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.

Weekend TODAY: The voices that also matter

Peace and prosperity is no excuse for social apathy, argue participants at forum


WITH the economy on a roll, one wonders: Have comfortable Singaporeans become blind to the inequities around them?

At a student forum on Friday that posed this question, Mrs Bridget Lew, founder-president of Home (Humanitarian organisation for Migration Economics), a migrant worker help group, clearly felt this was the case to some extent.

It was “outrageous” the way some Singaporeans treated their foreign domestic workers – the “small people in society”, she said.

Others in the 100-strong audience called for more resources to be given to help the disabled community – something that popular blogger Lee Kin Mun, better known as mrbrown, agreed with.

A father of a six-year-old autistic daughter, he wondered why “a lot of resources” have been given to help gifted students who “don’t really need as much help as those who cannot even function as a normal human being”.

He also urged individuals to speak up for what they care about, instead of relying on others to do so.

Mr Lee said that when his newspaper column was stopped last year, people had emailed him lamenting the loss of his voice to highlight their views.

“It was weird because I wanted to tell them: I’m not your voice,” said Mr Lee.

“You are responsible for speaking up for things that you care about. If (what I say) happens to jive with what you care about, then great.

“But we cannot rely on one person, one mrbrown or one politician, to speak up for you,” he added.

The role of alternative voices was a talking point during the Singapore Management University (SMU) forum on whether peace blinds Singapore to social injustices.

Student participant Liang Ye felt that certain issues are not brought up when things get comfortable.

“Apathy can also be peaceful. When you don’t seem to see anything happening, you think that everything is ok.

“When nobody voices an issue most people are aware of, then it seems that things are peaceful,” the 22-year-old told TODAY.

This was a point that Non-Constituency MP Sylvia Lim also raised, when she quoted former Federal Reserve chairman Alan Greenspan’s observations.

In his memoirs, he had said the widening gap between the rich and poor in the United States could unravel the ties binding society, and ultimately result in violence.

Ms Lim said the threat could “come from within if there are too many inequities and unfairness that leads society to such actions”.

Asked about alternative voices, she said the authorities “do listen very carefully to the things we have to say”.

“Maybe it’s mostly to rebut our points. But it doesn’t mean that they don’t take the point seriously. Perhaps they use it in their ongoing reviews of the policies.

“Over the years, we’ve noticed that certain changes in Government policies, perhaps, were raised by some Opposition parties earlier,” she added.

She further argued, it was important for the public to “hear the alternative voices” and judge for themselves which view made more sense.

While pointing out that there will “always be social injustice”, the SMU’s assistant professor of Law Eugene Tan, the forum moderator, said “each of us can do our little bit” and draw attention to concerns that may be under-represented.

TODAY: ‘Engage hearts, hold hands, assuage fears’

Minister Ng addresses MPs’ worries about CPF changes, urges them to convince people


ANY tinkering with the Central Provident Fund (CPF) system, the savings nest for Singaporeans’ golden years, was bound to be greeted with fear and uncertainty – especially if it meant resetting a system more than half a century old.

Mindful of this, Manpower Minister Ng Eng Hen, the man tasked to implement the changes, made an impassioned plea yesterday for his Parliamentary colleagues to sell the new policies to the ground.

Or, in his own words, to “engage hearts, hold hands and assuage fears”.

As he wrapped up a three-day debate involving about 40 Members of Parliament (MPs), Dr Ng was convinced the Government was making all the right moves – as far as the CPF reforms were concerned.

But “pristine policies” alone were not enough. The Government, he admitted, needed to “be better at PR to sell our policies”, as some MPs had highlighted.

He told the House: “I need you to spout poetic lines to convince your constituents that these measures are meant to help them. Spew forth with passion your Hokkien lyrics and poetic metaphors.”

To deal with the rapidly-ageing population, the Government will put in place re-employment laws by 2012. In the same year, the draw-down age for the CPF Minimum Sum will rise to hit 65 by 2018.

From next year, the interest rates for the Special, Medisave and Retirement Accounts (SMRA) will be re-pegged to the yield of 10-year Singapore Government Securities, plus an extra 1 percentage point.

The CPF Board will also administer a longevity insurance, with the details still to be worked out by a special committee.

The sweeping changes were inevitable. “There is no other way,” said Dr Ng. “We are changing the CPF because we are compelled
to, by circumstances unimaginable and unanticipated when the CPF system was started 50 years ago. A system designed in 1955 for an average life expectancy of 61, left unattended, would falter under the weight of needs as more grow old.”

