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[SINGAPORE] Raising the returns on the Central Provident Fund (CPF) may seem the most desirable and direct way to secure a decent retirement for the country's rapidly ageing population. But doing so is far from straightforward.
Prime Minister Lee Hsien Loong said last week that results of a review of the CPF system will be shared in August, during a parliamentary debate which saw at least eight Members of Parliament rise to urge changes to the CPF. Online, debates over the CPF also persist.
Even after setting aside tricky issues such as separating home ownership from the CPF - which would hit the property market, hiking employers' contribution rates further - which would add to high business costs, or forcing Singaporeans to save more, the demands for better CPF returns still require a sober assessment of risk-return trade-offs, pensions researchers and economists said.
CPF savings are currently invested in risk-free Special Singapore Government Securities (SSGS) that are not traded and pay a coupon rate equal to the CPF interest rates, which are pegged to market rates of risk-free assets. As interest rates have remained low, the CPF interest rates sit at the legislated minimum of 2.5 per cent on Ordinary Account (OA) savings and 4 per cent on Special Account (SA) savings.
Obtaining higher returns would mean venturing beyond the safety of SSGS, with all the attendant implications.
"The decision to invest the public, specifically the average citizen's, money into riskier assets, is a contentious one. Fact is, implicit acceptance of downside by average citizens for a statutory board's investment decision cannot and should not be assumed. So the default position is that the government will have to hunt for higher yields, while standing ready to absorb (losses)," said Mizuho Bank economist Vishnu Varathan.
Benedict Koh, Singapore Management University finance professor and director of the Centre for Silver Security, thinks the government should not offer artificially high, guaranteed returns which it cannot consistently earn from the financial market. "If they try to do so, they must take unusually high risk. If there are investment losses, they may need to balance the books by either raising taxes or draw down on reserves," he said.
There is also the issue of clarity - a formula pegged to riskier returns has to hedge against bad years, said Walter Theseira, who has served as a short-term consultant with the World Bank's Social Protection Team. Prof Theseira, also an assistant professor of economics at Nanyang Technological University, said: "The current formula for all its issues is well understood. In some countries, pension benefits are set and reviewed by politicians regularly. But this means that the value of benefits can fluctuate depending on politics - so it doesn't guarantee retirees a more stable income than a system where benefits are determined by a market-based formula, as in Singapore."
Going into riskier assets will weaken that very guarantee. "If you take on more risks, you can expect a higher return, but there is no guarantee of a higher return," said Joseph Cherian, director, Centre for Asset Management Research and Investments, NUS Business School.
Instead, he proposes that the government issue inflation-indexed bonds, which CPF funds can then be invested in.
This idea seemed to have been shelved last July, when the Monetary Authority of Singapore said that it would not issue such bonds, which are based on expected inflation. Investors would be worse off than if they had bought a plain vanilla bond, should inflation fall under expectations, MAS said. It also deemed the premiums - estimated at 10 cents a dollar for a three-year bond, in the current low interest rate environment - to be too high for investors.
Prof Cherian thinks otherwise. "There will come a time when the cost of bonds is cheaper." But he understands the government's reluctance. "Much of Singapore's inflation is imported, so if they cannot fully control the cost of goods, to deliver the yield they would have to find resources through taxation and reserves."
With headline inflation in recent years skewed upwards by housing and car prices, he believes that a more accurate gauge of the average Singaporean's cost of living is the MAS core inflation rate. That was 1.7 per cent last year - both the OA and SA's floor rates of 2 and 4 per cent were higher.
Mr Varathan, who also thinks inflation-linked bonds are worth considering, pointed out that if interest rates pick up in the coming years, CPF rates can be expected to rise - just as the high 6.5 per cent CPF interest rate of the 1970s and early 1980s was driven by higher global interest rates.
One way to raise returns but have members bear their own risks could be to further liberalise the CPF Investment Scheme. But history does not bode well for CPF members taking their savings into their own hands. Of those who invested OA funds via the CPF Investment Scheme between 2004 and 2013, 47 per cent incurred losses and 35 per cent could not beat the guaranteed OA interest rate of 2.5 per cent. Only 18 per cent reaped gains of more than the OA rate.
Prof Koh suggested that CPF offer more "default investment options" - inflation-indexed bonds, life cycle funds or other passive, low-cost, diversified portfolios - to members who lack the financial knowledge to take risks with their savings.
Bank of America Merrill Lynch economist Chua Hak Bin's suggestion, also to reap economies of scale, is for CPF to offer members the option to invest directly into a GIC or Temasek-managed fund, leveraging on the two sovereign wealth funds' experience and capabilities. But he thinks that should be restricted to CPF members with savings above a certain threshold, which may not achieve the aim of raising returns for those most in need of retirement security.