MPs offer ideas to improve CPF

Singapore's and our CPF system - basically a mandatory national retirement savings scheme for citizens/PRs linked directly to their earned wages, and tweaked to cover and partially pay for their home purchases and bigger-item medical expenses, including through purchasing optional medical/hospitalisation insurances - basically locks up a big chunk of our life savings for at least 35 years until age 55, not counting the $155k (current limit) Minimum Sum which will only be paid out from age 65 in monthly payments under a life annuity plan.

Quite clearly, the current rate of return on CPF members' Ordinary Account balances based on the CPF interest rate pegged at the legislated minimum of 2.50% p.a. is too low for such a super-long lifetime savings-cum-investment horizon and arrangement, bearing in mind that the 2.50% p.a. return will be mostly eaten up by inflation over time. So, in effect, it is fair to say that there is hardly any real return on our CPF savings - instead, likely we have to suffer a loss in terms of real purchasing power when we can finally spend most of our CPF money saved after age 55 - based on the present way CPF deploys their members' savings and pays interests on them.

I think a better and fairer way is to peg the rate of return to the average of 10-, 20-, or 30-year SGS coupon rates, plus the yearly increase in Singapore's CPI. In such a formula, we will have incorporated a fair medium-to-long term rate of return on a risk-free SGD debt instrument, and a fair adjustment to account for current/recurrent inflation in Singapore.

Once again. You want equity like returns, just buy STI ETF. 100% of investible limit.

(01-06-2014, 08:49 AM)HitandRun Wrote:

(31-05-2014, 06:50 PM)Behappyalways Wrote: Why is CPF lending out at a lower interest if someone is borrowing at a higher interest rate?

http://www.temasek.com.sg/investorrelati...masekbonds

I think the reference to CPF is a red herring. E.g. would you charge the same interest rate to Li Kashing and his son, Richard Li? AFAIK, Temasek is not guaranteed by the Govt, it is just a company owned by the Govt with a lot of assets. On the other hand, the SSGS (as owned by CPF) are guaranteed by the Govt.

Nevertheless, I believe that the real point that folks like "Behappyalways" are trying to drive across is why the Govt cannot provide with a higher return on CPF funds? The answer is simple, the return on investments each year is a fixed number. The only thing that Govt can try to vary is the distribution between CPF holders, annual fiscal Budget and savings for a rainy day, etc. The more return CPF holders get, the less the Govt gets. So which "management" or government would want to crimp its own budget voluntarily?

Let me try to understand this.

CPF is governed by the CPF Act which stipulates the minimum interest rate payable to members, that is 2.5%.

That being the case, Ministry of Finance issues bonds ( SSGS-Special S'pore Gov securities) at a matching rate. Neat & tidy.
There is a added condition under the Reserve Funds that such monies cannot be allocated for the functioning of Government such as road works, salaries etc.

Instead it must be "invested".

Having bought ( invested) all SSGS, payable at a coupon rate of 2.5%... that is where the money is parked. What MoF does with the money now, is to me, unspecified.

I suppose it is all a matter of bookeping from here on. The money could be lent out to various agencies such as GIC or Temasek or HDB. The MoF is the gatekeeper of sorts?

(01-06-2014, 12:10 PM)Porkbelly Wrote: I suppose it is all a matter of bookkeeping from here on. The money could be lent out to various agencies such as GIC or Temasek or HDB. The MoF is the gatekeeper of sorts?

At least that is what I think is happening. 3 points to note are (i)Funds given to GIC and Temasek should be considered invested as capital rather than loaned to them (ii)lending to HDB might be considered as expenditure and (iii)according to Govt's statement this week, CPF funds are specifically not allowed to fund expenditure by the Govt.

to me as a layman & living under the care of the ruling party & government, I just wanna able to retire as a decent human being, but it seems like many are struggling under current environment & policies & 'booking'.

To a layman, the money of in cpf is simply not invested smartly. With such long lock-in period, 2.5% is simply too little. I bet many of u have invested for yourself or ur family members with much better returns. The demand on a higher return is not unreasonable, given the amount we paid to first class funds managers who prob is paid millions.

(01-06-2014, 11:56 AM)tanjm Wrote: Once again. You want equity like returns, just buy STI ETF. 100% of investible limit.

The problem is :- most people want to have the cakes and eat them too.

They want
1) Higher Return
2) No risk
3) No loss in capital

What is the repercussion to the ruling party if the return is negative in the year of election?
There will be lots of heart pains. Imagine you have 100k at the beginning of the year and the return is -5%. Your account is left with 95k. Most people will be furious!
And Most likely, the ruling party will be voted out. The next party will take over and pray that the return will be positive in the next election year.

Can the return be negative even with million dollar fund managers? You can ask the hedge fund managers here. If they can guarantee a minimum of 2.5% after fee annually(not a projected return over 10 years hor), I would be glad to put some money in.

