Comments, opinions and an occasional ramble
More brickbats for the CPF
If you have not been following Lucky Tan’s latest entry on the CPF, I recommend you read it along with the comments that follow. It’s a critical piece, so read with an open mind.
I’m not sure if Lucky Tan’s historical account of the CPF is accurate but I do have sympathies for his point that the CPF has been turned into a “complicated masterpiece”. Instead of being locked away for the sole purpose of funding retirement, Singaporeans can use the CPF for housing, investments in financial instruments etc.
I’m not saying that the liberalising of the CPF is a bad idea. It’s always good to allow people flexibility to do what they want with the money. However, I think the government needs to get its priorities straight. If the CPF is meant for retirement, let it be for retirement and nothing else. It should not be used as a economic tool (cut CPF rates when the economy is down), nor should it be used as a source of funding for housing, and neither should it be used by its members for speculation in shares or other financial instruments.
If the government intends to babysit Singaporeans when it comes to retirement, please don’t be half-hearted about it. I am quite sure that if the government did not liberalise the CPF, there will be people complaining that they have a large sum of money squirreled away and sitting idle. It’s one of those damned if you do, damned if you don’t scenarios. I think that the government should have political will to resist demands by the citizens for short term benefits. If it is meant to be a savings plan, just make it as such and focus on generating returns that at the very least keep in step with inflation so that the value of the savings is not eroded.
One might then logically ask how can the average Singaporean afford public housing these days without the CPF. After all, they are quite expensive compared to 20 years ago. I think I rather contribute a lesser percentage to CPF and lock that money away completely for the purpose of retirement and using the freed up money to pay for housing. I think that overall, I would have to fork alot more cash out now compared to being able to utilise the CPF (there’s the employer contribution part to tap on as well) but as the Chinese saying goes, have it bitter first before having it sweet. It’s short term pain but in the long term, I would end up having more substantial liquidity for retirement. And, I won’t have to go through the troublesome process of unlocking the value of my home for retirement because my retirement savings are completely liquid.
Note: Do read up on the Canadian Pension Plan for a retirement scheme that’s somewhat of a hybrid model between our CPF scheme and the welfare model. I must say the Canadians are doing things in a pretty interesting way.
| Print article | This entry was posted by Aaron Ng on 05/09/2007 at 9:26 am, 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 4 years ago
Could it be that HDB prices are higher because everyone has access to CPF funds for this purpose. End result, poorer home owners, HDb (and government laughs all the way to the bank a homeowners drive up prices with their “easy credit”.
about 4 years ago
Hi aaron,
Suppose you blew the savings of your peasants in bad investments, forcing your peasants to purchase houses would have the effect of attaining a world record percentage of home ownership, the inflation of property prices in your country, which in turn leads to the inflation of the value of your investment property and finally leads to a respectable/healthy balance sheet on the investment accounts. Brillant idea isn’t it? It’s a “one stone kill many birds” idea.
Too bad conspiracy theories by defination cannot be proven
about 4 years ago
The concept is called “Reversed Robinhood” and the System is similar to Count Dracula. It really sucks. It sucks the blood of all the innocent victims that it can lay hands upon in order nourish its self-survival instinct and strengthen its own power. It works magnanimously at the beginning but after a while, just like a liar who tells a fib and he needs another 1000 lies to cover it up, the tail and the legs of the tortoise start to show.
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Just imagine, Temasick can without any qualms come out with $500 million as a Charitable Fund to help Asean countries, while not willing to increase in interest rate in our CPF. As it keep boasting of a steady annual returns of 18%, why can’t it take 5% from the 18% to beef up the CPF interest rate?
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Well, keep dreaming and hoping that Dracula would one day stop drinking blood and the Reversed Robinhood would soon start to rob the rich to help the poor. Its good to have hope. Keep up your blind faith!
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As for me, its time to leave this sick and decaying island being ruled by a sick person and a decaying old man.
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Bye chaps! And good luck!
about 4 years ago
This was written in February 2004:
IN addressing the problem of Singaporeans having insufficient Central Provident Fund savings to see them through their retirement, the government’s main response has been to propose privately-managed pension plans (PPPs) under the CPF Investment Scheme (CPFIS).
Being specifically tailored, more balanced across asset classes, and less narrowly focused geographically, these funds should better address retirement funding objectives than the current smorgasbord of investment options.
Because they have embedded asset allocation structures varied to suit different investor risk profiles, CPF members ought to be less confused and can hopefully make better investment choices.
