Thursday, 15 September 2016

CPF Investment Scheme to be reviewed: Tharman

Tharman says current scheme has not delivered the outcomes expected of it
By Yasmine Yahya, Assistant Business Editor, The Straits Times, 14 Sep 2016

The Central Provident Fund Investment Scheme (CPFIS) is not "fit for purpose" and will be reviewed, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.

He said the scheme, which was set up to offer CPF members a way to earn higher returns on their savings, has not delivered.

He noted that, over the past 10 years, more than 80 per cent of members who invested via the CPFIS would have been better off leaving their money in the Ordinary Account, which earns a guaranteed 2.5 per cent each year. About 45 per cent of those using the CPFIS even made losses over the same period.

The CPF Advisory Panel said last month that the CPFIS needed a review.

Mr Tharman, who was speaking at the Economic Society of Singapore's annual dinner, said the Ministry of Manpower will undertake this review in order to ensure that the CPF system provides a convenient option for those with more than the basic CPF savings levels to earn higher returns.

We have got to enable people starting from a younger age to take some controlled risk using their CPF money in order to earn higher expected returns... than what the CPF account would offer. The traditional way we try to provide it is through the CPFIS system. It hasn't worked out," he said.

One reason for this is that members investing via the CPFIS have to pay fees to investment managers, which then erode their returns.

Another reason, Mr Tharman said, is that the average investor can undermine his own interest, buying when the market is euphoric and selling when prices are down.

The CPFIS will have to be managed in a way that will keep fees low, he said. There also has to be some minimum holding period for investments in a fund, and incentives to avoid switching in and out of funds. "We have to invest and stay locked in for long enough, because that's the only way to earn superior returns over time," he added.

OCBC economist Selena Ling said the review is timely as the CPFIS' performance has been "less than encouraging and volatile".

CIMB Private Bank economist Song Seng Wun noted that only a minority of CPF members use the CPFIS, and suggested it include overseas investments in future.

Mr Tharman outlined three other priorities to ensure the CPF system remains sustainable into the future.

One is to help the elderly who may have assets but not enough cash, to unlock the value of their homes. One way is through the Lease Buyback Scheme, which lets flat owners sell part of their lease back to the Housing Board for retirement income. This has seen increasing take-up but "there is still some way to go", he noted.

"We've got to make people comfortable with the idea of taking some value out of their home. It's still their home, but take some value out of it because it can improve your quality of life in retirement."

Another priority is to better integrate elderly workers into society. Singapore is still an ageist society, he noted, and the culture must change to allow the elderly to continue contributing economically.

Finally, another key priority is sound governance, Mr Tharman said. The CPF system and the government Budget both depend on it.

"What we have to do is to protect Singapore's long-term interest and protect the interest of the future generations of Singaporeans, through a robust system of checks and balances."

'Sound governance' key to social security
Tharman says proposals on elected presidency improve the system of checks and balances
By Charissa Yong, The Straits Times, 14 Sep 2016

Singapore's ability to provide a robust social security system rests on its "sound governance", and this has to be guaranteed for the long term, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.

This is why the proposed changes to the elected presidency are important, as these proposals improve Singapore's system of institutional checks and balances that will keep good governance going, he said.

Mr Tharman made this point at the end of a 40-minute speech which charted the Government's strategy to make sure that Singaporeans have enough money to live on well into retirement.

He laid out the strategy's three key thrusts: help seniors get some income from the homes that they own; let people earn higher returns on their Central Provident Fund savings; and enable people to work for as long as they would like to.

But all this is possible only with sound governance, he told 500 economists and guests at the annual dinner of the Economic Society of Singapore.

Singaporeans are guaranteed returns on their CPF savings because these are backed by a government with a triple-A rating, he said.

Singapore also gets a significant part of its revenue - about 18 per cent this fiscal year - from the income it gets from investing the reserves under the Net Investment Returns Contribution framework.

The Government, the Council of Presidential Advisers (CPA), the elected president and Parliament each play a critical role in sustaining this system, added Mr Tharman.

He listed three ways the proposed changes would improve how key actors play their part to check and balance one another.

One, the president has to be well qualified to have the judgment to assess the Government's proposals on how it spends its Budget.

The president also needs to be able to assess all other proposals related to the use of Singapore's past reserves, and to approve key appointments in the civil service.

Among the changes proposed by a Constitutional Commission was tightening the criteria candidates need to meet to run for president.

Two, the CPA provides a deep reservoir of expertise for the president to tap on and can serve as a sounding board for him or her.

The commission also recommended that the CPA's size and structure be strengthened.

Three, Parliament might also get more power vis-a-vis the president.

The commission recommended that Parliament be given the power to override the president in specific situations to break an impasse.

For instance, if the CPA agrees with the Government's proposal but the president vetoes it, Parliament can seek to override the president and break the impasse.