But while each Singaporean will be expected to make provision for his own needs, the Government will not leave them to fend for themselves, he asserted.

A number of MPs had voiced concern over the delayed drawdown age and that Singaporeans could face hardship if re-employment failed to work.

To many Singaporeans, their CPF monies was becoming “a bit of a mirage”, charged Non-Constituency MP Sylvia Lim, who also took issue with the timing of the reforms.

The Workers’ Party chairman argued: “How can we agree to delay the drawdown age now when these details (of the re-employment laws) are up in the air? Will the new laws be just a piece of paper?”

In response, Tampines GRC MP Sin Boon Ann countered that allowing Singaporeans to draw down their CPF funds earlier would be a “disincentive” to continue working in their old age.

Pointing out that some companies were already adopting re-employment practices, Dr Ng assured Parliament that the parties involved in drafting the legislation were acutely aware that it “has to work”.

Said Dr Ng: “Some (MPs) suggested that the re-employment law be enacted well before 2012. Laws assist but there are no shortcuts. We will work on guidelines first and gauge the process.”

On some MPs’ calls for “even higher risk-free interest rates” on SMRA accounts, Dr Ng described such a demand as “too good to be true”.

Reiterating that 70 per cent of all CPF members would effectively enjoy a 3.5-percent rate on their Ordinary Account and 5 per cent on their SMRA, he said: “It is easy to claim that our investments should do better, but who dares to promise you this? No one will be willing to underwrite this system simply because it is more than fair.”

There is no risk-free asset that guarantees a 2.5-per-cent minimum return per annum, “let alone a 3.5-per-cent minimum return”, said Dr Ng. And top consultants engaged by the Government affirmed this, he added.

Nominated MP Siew Kum Hong had cited the example of Aviva’s Big e fund. But Dr Ng pointed out the firm gives the money back to the investor should the returns fall below 2.5 per cent – it does not give a guarantee.

Said Dr Ng: “For our system, there is no fine print – and that’s the bottom line.”

As for those who do not pay CPF, such as odd-job labourers, contract workers and housewives, Dr Ng pointed out that there were help schemes such as additional housing grants, Workfare and Comcare.

Under the new CPF system, 84 per cent of new entrants to the workforce would have enough to meet the Minimum Sum for retirement, even for low wage earners and “even after buying their first home”, said Dr Ng.

Praising the “high quality debate” in the House over the past three days, Dr Ng described the Government’s most pressing challenge as somewhat of a happy headache.

Said Dr Ng: “We could not have imagined 40-odd years ago when this nation was conceived, that we would be here in 2007 discussing how to deal with the problem of people living longer.”

And he was in no doubt that future generations would thank the Government of today for having the “resolve and courage to do what was necessary”.

Said Dr Ng: “How will we be judged? It is hard to be completely sure. But of this one thing I can be reasonably sure that they will conclude: that this Government did not shirk its responsibility but lived up to its duty.”

Straits Times: Sylvia Lim: Delink retirement age and CPF draw-down age



“It seems to many that a member’s CPF money is becoming a mirage: A virtual pool of water which seems just ahead, but as one approaches, is found to be far away.”

THE retirement age and the age at which Singaporeans can draw down on funds in their CPF Minimum Sum accounts should be “delinked”, Non-Constituency MP Sylvia Lim said yesterday.

Although the opposition Workers’ Party she chairs does not object to extending the retirement age even up to 67, it could not support pushing back the age at which Singaporeans can draw on their retirement funds.

CPF members can currently draw down on their Minimum Sum starting at age 62.

But with changes announced this week, the bar will be raised to age 63 in 2012, 64 in 2015, and 65 in 2018, as people are encouraged to stay longer in the workforce and build up their retirement nest egg.

Ms Lim said Singaporeans would be affected in “profound ways” by this delay.

There were those wanting to “slow down”. But the delay in accessing their Minimum Sum was akin to pressure to keep on working at the same pace as before.

A later draw-down age could also cause financial hardship for those affected.

She argued that although the goal is to increase the employment rate among those aged 55 to 64, there was no certainty someone could keep a job – even with a re-employment law in place by 2012.

And even if they had work, she said it was likely they would earn less – and might not have enough to cover their expenses.

