By Leong Sze Hian and Yeo Toon Joo
The Government has claimed it costs more to obtain the people’s CPF funds than to secure funds from the market, e.g. by issuing government bonds. In a TODAY report, it was said that:
According to the Ministry of Finance, “Taken over the last 30 years, the average return on a balanced portfolio of global bonds and equities (5.9 per cent in Singapore dollars) was lower than what the new SMRA (Special, Medisave and Retirement Accounts) formula would have yielded (6.5 per cent)” (Today, Oct 15).
So, how did the SA return for the last 30 years jump from 4.6% (according to the 2nd Minister for Finance on Sep 29) to 6.5% (according to the Ministry of Finance on Oct 15) under the new SMRA formula? Was the compounded annual rate of return on 10-year Singapore Government Bonds 5.5% over the last 30 years?
If this is the case, does it mean the Government, now by its own admission, has been short-changing Singaporeans by 1.9% (6.5 minus 4.6) on the SMRA and 3.4% (6.5 minus 3.1) on the OA, over the last 30 years.
If the Government had to borrow at 5.5%, then isn’t CPF at 4.6 (SA) and 3.1 (OA), a very cheap source of funds?
I refer to the article “CPF changes must be fair to all, ministers say” (Business Times, Sep 24).
The British pensions expert was reported to have said there were only three ways to solve the problem of living longer and providing for old age. I believe there is a fourth way: enhance their returns.
According to the World Bank’s web site, “Since the early 1990s, the World Bank has been providing policy advice to its member countries on the design of pension systems. The advice emphasizes flexibility of system design within a broad five-pillar conceptual framework, customized for individual country conditions and placing substantial importance on the key principles of affordability and sustainability.
“The World Bank Treasury provides a highly customized capacity-building technical assistance program to pension funds in our member countries who need to build investment management capacity and/or strengthen their investment management operations. The program aims to benefit clients by transferring the experience, skills and knowledge accumulated by Treasury in managing the World Bank Group’s pension assets over the past 50 years. The program helps pension funds to upgrade their processes, systems, and general investment management framework on a sustainable basis over a period of several years.” (World Bank)
According to the World Bank Pension Fund annual report 2005, its return for the 10-year period, from 1996 to 2005, was 8.1 per cent per annum.
Maybe, we should ask others for advice on our pension plan
I, therefore, suggest that we consider utilising the expertise of the World Bank, as we are now contemplating major changes to our CPF system.
The Canadian Pension Plan had an average annual return of 8.4 per cent for the last 8 years, and since the inception of the Norwegian Government Pension Fund – Global in 1996, it has had an average real annual return of 4.6 per cent for the years 1997 to 2006.
Closer to home, Malaysia‘s Employees Provident Fund (EPF) has been paying dividend rates which increased gradually from 4 per cent in 1960-1962 to 8.5 per cent in 1983-1987, then declined gradually from 8 per cent in 1980-1982 to 4.25 per cent in 2002, and finally increased gradually from 4.5 per cent in 2003 to 5.15 per cent in 2006.
Singaporeans least optimistic about future
According to Dr Vincent Chia Wei Meng, the absolute difference in life expectancy at birth increased to 4.5 years”, for the least-deprived group compared to the most-deprived group (“The numbers tell the story”, Today,Oct 4), citing Gopal K Singh and Mohammad Siahpush’s paper, “Widening Socioeconomic Inequalities in US Life Expectancy, 1980–2000”, in the International Journal of Epidemiology.
He also cited the “Old-Old in Singapore”, a paper published by Ang Seow Long and Edmond Lee from the Singapore Department of Statistics. Their study found that only 11 per cent of those age 85 and above live in HDB one- or two-room flats.
Therefore, I estimate only about 2,000 Singaporeans will reach 85 years and be destitute in 2042, first year of the proposed Longevity Insurance scheme.
So, in view of all this, is it any wonder that the AXA study in August 2007 found that Singaporeans were the least optimistic over their future, among 8 countries in Asia? (“S’poreans least optimistic over their future: Survey”, Straits Times, Oct 5)