Photo from HEC Paris

Singapore’s “funnelling of CPF funds”, no different from any first world country

By Chris Kuan

Call me pedantic but just like to add a few points and suggestions to “Lack of retirement adequacy draws questions to Govt’s funnelling of CPF into Temasek” post by Roy Ngerng in The Independent Singapore.

By the way, contrary to what some are suggesting – we are not squabbling. Read his post properly.

The “funnelling of CPF funds” thingy inferred by Roy is no different from any first world country in the way pension funds invests in government bonds and then how the proceeds move around in the government.

Typically public and private pension funds are required to hold a certain percentage of their assets in government bonds either because it is a regulatory requirement or because it is the prevailing asset allocation strategy. On a regular basis, the government will issue government bonds and a variety of investors buy them including pension funds. The debt proceeds from the issuance of the bonds are then for the government to use at its sole discretion. In most cases, the proceeds are used to cover the shortfall of revenues over expenditures, i.e. used for spending.

However nobody in the first world countries will say that the monies spent are “pension” monies in the same way we should not be calling the monies the Singapore government has given to Temasek or for GIC to manage are “CPF monies”.

So this “funnelling” is not exceptional. The exception is the design of the Special Singapore Government Securities (SSGS) issued to Central Provident Fund (CPF) and maybe the coercive nature of the relationship between CPF and the government but even the latter may not be so exceptional if we think CPF as more akin to a first world national social insurance fund than a pension fund.

Much of Roy’s “philosophical” issues with CPF can quite easily be resolved by giving CPF members the following choice:

  1. Continue to receive the 2.5% Ordinary Account (OA) and 4% Special, Medical and Retirement Accounts (SMRA) rates plus the usual extra 1% on first $60,000
  2. Peg your OA and SMRA to the rate of return generated on the asset pool managed by GIC. This gives CPF members a direct stake in that asset pool.
  3. Combination of option 1 and 2.

There are trade-offs though.

Option 1 is government risk – safe and therefore low returns. Option 2 is market risk, no government guarantee – higher risk and therefore higher returns. Option 2 becomes especially attractive if changes are accompanied by my previous suggestion of a means tested inflation adjusted basic state pension of $600 a month from age 65 onwards.

The trouble is the long term risk reward for investment is skewed towards risk – that is to say accept risks to earn a higher return is preferred. This relationship is weak in Singapore because of low bond yields and poor equities return which is the reason why I suggest pegging the rates to GIC who invests globally. The government is aware that paying the current CPF rates and then handling the funds over to GIC to invest globally, enables it to earn the “risk premium”, i.e. the reward for taking risk. In fact in an interview, GIC’s chief investment officer euphemistically call this process as “harvesting the risk premium”.

Therefore by paying the current CPF rates and “harvesting the risk premium” by investing globally, the government increases the amount of reserves, i.e. after deduction under the Net Investment Return Contribution, retained earnings (more than 50% of total earnings) becomes reserves.

Now you should understand why the current arrangement suits the government just fine. It is one of the ways in feeding that vociferous monster called the reserves.