But will CPF members readily shift funds into PPPs? And will they get a higher long term return on their CPF funds?
Under the PPP framework, the plan provider will likely be the only manager of the funds it offers. Regrettably, no fund management house is competent in all areas. By excluding a multi-manager multi-asset (MMMA) approach there is a risk that the PPP may not deliver the expected higher long term returns. This is because only internal manager changes are possible.
Industry experience is that salvaging investment performance through internal manager replacement is less effective. But since the plan provider cannot be easily excluded from the scheme after it has been admitted, it will take a far longer time to resolve underperformance.
To be sure, there is nothing to prevent a plan provider from using an external investment manager for asset classes which they concede they are not good in, but that only adds another layer of fees.
Under the proposed framework, the onus remains on the individual CPF investor to choose a suitable pension fund. The choice may be less bewildering with just a few PPPs, but it may be that only a minority of Singaporeans will make successful investment decisions, as in the past. Sure, financial advice may be available, but it comes at a cost. The majority may well stumble.
It’s also worth considering if a relative return benchmark, which plan providers are likely to suggest, should be the only one used. It may be appropriate for a long term horizon but many CPF members will have intermediate financial objectives. It will be tricky to achieve such goals through a cocktail of funds which are managed against relative return benchmarks.
Fund size matters
For the PPPs to take off, assets of sufficient size must be garnered at launch. Otherwise, no economies of scale can be enjoyed.
But there is no certainty that an investor education programme alone can convince enough Singaporeans to place money in the PPPs – especially with the guaranteed risk-free 2.5 per cent for the Ordinary Account (OA) and 4 per cent for the other accounts.
To keep fund expenses low, PPPs are not expected to have front-end sale charges. But without this, it is unclear how the funds can be marketed unless the investment manager is willing to cede part of the already lower wholesale mangement fee to the distributor.
To resolve this impasse, calls have been made for the current yields on CPF accounts to be reduced or even removed in order to kickstart the PPPs. Thankfully, the CPF Board has rejected this callous suggestion.
Although the board has expanded its original mission when incepted in 1955, with the funds progressively freed up for purchase of property, financial products, healthcare, insurance and tertiary education, it does not negate the fact that they are essentially long term funds.
Unless the plan provider can guarantee a satisfactory investment return, the CPF Board must allow members the option to keep their funds as deposits with the CPF and be paid a reasonable rate of interest. Otherwise, such savings should not be compulsory or locked up.
With initial industry reaction to PPPs tentative, are there other alternatives which the CPF Board can consider?
A radical option is for the board to run a national pension scheme. Admittedly, this would appear counter to the current trend of encouraging risk taking and letting people make their own decisions. But intractable problems require staid, even simple, solutions.
Operating a national pension scheme is not as complex as it’s made out to be, though assuming responsibility for investment returns can be daunting. Instead of investing CPF members’ surplus funds in specially issued Singapore government bonds and deposits which have pre-determined yields pegged to the rates which it pays CPF members, the CPF Board can farm out part of this for management by external investment managers.
To achieve a critical mass, a portion of the OA can be allocated for the national pension scheme. This may require the funds to be ‘locked up’ in the scheme for five to 10 years, with premature withdrawals permissible only under exceptional circumstances.
Another portion of the OA can be marked out for potential withdrawals for housing, et cetera, and be paid an interest rate commensurate with short term savings. If members wish, they can use this portion for investment options under the CPFIS.
To make the scheme more acceptable, it should offer an absolute and guaranteed return benchmark. The present 2.5 per cent yield on the OA is not inappropriate and, if used, will mute criticism by CPF members. This way, a critical fund mass can be achieved with immediate economies of scale. Under the PPP route, flows from the $67 billion in the CPF OA and Special Accounts will likely be in drips.
No reason why not
There is no reason why the CPF Board cannot run a national pension scheme as it has both the administrative infrastructure as well as experience managing external fund managers. Some $3 billion of CPF’s in-house insurance funds are already managed this way.
Admittedly, this option may appear to be another case of the ‘nanny’ mentality. But the truth is, the majority of CPF members need help in managing their retirement savings.
Concomitant with CPF reverting to its original mission and playing a more active part in managing a national pension scheme, the government should perhaps rely less on the CPF as a tool to implement economic and social goals.
Now that the home ownership programme is largely complete, the optimal contribution rate should perhaps be set at a level that ensures sufficient savings to grow a retirement nest egg. Such rates should be varied only when expected investment return rates based on the national pension scheme change substantially. They shouldn’t be a convenient way to manage business costs since there are, and should be, other means.