SUMMARY (in italics, by Yeo Toon Joo, Peter): Contrary to the Manpower Minister’s protestations in parliament over CPF’s poor rates of return to members and the unpopular proposed longevity insurance scheme, the Government, if it so inclines, can ensure a good monthly pay-out for Singaporeans who live beyond 85 – without making all Singaporeans contribute compulsorily to the scheme.
The Government should not spend the $1.2 billion one-off payout for bonuses tied to the later draw-down of the Minimum Sum. It should instead set aside that sum and grow it at 5 per cent.
By 2042, the year the 85 and above longevity insurance kicks in, that amount would have swelled to $6.6 billion – enabling a pay-out of $52 million a month for 15 years until age 100 for our aged Singaporeans.
The following article is by Leong Sze Hian.
I refer to the article “CPF reforms will help most to save enough for retirement. Changes mean even low-wage workers can meet Minimum Sum, plus buy a home: Ng Eng Hen” (Straits Times, 20 September).
It states that “The two changes that generated the most heat were the compulsory longevity insurance and the new CPF interest rate. PAP MPs Ong Kian Min and Sin Boon Ann were among those who questioned if the extra one percentage point to be paid on the first $60,000 in CPF accounts was indeed the best that the Government could do.”
I find the minister’s reply in Parliament – “In fact, no financial consultant was prepared to offer CPF members as good a deal” – somewhat short on detail.
‘There is no equivalent product in financial markets that offers such assured rates at no risk,’ he said.
Surely, comprehensive studies must have been done, of the pension schemes in the world and other options.
Why not make this public and share the details with Singaporeans?
What were the reasons for rejecting the Private Pensions Plan proposal floated a few years ago by the Ministry of Manpower?
Dr Ng also recounted a conversation he said he had with a fund manager who laughed when asked for a 4 per cent guaranteed rate of return. The fund manager, Dr Ng added, “countered with a 3.3 per cent rate instead.”
Since CPF members’ savings are for the long term of a few decades, why is there a need to ensure that the returns never fall below 2.5% in any year or month?
Isn’t the re-pegging of the SMRA rate a contradiction in that a guarantee of 4% now becomes a floor of 2.5% after 2 years, so why can’t the 2.5% become a lower floor or no floor at all, if in so doing, it enables Singaporeans to get higher returns on their CPF – isn’t this the very rationale for un-pegging the SMRA rate?
“GIC does not use CPF funds to invest”
In reply to a question by opposition MP Low Thia Khiang (Hougang) on whether the GIC uses funds from the CPF funds to invest, Dr Ng said: “The answer is no.”
Using a banking analogy, he explained,
“You put money in a bank and you agree that you put it there and you get 2 per cent. The bank publishes a report and says of all its earnings, it earned 8 per cent. You go to the bank and say, I want 8 per cent. It doesn’t work.”
He said that the Government bears the liabilities in the same way that the bank does.
“The Ministry of Finance has taken our liabilities. What the Ministry of Finance does with its money is (its) consideration. But… the CPF Board… promises a risk-free rate to (CPF) members. And that is how it works.”
The analogy used may not be very appropriate, because the bank’s customers and shareholders are two different groups of people, who in many ways are on different sides. In contrast, for CPF members and the (ultimate) shareholders of Temasek, they are the same, the citizens of Singapore. We are all on the same side.
If Temasek (or GIC) does not use CPF funds to invest, where do CPF funds go to, since the budget is in surplus for most years?
Also, unlike the bank analogy, Singaporeans are not asking for the entire 8 per cent – just some of it to enable more of us to retire with enough money.
Now that even PAP MPs are calling for some of Temasek and the Government Investment Corporation’s (GIC) returns to be shared with Singaporeans by way of higher CPF interest rates, let’s review some of the considerations, literature and debate in Parliament on this issue.
An alternative to LI
Instead of spending the $1.2 billion one-off payout for bonuses tied to the later draw-down of the Minimum Sum, which will only benefit those who are 50 to 57 years old now, with a one-time maximum $900 to $1,500 top-up, an alternative may be to grow this amount at 5 per cent until 2042, the first year that the age 85 longevity insurance will kick in. This amount will grow to $6.6 billion, which can pay out $52 million a month for 15 years until age 100.
This means that 173,000 Singaporeans can receive the $300 monthly life annuity.
As I estimate the number of Singaporeans who are age 49 to be about 40,000 plus, the number who will live to age 85 may be fewer than 20,000. Of this, the number of those who may be destitute, could be smaller.
Thus, setting aside the $1.2 billion now, could solve the longevity insurance problem for 10 years from 2042 to 2052, if not longer, because the yearly increasing number of those who turn 85 and older, and are destitute, will also die off gradually every year, with about half being still alive at age 92, according to the life expectancy statistics.
By 2052, our reserves (currently about $250 billion) would have grown to about $64 trillion, assuming its historical rate of return of 13.1 per cent (Temasek’s 18% + GIC’s 8.2% divided by 2) continues.
