contributing to the Central Provident Fund, you are helping your employees take a step closer to a secured future. A future where worries of housing, sickness and old age will not be a problem because they have a pension as well as insurance system to lean on. And unlike the other government monitored public pension schemes for employees around Asia, the Singapore CPF system is operating on a fully funded basis. And it is managed by a tripartite system of you the employer, your employee and the government board.

How much is deducted from the salary?

As an employer, you are mandated by law to deduct 20% from your employee’s salary to be placed into their Central Provident Fund. By deducting the CPF contributions from their salaries, the pension scheme for employees can continue to be funded up until they retire. You as the employer are also required to contribute to your employees CPF account as well. Employers are required to pay 17% of their employees wage to their Central Provident Fund account. Below is an example of how a Central Provident Fund is calculated:

Your employee earns $2,000 per month: CPF Calculations will be

  • $2,000 x 20% (0.2) = $400
  • $400 will be the amount of cash that will be deducted from your employee’s salary.

You as an employer would have to pay 17%. So, if your employee has a monthly salary of $2,000 then the CPF calculation will be:

  • $2,000 x 17% (0.17) = $340

Understanding the Four Schemes

  • Retirement Scheme – the Central Provident Fund was founded for the purpose of retirement, and to this day it is still true to its original nature. The CPF contribution that you as an employer pay monthly goes to the retirement fund of your employees. The monthly payout that you receive during your golden years (65 years and beyond) depends on your CPF contributions per month.
  • Healthcare Scheme – the Medisave account under your employee’s CPF account and even yours, is there to provide coverage for hospitalisation and medical bills. Medisave account offers Medishield life which protects you and your family from large hospitalisation bills, receive subsidies for treatments, and for B2 and C-ward types in public hospitals. While the Integrated Shield Plan covers private hospitals as well as A and B1 ward types of treatments.
  • Home Purchase Scheme – the CPF fund can also be used as a means to getting/ purchasing a new home or a HDB flat. Through the Central Provident Fund, your employees can get down payments to buy HDB flats. The money for the HDB purchase is taken from the Ordinary account, one of the three accounts under the Central Provident Fund.
  • Insurance Scheme – the insurance scheme is included in the Medisave account, named as the Private Medical Insurance Scheme.

The Three Accounts Under the Central Provident Fund

There are three accounts under the Central Provident Fund; this distribution makes it easier for the pension plan to cover more than just the retirement of employees.

  • Ordinary Account – this is where funding for housing is taken, it can also be used for the education of your employee or their children.
  • Special  Account – this account is meant for the retirement of your employees.
  • Medisave Account – this account is for medical needs such as hospitalisation and treatments.

The amount placed on each account depends on the age of your employee. For younger employees, more will go to their Ordinary Account, and older employees would put more on their Medisave Accounts.

Final Thoughts

The Central Provident Fund was created for the welfare of Singaporean or non-Singaporean employees. Understanding its contents is vital for employers Singaporeans or Foreigners because a CPF contribution is compulsory and failure to comply can have serious consequences. It is better to be informed now than be sorry later.