Comments, opinions and an occasional ramble
Government will not take investment risks on behalf of CPF members
I read Siew Kum Hong’s prepared text of the speech he delivered in parliament yesterday. I’ve been so busy with work, studies and family that I only had the time to read one blog entry the entire week. 
I think Kum Hong asked, in an indirect way, a very interesting question on why the government is not investing the monies of CPF members to achieve a much better rate of return. In his view, the government would be as equally judicious in the investment of CPF monies as reserves. So, if judicious management of reserves by GIC has yielded 8.2% annually from 1981 to 2006 (after smoothening out the fluctuations), can’t similar rates of return be yielded by a similarly judicious management of CPF funds?
I can see where he’s coming from, but I can also see why the government is extremely reluctant to invest on behalf of CPF board members. Basically, no one is going to complain when rates of returns are good. When rates of returns are negative, imagine the consequences, especially in an election year.
People are not going to be so sensitive about returns on the reserves as compared to the returns on their CPF. This is because the individual Singaporean has a personal CPF account and they can claim ownership to the money in that account, since it is under their name. If returns on the CPF are going to be negative for a few years due to a recession, wouldn’t people be upset? How many people will actually be able to accept that this is the cyclical nature of markets? I don’t know, but if I were the government, I sure don’t want to find out the hard way.
I think that unless everyone can understand that investment entails risks, is subject to fluctuations and are able to stomach fluctuations in investment, the government is not going to bear investment risks on behalf of CPF members. Imagine if it was the CPF Board that invested in Shin Corp and not Temasek.
| Print article | This entry was posted by Aaron Ng on 21/09/2007 at 2:13 pm, and is filed under Perspective. Follow any responses to this post through RSS 2.0. You can leave a response or trackback from your own site. |
about 2 years ago
Imagine if it was the CPF Board that invested in Shin Corp and not Temasek.
Well said. That’s the crux of the problem.
about 2 years ago
I don’t think I has to go down the temasek route
Why cant they just set up a global index fund for CPF account holders so that they can invest a portion of their CPF in a portfolio of stock, reits and bonds indexes all over the world as pre-selected by the CPF board and the $ cannot be taken out until 65 just like special account.
Of course the risk must be spelled out clearly to all those involved.
about 2 years ago
dun tok cock,
you can already invest money in your ordinary acc.
aaron,
i think the money is invested. The problem is that the government does not want to share the profit.
about 2 years ago
The issue should not be seen in black and white. Risks can be shared, for example a conservative person can choose to hold 70% bonds and 30% Temasek linked funds, while the aggressive investor can choose 70% Temasek linked funds and 30% Bonds. Why should Singaporeans be condemned to poor returns?
One should realised there is risks associated with “Risk free returns”. Without the power of compounded interest, we could well see another generation of Singaporeans with higher retirement age and insufficient retirement funds.
about 2 years ago
yh is right. The Government already invests. It simply wishes to take on the risk and reap the rewards of doing so, while paying citizens a small and stable interest rate for their funds.
To be cynical, you can say that it squeezes citizens of better long term returns, so that when they ask for help, it can do so with ample funds and thus appear to be generous.
From another point of view, you can say that the Government operates much like a bank. It guarantees a small fixed return on your ‘savings account’ or ‘fixed deposit’ (CPF funds fall somewhere in between those two types), and uses the funds thus raised to make profits by investing in projects and stocks. It has to be ‘compensated’ for taking on the additional risk, just like a bank does. Or does it????
about 2 years ago
I do not sgree to the view that Govt is a bank and we are depositor. Depositor can withdraw their capital anytime, so return should be lesser like that of a fixed Deposit. We are long term shareholder who will put our money in it for 40 years. Such long term investment should get a much higher return even if it is a very conservative potfolio with compound interest. It don’t have to be a risky investment and in the long run conservative potfolio does not give negative return. Don’t be fooled by them and buy what they told you, Aaron. Our huge reserve is built up from CPF and taxes from the people as capital in the first place. We should be given a fair share. No need to be as high as their return of Termasek or GIC but at least it should be higher than what they proposed.
about 2 years ago
If you have read the Sunday Times yesterday, do lookout for a quote from one of the MPs of Tampines GRC who mentioned that he cannot understand how the Government can invest the money of Singaporeans and profit from it yet tell them that they cannot take care of us.
about 2 years ago
There is a simple way to do this and the PAP govt won’t do it because it likes to borrow our CPF money at 2.5%.
List a number of highly diversified index linked products, such as global equities indexes, Asian equities, N. American Equites, etc. these are index-linked products so can be run with low fees & administrative charges. Along with these offer Singaporeans risk free 2.5% something like Fixed Deposit.
The simply let the CPF account hold choose his mixed. He can go risk free or 60-40. No reasonable human being will blame the govt if he loses money on an index fund especially if he can also choose a risk free option which can be a default choice.
By restricting the account holder to 2.5%, the govt guarantees the person will have insufficient to retire at a decent age and is doomed to a prolonged work life.
This has been suggested many many times. The PAP govt refuse to do it because it wants to have access to lots of money at 2.5% for its GIC. …GIC money we will never see until the day we die.
Anyone who believes the PAP govt explanation about how they are reasonable in giving 2.5% risk free is a fool. Aaron Ng if you read my comment and still think the way you wrote in blog posting, I don’t mean to be rude but your posting is poorly researched….
To add to this the Chilean govt put the pension funds in the hands of professionals for management and returned an average of 11.8% for a period of 18 years since it started.
about 2 years ago
Lucky,
Apologies for the late reply. I have been very busy.
I think you should read my entry more carefully. I never said the government SHOULD NOT invest the money of CPF members. I only gave reasons why I think the government is not doing it. And, I never said anything about whether the reasons are good or bad. So stop jumping to conclusions and saying that my entry is poorly researched. Your last comment and my entry are apples and oranges. We are talking about different things.
Now to deal with your subject, I totally agree with you that professional fund managers will be able to give good returns. If we are to adopt this model, every CPF member will have to ask themselves whether they are prepared to take risk of loss. Can they stomach seeing their investment increase 24% in one year and then -15% in another year? I know that in theory the long term figure should be positive if the money was wisely invested but the problem is, not everyone is like you who can see long term.
Sure, the government might have been borrowing cheaply from citizens. I don’t deny that. However, the verdict is not out on whether CPF members are willing to tie their returns to GIC’s performance. I may have the stomach, but I can’t say so for my mum or dad.