Government-appointed CPF panel (Photo - ST)

Nation-building Straits Times reminds citizens what a good deal the CPF is for them

A Straits Times article on Sunday, entitled "Singaporeans don't realise what a good deal the CPF is" reported how members of the Central Provident Fund advisory panel - a panel that is formed to study ways to improve the CPF scheme - say how the scheme is attractive to foreigners despite reservations from many locals, people should not expect too much from the CPF system and why people still want to take money out from the scheme even though it is supposed to be so good.

The report quotes finance professor Benedict Koh, associate dean of the Singapore Management University Lee Kong Chian School of Business and panel member, saying that people from overseas have asked him if they can invest in CPF and that a 4 to 5 per cent interest rate guaranteed by a government with a triple-A credit rating* is simply unique.

The article pointed out that though interest of Ordinary Account savings follows the three-month average of major local banks' if that is higher but for July to September, the banks' interest rate was calculated from February to April and was only 0.24 per cent. Indicating that CPF offers a higher interest rate than banks. It went on to state that the interest rates on the Special, Medisave and Retirement accounts (SMRA) are pegged at 1 percentage point above the 12-month average yield of 10-year Singapore Government Securities, or 4 per cent, whichever is higher.

Prof Koh and panel chairman Tan Chorh Chuan are then quoted to say that there is a limit to what people can expect from the system, because it must be a sustainable one.

Professor Tan said, "For instance, it is not advisable to extend the extra 1 percentage point interest on the first $60,000 of balances to a higher limit because, "eventually, someone would have to pay for that...You cannot guarantee paying interest on a risk-free asset that is permanently higher than the market rates. For a country like ours with limited financial resources, it's not a prudent thing to do. I teach finance and my message in the first class is always 'There is no free lunch'. You cannot want high returns and not take risks, you will never find such a financial product."

Christopher Tan, chief executive of financial advisory Providend is quoted to say that by looking at it in parts, people see that they put their money in when they are young, and when they want to take it all out at 55 they are unable to, and at 65 they try again and can withdraw only a portion. In fact, it is similar to what people sign up for with conventional retirement plans offered by insurance companies, he says, where "you don't take the money out early, and when you reach the age of 55 or 60 if you don't take out a lump sum they pay it out as an annuity... So if people see that connection and they see this like a retirement plan, if you look at CPF like another provider and compare all the products between the providers right now, it's the best retirement plan you can find, really,"

Chris Kuan, a regular contributor on economic commentaries wrote on his Facebook commenting that the report is certainly a propaganda piece and expected from ST.

"The ST journo can't help herself but promote that often repeated piece of intellectual hogwash of comparing the CPF Ordinary Account rate of 2.5% to average bank deposit rates of 0.24%. The fact that the Ordinary Account (OA) can be used for housing purchase and other specific purposes does not make it equivalent to a bank deposit which imposed no conditions whatsoever. Do remember when you sell your property, the funds go back to the OA making the "withdrawal" much more like a "loan". Given that you are unable to use your CPF without conditions — save the Minimum Sum (MS) — until you are 55, your OA is more akin to a 20-year interest bearing asset than a bank deposit. So the comparison between the two rates to show CPF is a good deal, is .... well I leave you to use any word you deem appropriate for it.

As for the MS which goes into the Retirement Account (RA) and used for CPF LIFE, we are really talking about a 40-year interest rate bearing asset. One can argue that both the OA and SMRA rates are higher than actual and implied (i.e. extrapolated) government bond yields but do remember investments such as the OA which imposes conditions on limited withdrawals and the SMRA no withdrawal at all, are illiquid investments compared to government bonds. The illiquidity is a risk and an economic opportunity cost that require additional yields in comparison to liquid investments such as government bonds. So do not think just because the OA and SMRA rates are higher than government bond yields that they are a gimme.

The argument may be on firmer ground if it is couched in terms of relative returns. Given the collapse in global bond yields in the last 3-4 years, the CPF rates indeed have looked better by being left unchanged. But remember they were shitty for a long time on a comparative basis until global bonds yields collapsed to the extent we have seen. Which makes me arrive at a horrible thought ... this is a ready made excuse for the government to reduce the OA and SMRA rates."

*Singapore's AAA rating by its own virtue is questionable in my opinion, because one key factor of its rating is it does not have to borrow from external creditors for investments or development projects as it can raise the funds required via the CPF investment scheme.

So in a way, it is the same system that makes the guarantor credible as a debtor. Not to say that it is wrong, but people should get this in the mind about how public debt helps Singapore to maintain its rating and the terms and conditions of the CPF scheme would affect its public debt standing.