Many also suffered a cash crunch from age 55 onwards: With lower CPF contribution rates, they would take longer to build up savings. And having to set aside larger amounts in their Minimum Sum and Medisave, meant they have less they can withdraw at age 55:

“It seems to many that a member’s CPF money is becoming a mirage: A virtual pool of water which seems just ahead, but as one approaches, is found to be far away.”

One way to avoid a later draw-down on CPF funds would be for the Government to boost returns on CPF savings, so people would have more for retirement, she said.

Also, government coffers had grown, she said, citing how the taxman’s collection rose by more than $6 billion last year compared to five years ago.

Ms Lim’s call for allowing workers to draw on their retirement savings was criticised later by Mr Sin Boon Ann (Tampines GRC).

He said she had not addressed a fundamental issue: That if people drew on their CPF funds early, would they have enough to see them through their retirement.

He added: “How can she be sure that if there’s an opportunity for Singaporeans to draw down earlier, (they) will continue to want to work to ensure that there is sufficient income to meet their daily needs?”

Mr Low Thia Khiang (Hougang), who is Workers’ Party secretary-general, rose later and asked if Mr Sin was suggesting Singaporeans were lazy and would not work if they received their CPF funds – and the Government thus needed to hold on to their money.

Mr Sin countered that Mr Low was being “disingenuous” by for putting words in his mouth. He never said Singaporeans are lazy.

His said the point he was making was that early access to CPF funds could be a “disincentive” for Singaporeans to work actively.

Straits Times: Longevity insurance an irresponsible act, says Low



OPPOSING VIEWS: MPs Low Thia Khiang and Chiam See Tong (next picture) challenged the CPF policy changes.

THE two opposition MPs yesterday called on the Government to do more for older Singaporeans.

Mr Low Thia Khiang (Hougang) asked for the setting up of a longevity fund to help provide for the elderly. He added that he fears the CPF policy changes may cause Singaporeans to perceive the old as useless, leading to the erosion of social cohesion.

Mr Chiam See Tong (Potong Pasir) also argued that the Government should contribute to the annuities scheme, echoing earlier calls by ruling party MPs Inderjit Singh and Josephine Teo.

In an impassioned speech made in Mandarin, Mr Low, secretary-general of the Workers’ Party, said in a droll manner that “the world is becoming a funnier and funnier place”.

It is one where “longevity has become a crime”, he said. “Singaporeans have worked so hard all their lives, they have contributed to the economy. Much credit must be given to them. But now if people live a long life and their CPF is exhausted…the Government wants to force them to buy annuities.

“I think this is an irresponsible act on the part of the Government,” he charged.

What should be done instead is to set up a longevity fund that will make payouts to those who live beyond 85 and are in financial difficulties, he said.

Mr Low went on to say that, for people to identify with their nation, “policies should not be formulated based on data and economic consideration alone”.

But his suggestion of a longevity fund was rejected by Second Finance Minister Tharman Shanmugaratnam.

“It will not be wise for the Government to do this or for Singaporeans to want the Government to do this,” he said.

“We know that these pressures will build up over time for Government to spend more, to grant more, to subsidise more. It’s in the nature of every society and every society, especially as it gets older.”

It was in anticipation of this that the elected presidency system was put in place, said the minister. “It is a system that makes sure that subsidies are paid for and funded on the Budget now, one way or another, not left to future generations to pay.

“This is the way we must run the Government. There is no easy way out.”

In his speech, Mr Low also stated his party’s opposition to the deferment of the age at which Singaporeans can withdraw their CPF savings.

While Singaporeans may be living longer, they may not necessarily be healthy enough to continue working, he said.

And delaying the use of CPF monies means that they are deprived of a chance to decide if they want a lighter job with less income.

“If we do not allow our people to start drawing down on their retirement account at the age of 62, it will result in Singaporeans having to work until they are old or even until they are dead,” he said.

This met with a rejoinder from People’s Action Party MP Cynthia Phua (Aljunied GRC), who accused the Workers’ Party of playing to the gallery. “(They) refuse to face the reality and are not prepared even to take and to shoulder the responsibility.”

Meanwhile, Mr Chiam called for the Government to manage the annuities scheme itself rather than farming it out to a private insurance company. This way, it could “top up the annuity accounts of poor citizens itself and not wait for the government surpluses to do so”.

He urged that the CPF system be “made simple and more transparent so it can be easily understood by the workers”.