By Devadas Krishnadas, TODAY, 25 Jul 2014
One proposal is the option of taking higher risk in investing CPF monies in return for the prospect of higher returns. Ideally, this should be limited to CPF members who already have high confidence of meeting their retirement needs through meeting a certain minimum sum. This would ensure that they have the base of security before taking greater risks.
What is important is that CPF members who qualify and elect to take higher risks should be expected to indemnify the Government from protecting them against any losses or from making good their retirement adequacy if their total financial circumstances are significantly altered by future events, such as another global financial crisis. This is to ensure that well-to-do CPF members do not benefit from a privatised upside gains but also socialised downside protection.
WHY PRIVATISING CPF MAY NOT WORK
Another suggestion often touted in social media discussions is to privatise, in part or as a whole, the management of CPF in order to have full transparency. This would be a very radical option.
The CPF system is not only integrated into our social fabric but also our national fiscal management system, as CPF monies are invested in Special Singapore Government Securities or SSGS bonds that are issued and guaranteed by the Government. The proceeds from SSGS bonds are invested by the Government via the Monetary Authority of Singapore and the Government of Singapore Investment Corporation (GIC) to generate the required returns to cover the interest rates payments on CPF deposits.
Privatising CPF would reduce GIC’s inflow of fresh funds and affect its current operating model. GIC, being our sovereign wealth fund, can be relied on to keep the national interest as its highest priority. Private investment houses would no doubt be eager for the opportunity to manage the large pool of CPF capital, in view of the handsome management fees involved.
But unlike GIC, private investment managers’ focus would be serving their corporate and shareholder’s interests. GIC can afford to invest long term as Singapore is its sole client. Private investment firms would find it more difficult to do the same under the pressure to produce early results. Privatisation of CPF, therefore, entails higher risks than simple portfolio risks.
It has also been suggested that CPF funds can be inflation protected. This could be done by reconfiguring the SSGS as an inflation-linked bond. While this is easily enough done it would raise the performance bar on national investments. This could lead to riskier investment choices in an attempt to meet the higher hurdle.
Servicing a higher interest hurdle due to the need to deliver real returns over inflation is not a small ask. GIC could also be expected in the near future to contribute to more current expenditure by the Government to meet higher social spending needs. The dual strain on GIC could be a slow strangling of the goose laying the golden eggs.
Furthermore, it should be noted that Singapore’s healthy sovereign credit rating and fiscal confidence come from the certainty that its assets handily exceed its liabilities. As expenditures rise and the size of the government bond market grows to feed the needs of the economy we would still need asset growth to maintain this enviable state of accounts.
EVOLVING DEBATE
The public is likely to be confused even more by further tweaks to the system. There is also a chance that the main body of the public will be upset if there is any perception that only well-to-do CPF members have opportunities to maximise returns even if doing so comes with higher risks.
Clamouring from the middle and lower-middle to also join the chase for higher returns could compel a populist government to accede to their requests. In the event of general losses in the future and its erosive impact on retirement confidence, the contingent liability may have to borne by the government, which effectively means burdening future tax payers through higher taxes, lower expenditures on their needs or both.
The public needs to understand and the Government needs to be clear on the difference between retirement adequacy and retirement affluence. The former is a matter of concern in CPF reform while the latter is strictly a matter of individual career and wealth management. CPF members should not expect to have retirement outcomes all on the same final terms as that is a mix of what the CPF and they themselves do. Further tweaking also does not address the fundamental source of unhappiness of CPF members, which is the perception that the “goalposts” are arbitrarily being changed by Government.
The Government, in making changes to the Minimum Sum, does so in an attempt to ensure that members have certainty of retirement adequacy. However, CPF members also expect certainty and commitment from government about withdrawal terms.
The Government would be better off simplifying the CPF model by limiting its scope, moderating the permissible withdrawal for housing needs and making schemes more common rather than more specific to population segments. This would provide greater clarity, a better sense of equity and improve the prospect of providing for retirement adequacy for a larger percentage of Singaporeans.
The debate on the CPF is a challenging and evolving one but this is to be expected. Singapore is a changing society at several levels — not only demographically but socially and politically.
CPF reform is a moving target because Singapore itself is a moving target. Policy should not be aiming for perfection in the short term but for fairness and sustainability over the longer term. Acceptance of this by both public and Government is a pre-condition to a responsible debate on a matter as crucial and as structural as the CPF.
Devadas Krishnadas is the CEO of Future-Moves Group, an international strategic consultancy and executive education provider based in Singapore.
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