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Deja vu for CPF private pension plans
[SINGAPORE] The issue of private pension plans for the Central Provident Fund (CPF) has resurfaced amid concern over an ageing population and insufficient savings. But there will be challenges in getting them off the ground.
Fund managers say they are keen to participate in private pension plans, but almost the same challenges that stymied the idea when it was debated intensely in 2003-2005 remain today.
These include investment and operational issues, as well as members' profile of low individual balances and an aversion to risk.
In the investment space, the challenge remains to persuade investors to move out of the CPF's guaranteed interest rates of 2.5 and 4 per cent, which are free of risk and costs. Operationally, there is still the question of whether the funds can gain critical mass if there is little in the way of fees to market them and compensate distributors.
For fund managers, the management of pension assets is a distinct opportunity.
Gopi Mirchandani, deputy chairman of the Investment Management Association of Singapore (Imas), said an in-depth study needs to be undertaken by all stakeholders, and Imas would welcome the opportunity to contribute.
"If one references the experience of pension systems in other jurisdictions, whether it is the US 401 (K) plans or Australia's superannuation schemes, we have noted that the growth of pension assets was driven largely by legislation (compelling contributions) and tax incentives."
She said it is possible to construct an investment portfolio of equities and bonds for which the objective is to beat average returns of 2.5-4 per cent annualised over the long term. The question of target returns, however, will need to be examined in the larger context of different pension models, such as defined benefit (DB) or defined contribution (DC). The CPF is a DC scheme, where members make contributions and are responsible for investment decisions.
Ms Mirchandani said: "There is a need to review the needs and abilities of present and future Singapore to determine which would be the best model for us. The issues which confronted us in 2004, when the private pension scheme was first mooted in a public consultation by the CPF Board, would need to be taken into consideration."
Wong Kok Hoi, founder and chief investment officer of APS Asset Management, believes that CPF interest rates - which are an implicit hurdle rate - are a non-issue for portfolio managers. "Pension funds should be invested for the long term - 10, 20 or 40 years - where the objective is to earn a return of 5-7 per cent above money market funds or bank deposits."
He added: "Equities and bonds will surely beat the CPF rates over the long term unless the world changes drastically. Asset classes with higher risk must give you higher return. Otherwise why would people want to buy equities or bonds?"
Deputy Prime Minister Tharman Shanmugaratnam said earlier this week that the government would explore the option of private pension plans for the CPF for those who are able to take higher risk. But he also warned that private pensions "will not be a walk in the park", as higher risk did not always translate into higher returns.
Eleanor Seet, president of Nikko Asset Management Asia, said: "The CPF has done a pretty good job with the guaranteed rates of 2.5 and 4 per cent. The reality is that, vis-a-vis other options, the rates are extremely attractive. That's why investors have found it quite a struggle to look at alternatives . . . From the fund management perspective, it is possible to do better, but that comes with higher risk. I think everyone understands that."
Data compiled by Morningstar shows that there are funds which handily beat the CPF rates. Aberdeen's Pacific Equity Fund, for example, generated annualised returns of 4.6 per cent over three years; 13.8 per cent over five years; and 13.5 per cent over 10 years. The maximum loss and volatility over the periods were in double digits, however.
As at March 2014, there was S$259.5 billion in total members' balances in the CPF. The Ordinary Account (OA) accounted for S$100.7 billion and another S$62.8 billion sat in the Special Account (SA).
In terms of participation in the CPF Investment Scheme, S$20.7 billion of OA funds were invested, and S$5.7 billion of SA funds.
Industry anticipation of the prospect of private pension plans for the CPF was intense in 2004. Such plans were mooted as a means to enhance returns and lower costs for CPF members.
Private pension plans were envisioned as balanced or mixed-asset portfolios which would be farmed out to the private sector to be managed on an institutional basis. The ideal scenario was that there would be no sales charge, and annual fees would be reduced to a fraction of the prevailing fees.
In 2007, the government announced that it would retain the CPF's "risk-free" structure as the majority of members did not have large balances and it would be "too risky for older members".
In 2004, estimates of the fund size needed for an expense ratio of 50-75 basis points ranged from S$200-300 million to as much as S$1 billion.