What Constitutes A Fair Return On CPF Funds

Source : The Straits Times, Sep 22, 2007

MEMBERS of Parliament who argued for higher guaranteed CPF returns have overlooked the basic finance theory of risk-return trade-off where guaranteed returns with lower risk must come with lower yield.

Those who argued that CPF returns be linked to returns achieved by government investment vehicles such as Temasek and GIC should consider whether CPF members are prepared to suffer negative returns should these investment vehicles fail to perform in certain years.

In considering what constitutes a fair CPF return, one needs to take into account the real return, which is the return adjusted for inflation, and the risk-free guarantee offered by the Government. No amount of upward adjustment of CPF returns would be satisfactory should the real return be reduced by steadily rising inflation, and thus the responsibility for macro price stability lies squarely with the Monetary Authority of Singapore (MAS).

The Ministry of Finance (MOF) took the bulk of liabilities from the CPF Board, obliging it under statutory requirements to buy special issues of long-term Singapore Government bonds and placing advance deposits with the Accountant-General, all through MAS as banker for the Government, with returns pegged at rates which the CPF Board promised its members.

To whichever government institution MOF allocates the pool of funds, including the liabilities it acquired from the CPF Board, presumably it would have to ensure (certainly for that portion of CPF funds) returns at least on par with what the CPF Board guarantees its members. Failing that, MOF would have to bear all risks, including political credibility, budgetary shortfalls and market volatility.

It is therefore reasonable to regularly subject the proposed CPF returns to market test, which is to entice private financial institutions to bid for the management of CPF funds by providing the equivalent guaranteed returns, measured in real terms.

The more relevant consideration would then be to constantly think of ways in which government investment vehicles could consistently enhance yields and improve corporate governance further.

Consistently good performance over time by Temasek and GIC would then allow the Government to provide more special transfers to Singaporeans who have lost the ability to compete or when the economy is hit by external shocks.

While a fair CPF return is important to meet the retirement needs of workers, the more fundamental approach must be for them to accumulate sufficient CPF savings through having decent-paying jobs and staying longer in employment, and to manage their CPF savings in balanced portfolio allocations.

Assoc Prof Tan Khee Giap