Actually, there is NO NEED to give a higher return to EVERY CPF member. For a more equitable society, those who have lower income should have a higher return for their CPF. I am quite alright if the lower income Singaporeans get a higher return or topup yearly in their special accounts. It will help them to build up their retirement funds.

For those rich folks, 2.5% or 3.5% do not matter much at all.

Just putting down my irks with the current CPF scheme, they may have already been talked about in previous posts, so I am just saying my thoughts aloud. Below are my personal views only

1) Returns are not sufficient.

Basically MOF has spoken out that CPF proceeds are invested in SGSS and subsequently channeled to GIC to manage, given that they are not allowed for govt spending. If so, why not simply proceed to put it straight into GIC's management; bypassing the need to put it in SGSS? It is worth noting GIC has produced 6.5% returns over the past 20 years, I believe this figure is good enough to smooth out volatility in returns from good and bad years.

Perhaps MA and SA returns can be pegged close to GIC 20 yr returns, while OA's rate are increased from 2.5% to 3.0%. OA rates should not be pegged to GIC's return as they will affect the housing loan rates which will make borrowing for housing difficult.

2) Lack of investment products available as alternatives for SA and OA.

Many of these accounts/ unit trusts are terrible in performance where they are unable to match mkt averages in my view. My recommendation is to introduce more ETFs into the scheme. Vanguard is a perfect example where they have ETFs to not just Singapore but global exposure and are of one of the lowest fees (this is their moat). Alternatively, is to ask GIC to open a fund which can be invested by members. It will be nice to ask aggregate value fund to participate in the CPF-IS scheme, their fee structure is almost perfect, just that perhaps they have to lower their 250k threshold, perhaps make it 50k for CPF board members?

SA account only allows bond funds. I will like to recommend for account members to be allowed the option of purchasing ETFs. This deliver better market returns, with compounding helps us to reach the min sum and medisave min sum at a quicker rate. The SA should not be allowed for bond funds only.

Lastly in the current CPF system, it is unlikely we will be able to withdraw most of our SA/MA proceeds at 55. The govt has to take the perspective that the SA/MA will be lock in from the age of 25 to the time of death. Since we are unable to withdraw most of the fund, the govt should consider to manage it in the view of a portfoilo of VC/equities/bonds (similar to GIC), instead of the myopic view of bond like products only. This is because the former portfolio outperforms bond like products. Thus, my strategy will result in SA/MA being able to fund the min sum by itself enabling OA to still be used for housing purchases/installments.

Lets use an example here, we have a 25 year old grad who enters and is employed throughout his life till 55. Lets say he is able to put in 5k each yr into his SA and MA account. Assuming a 5% returns (CPF SGSS rates), at 55, he will have 348k. but at 6.5% returns (GIC returns), it is 459k. This means putting funds into GIC like funds will enable an individual to use his CPF MA/SA amount to sufficiently fund his min sum (155k) and medisave min sum (40K) figures for retirement as of 2014 figures.

Note: If the govt decides to make CPF's return close to GIC's returns, then point 2 can be considered to be scrapped.

Note 2: For an individual to be able to contribute 5k into his MA/SA yearly, he is only needed to earn 3.4K a month. It is worth noting my calculations excluded the very high possibility of getting AWC and performance bonus. It also excludes yearly wage inflation, pay hikes and promotions. Therefore a 5k annual contribution to CPF SA/MA is highly probable if one is employed.

to add on, perhaps cpf members can buy the shares of PSA and Changi Airport through an IPO or something..just like those years of Singtel IPO. let the citizens share the fruits of nation's success

Hi CY09,

Actually, I have invested my CPF OA funds under CPF-IS scheme into Lion Global's Infinity US 500 and Infinity European stock index funds. These funds feeds into Vanguard ETFs. I am still holding onto these funds but they are no longer available under CPF-IS scheme. The problem with these funds is that nobody bothers to market them, resulting them having low fund size which defeats the purpose for an index fund (which is low cost) since expense ratio will be high and returns will be lower. I don't think CPF Board will allow one to invest directly into Vanguard ETFs as they are not listed on SGX.

For ETFs, currently those available under CPF-IS scheme include STI ETF, S'pore bond ETF and a gold ETF. For unit trusts, I do agree that their performance are mixed but with careful selection, one will still be able to beat the CPF-OA rate of 2.5%pa. Some of the better funds include those managed by Aberdeen, Schroder S'pore Trust etc.

For CPF-SA, besides bond funds, one can invest in balanced funds. Some balanced funds do have long track record and can beat 4%pa rate. But it is a tough ask as one have to take a higher risk of underperformance in some years. Some of the balanced funds with good track record and can possibly beat CPF-SA rate include First State Bridge, FTIF Templeton Global Balanced etc.