Free CPF Board To Take Risks

Source : TODAY, Wednesday, October 10, 2007

Invest members’ funds for better returns

Letter from TAN KENG TAT


















MANPOWER Minister Ng Eng Hen is right in that we should not malign the Central Provident Fund (CPF) as it has done a sterling job giving generations of members affordable housing and healthcare since its inception.

But, paradoxically, what is roiling members in the current CPF debate is that, compared to the stellar returns of 18 per cent and 9.5 per cent achieved by Government’s investment vehicles such as Temasek Holdings and the Government of Singapore Investment Corporation (GIC), their CPF return is woefully low. They are also not enamoured of the proposed compulsory annuity plan.

Last year, the CPF paid 2.5 per cent on the Ordinary Account when inflation was running at 1 per cent. Going by the investors’ rule of 72, with a real return of only 1.5 per cent, it will take as long as 48 years for their savings to double!

Even if the Government increases the interest on the first $60,000 in the combined account to 3.5 per cent, it will not make a significant difference, as the forecast inflation rate is 1.5 per cent at the upper end.

This is the conundrum that members face: Low investment yields may seal their financial fate when life expectancy rises.

The Government’s reply is that the CPF rate is low because it is risk-free and guaranteed by the Government.

But critics can argue that it makes no economic sense to shackle the CPF Board to a rigid, risk-free investment strategy and, at the same time, wax lyrical over the performances of Temasek and GIC, which are not barred from taking measured investment risks with Singapore’s foreign reserves.

The California Public Employees’ Retirement System manages about US$246 billion ($362 billion) for 1.5 million members and it has chalked up a respectable average return of 15.9 per cent a year in the past four years.

Even China’s nascent US$53.3-billion Social Security Fund has announced a profit of 15.2 per cent for the first half of this year.

And for the financial year ending March 31 this year, Singapore’s central bank’s net profits more than tripled to $3.846 billion, due to higher interest income and investment gains.

The CPF should have a free hand to exercise its fiduciary duties to diversify and grow into a world-class, multi-billiondollar sovereign-wealth fund that can also invest directly in Temasek or in GIC to earn a market-competitive yield and create wealth for its members when they retire.