Straits Times: CPF returns: As good as it can get



SHORT-CHANGED: Mr Low Thia Khiang then asked if the Government short-changed Singaporeans on CPF interest rates.

A week after Parliament debated the CPF changes to boost the retirement income of Singaporeans, the issue of whether the new higher interest rates are fair lingers on. Lydia Lim and Jeremy Au Yong tap the experts

IT MUST have occurred to opposition MP Low Thia Khiang that a PAP MP had dropped a clanger and his job was to amplify the sound it made.

Mid-way through last week’s debate in Parliament on the CPF reforms to bump up the retirement savings of Singaporeans, MP Sin Boon Ann referred to the Government’s use of CPF monies.

“Getting funds on the cheap from the CPF” had enabled it to underwrite many development projects and social spending, he said. It was time to wean the Government off such “cheap funds”, he added, after commenting that it invested the money for much higher returns than the interest it paid CPF members.

Mr Low, the Workers’ Party chief, seized on the opening.

“Does the Government short-change Singaporeans by giving CPF members a 3.5 per cent interest rate while the GIC makes 9 per cent and pockets the balance of 5.5 per cent?” he asked.

He added: “Is the delay in the CPF draw-down age to enable the GIC to have a readily available cheap source of funds to invest?”

Manpower Minister Ng Eng Hen tried to explain that the link between GIC and CPF was “not so simple”. The Government bore all the liabilities of seeking higher returns with their attendant risks without passing them on to CPF members, he said.

A few days later, Prime Minister Lee Hsien Loong said firmly his Government did not need to rely on such cheap funds.

Who is right?

Financial experts Insight spoke to dismiss the “cheap funds” charge as spurious. The Government has no such need, they say.

Even if it does, it has cheaper ways to raise funds.

How? It can borrow money from the market either by issuing short-term treasury bills, or longer-term securities. Both are also types of government bonds.

Put in simple terms, a bond is a loan. A government bond is then a loan to the Government. It repays it with interest at the end of a certain period, say 10 years. The longer the term, the higher is the interest. Either way, bonds are deemed very low risk investments.

And when compared to returns on such bonds, CPF returns come off much better, says Citigroup economist Chua Hak Bin.

He uses the example of two- or three-year treasury bills, which he says make a fair comparison to Ordinary Account funds.

The interest rates on these currently range from 2.2 to 2.5 per cent, lower than the 2.5 to 3.5 per cent interest the Government will pay CPF members.

He does make one qualifier, however: “If the Government were to try and raise funds to the magnitude that is in CPF – I think it is over $100 billion – that would probably push interest rates up on par with CPF returns.”

As for funds in the Special, Medisave and Retirement Accounts (SMRA), MP and DBS Bank managing director Liang Eng Hwa says these are comparable to longer-term government bonds.

The new SMRA rate is pegged to the yield on 10-year Singapore Government Securities plus one percentage point.

The extra percentage point is because SMRA funds typically remain in the accounts for more than 10 years and should be treated more like 30-year bonds, which have higher yields.

But Singapore does not issue 30-year bonds.

Here again, the Government is being fair to the people, Mr Liang says.

The difference in yield between 10- and 30-year bonds issued by the United States government, for example, is only 0.3 percentage point.

Yet the Singapore Government is paying CPF members one percentage point more.

Mr Liang believes that given current market conditions, the Government is being “pretty generous”.

What the Government does is issue bonds that guarantee the rate of return promised to CPF members. Or to use the loan analogy, the Government takes a loan from the CPF that has an interest rate of 3.5 per cent on the first $20,000 in OAs and 5 per cent on the first $60,000 in SMRAs.

By doing so, the Government assumes the risks for these funds when it invests the money. CPF simply waits to collect on its loan.

This being the case, Singapore Management University Practice Associate Professor of Finance Benedict Koh says it would be a mistake to compare CPF returns to the long-term average annual returns on investments by GIC and Temasek Holdings, which are subject to risk.

“It is akin to comparing deposits in a bank with the loans of banks. Singaporeans are quite contented receiving 2 per cent interest yield on time deposits while the banks can be making 24 per cent on credit card balances or 12 per cent on unsecured personal overdrafts,” he says.

“If DBS depositors are not willing to assume the risks of DBS Bank, are CPF account holders willing to assume the risk of GIC and Temasek? Just look at the Forum letters complaining about the Shin Corp investment by Temasek. I don’t think Singaporeans can stomach such losses on their savings,” he adds.

Since paying US$3.8 billion (S$5.6 billion) for a 96 per cent stake in Thai telecoms company Shin Corp last year, Temasek has seen the value of the investment fall more than 30 per cent.

The new rate: As good as it gets?

FINANCIAL adviser Joseph Chong says that for a risk-free investment, the interest rate the Government will pay CPF members from January is so good that large insurance companies would be “swarming” to put their money with the CPF Board – if they could.

The CEO of financial advisory firm New Independent says Singaporeans who sniff at the rate are “looking a gift horse in the mouth”.

Dr Chua believes it would be “impossible” for any private institution to give the same interest rates while guaranteeing that people will not lose any money.

“Maybe it was possible five or six years ago, but long-term bond yields have come off considerably since then,” he says.

“So given that it’s risk-free, 3.5 per cent is very hard to match. It’s about fair,” he adds.

But Dr Chua thinks the Government should find ways to help CPF members with bigger balances than average earn better returns, through low-risk investing.

“Performance of GIC and Temasek does show that managed funds, by taking on some risks, can deliver substantially higher returns,” he says.

What it can do is pool together these CPF funds and help members secure the lowest possible cost of investing.

He says: “Yields can rise considerably if you are willing to take a little bit of risk. A Reit can yield 4 to 8 per cent. They do gyrate but are less volatile than usual stocks.”

A Reit or Real Estate Invesment Trust is a financial instrument that allows people to invest in real estate, while earning dividends as they do with normal shares.

As GIC and Temasek manage the country’s reserves, Prof Koh also says Singaporeans are their shareholders ultimately and hence are entitled to dividends.

“The question is how much and when? Just as a company needs to plough back its earnings to grow, Singapore needs to grow its reserves to provide stability,” he says.

But just as company shareholders get restless when they receive no dividends, he says some Singaporeans may also get impatient if they feel they do not benefit from GIC and Temasek’s investment performance.

He suggests the Government tie more closely the various payouts and top-ups it gives citizens to GIC and Temasek’s performance, “so citizens can see how they are benefitting from the high returns generated by these two organisations”.

Unlike a number of MPs who asked that the GIC invest CPF funds directly to help members earn better returns, Mr Chong says the current system where the Government tops up CPF accounts when there are Budget surpluses is more bearable for the average Singaporean.

“If GIC does well, the Government can top up our Special Accounts. Let the Government bear the risk,” he says.

While financial experts agree that the Government’s case is sound, they also note that not all Singaporeans are equally savvy about finances. And hence it is not surprising that many continue to make comparisons with what other pension funds can make, even though it would be like comparing apples with oranges. Here, the answer lies not in financial, but political management.

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