So, by 2052, if we use just 0.1 per cent of the reserves every year, the longevity insurance problem could be solved forever!
I refer to the article “Temasek geared for more challenging economic conditions: It aims to continue posting the solid annual returns it has been delivering” (Straits Times, August 4).
It states that,
“Temasek Holdings has delivered solid annual returns of over 18 per cent since it was set up 33 years ago and hopes to keep doing so despite the increasingly testing economic conditions, it said.”
The accompanying article “Drop in Shin’s valuation drags gain down” states that,
“The charge (Shin Corp’s valuation)” was a key factor in the Singapore investment company’s 29 per cent drop in profit, from $12.8 billion in the year before, to $9.1 billion for the year ended March 31″.
According to the above articles’ accompanying table/chart, Temasek owns either wholely or partially 22 of Singapore‘s largest Government-linked Companies (GLCs) and companies.
Some of these are essentially monopolies. For example, it owns 100% of MediaCorp, Singapore Technologies Telemedia, PSA Int’l, Mapletree Investments, PowerSeraya, etc. Its stake in SingTel, which I understand is Singapore‘s largest listed company by capitalisation, is 56%.
What was the value booked when entities such as PSA Int’l were transferred to Temasek? How were the valuations done? Who did the valuations?
The Business Times article “How Temasek can set itself apart” (August 4, 2007), states that,
“When a journalist noted that the US held up the Norwegian Pension Fund as a model, given its quarterly reporting with disclosure levels similar to that of a listed company, Dr Ng said Temasek was not a pension fund. …Still, it is worth looking at the Norwegian fund a little more closely.
This is the same fund whose asset manager sold its stake in ST Engineering in July 2005 as STE’s production of land mines violated Norwegian human rights conventions…The former Petroleum Fund was set up in 1990 to invest Norway’s surplus wealth arising from its oil resources. It cannot invest inside the country…Its quarterly reports are published in conjunction with a press conference, which is also webcast.
The reports show the benchmarks and targets required and its performance against the benchmarks. The fund discloses all its costs, including internal costs and fees paid to external managers and compares their performance.
Temasek may not yet be quite ready to follow the Norwegian model. Concerns over the lack of transparency of the sovereign wealth funds may not lead to any concrete backlash. But nationalistic pressures from other countries could constrain investors such as Temasek.
The investment company, with high standards of corporate governance, has spoken of the need to differentiate itself from other state-controlled funds that may have a different agenda. It may not be a bad idea to clearly set itself apart from other, more opaque funds by continuing over time to increase the level of disclosure.
It will thus remain a beacon for Asian sovereign wealth funds”.
The wisdom of crowds
In this connection, please see below – an extract of the article, The Wisdom of Crowds , as published on theonlinecitizen earlier:
The 18 per cent per annum return over the last 30 years, might to some extent, be due to the transfer of assets at what may appear to be generally perceived as somewhat less-than market valuation (using generally accepted valuation techniques for similar companies in the same industry).
Examples may be POSBank at $ 1.6 billion that was about 137 per cent more than its net tangible assets, in November 1988, and HDB Corp at $ 117 million in November 2004.
According to the book, “The Singapore Miracle: Myth and Reality”, by Rodney King,
“The net asset value of HDB Corp was $144.9 million and it had an issued paid-up capital of $142.6 million.
After liberalising the telecommunications industry in 2000, the Government paid Singapore‘s existing telecommunications operators $2 billion as compensation for the introduction of competition to the local market. Starhub was given $1.08 billion. It had just started operations and had yet to draw any revenue”.
The rate of return is partly dependent on the original costs of acquisition. This may, in a way, give an otherwise higher rate of return from the time of acquisition to divestment or current valuation.
In the Asia Times of April 13,:
“According to independent financial analysts who spoke with Asia Times Online, Singapore’s outsized surpluses are habitually hidden away off-budget, often through the use of accounting gimmicks that diverge from internationally accepted norms. They note that government-linked companies and investment corporations buy and sell among themselves at undisclosed transfer prices, obscuring their profit and loss profiles”.
The Key Performance Indicator (KPI) of returns may need to be broken down into Performance Indicators (PI), to enable the staff, managers and other stakeholders, to understand better how and why the KPI was derived, so as to know what to do and the lessons learned to avoid, in the continual quest to improve future performance.
For example, it may be helpful to know the components of the return that was attributed to realised capital gains, unrealised gains, income, perceived less-than market valuation differential, etc.
The second article states that :
“Instead of seeking ways to maximise the returns on their vast holdings of foreign exchange reserves, Asian and other surplus nations might be better advised to consider whether it is prudent to accumulate such reserves in the first place. And, now that they do hold large amounts, whether it might be better to start spending at least part of them on assets with a high economic return, such as better physical infrastructure and improved services such as education and health for their people, instead of chasing higher financial returns.”