The Government will respond to the proposals by the commission in a White Paper tomorrow.

At the end of the day, said Mr Tharman, these changes must seek to achieve "a system of checks and balances which gives the Government enough reason to pause before making proposals that risk not passing muster with the CPA and the President".

"But at the same time, it must be a system that allows the business of good government to continue. That is the balance we have to find."

CPFIS review long overdue, say fund managers
By Yasmine Yahya, Assistant Business Editor and Wong Wei Han, The Straits Times, 14 Sep 2016

Industry players welcomed the news that the Government will review the Central Provident Fund Investment Scheme (CPFIS).

Deputy Prime Minister Tharman Shanmugaratnam told the Economic Society of Singapore at its annual dinner yesterday that the Ministry of Manpower will conduct this review, which the CPF Advisory Panel recommended last month.

Fund managers who spoke to The Straits Times yesterday noted that a review is long overdue, especially given the fact that many of the investment funds offered via the CPFIS have failed to give investors higher returns than the 2.5 per cent guaranteed by the CPF Ordinary Account, they noted.

Also, the number of investment funds being offered via the CPFIS has dwindled over the years, narrowing the options for CPF members.

"If you look at the scheme, the CPFIS has been streamlined over the years to an extent where the number of eligible investment options for the scheme has shrunk," said senior portfolio manager Daryl Liew of wealth manager Reyl Singapore.

"The number of bond funds available, for instance, is quite small compared with 10 years ago. What this means is that there are fewer options, making it a less compelling platform for investors."

Lexico Capital partner Jack Wang agreed, adding that another reason why the current CPFIS is not ideal is the lack of financial literacy among average investors.

"As a result, they often make wrong decisions based on nothing more than the sales pitch. It's not easy for them to ensure a consistently high return, or at least a return that's higher than what they're already getting from the CPF Special Account yield," said Mr Wang.

Mr Tharman had also said in his speech that one issue has hobbled the CPFIS - the fact that it allows investors to put in or withdraw their funds from the investments as and when they like.

This leads them to fall prey to behavioural biases common among investors - buying into exuberant markets when prices are high and selling amid a market panic when prices fall.

Another contributing factor as to why the CPFIS has failed to provide investors with higher returns is that investors have to pay fees to investment managers, which eats into whatever returns they may have earned.

Timely to invest in CPFIS review
By Yasmine Yahya, Assistant Business Editor, The Straits Times, 16 Sep 2016

The Government's move to review the Central Provident Fund Investment Scheme (CPFIS) has been hailed by investment managers and economists as a timely move - and for good reason.

Deputy Prime Minister Tharman Shanmugaratnam's comments that the CPFIS "hasn't worked out" and "is not fit for purpose" give a good idea of how the scheme has failed to live up to its intended purpose.

The CPFIS was set up to give CPF members with more than the basic CPF level of savings an option to take some risk to earn higher returns than what is guaranteed. But in a speech on Tuesday at the Economic Society of Singapore's annual dinner, Mr Tharman noted that the scheme has not quite borne fruit. Over the past 10 years, he said, more than 80 per cent of members who invested via the CPFIS would have been better off leaving their money in the Ordinary Account, which earns a guaranteed 2.5 per cent each year. About 45 per cent of those using the CPFIS even made losses over the same period.

One reason for this is that investors who buy into investment funds via the CPFIS have to pay fees to investment managers, which then eats into whatever returns they may have earned. Another is the fact that most investors are prone to behavioural biases that work against their interest.

In revamping the CPFIS, the Government has its work cut out for it. It has to find a way to offer investments that would be conservative enough for the average investor while still delivering reasonably high returns. It will also have to come up with a structure that ensures investors will not have to pay high fees that end up eroding those returns.

And it will have to create a mechanism to prevent investors from giving in to their impulses.

Whatever the Government comes up with, this review is especially important as savers are now earning ultra-low interest rates on their deposit accounts, and economists forecast that low interest rates will stay low for several more years.

* CPFIS review on, details in next 12 months
Other ways to grow interest being worked on: Lim Swee Say
By Charissa Yong, The Sunday Times, 2 Oct 2016

The Manpower Ministry has started a review of the Central Provident Fund Investment Scheme (CPFIS), and people can expect something in the next 12 months, Manpower Minister Lim Swee Say said yesterday.

The CPFIS is one of three options CPF members will have to grow the interest on their savings, apart from leaving them alone to earn risk-free interest, or opting for the new Lifetime Retirement Investment Scheme (LRIS), an in-between option with medium risk and returns.

The LRIS, proposed in August by a panel reviewing the CPF, will take a longer time to roll out, but the process has begun, he said.

"We're moving towards putting in place all three options for members to grow their interest - either through the CPF risk-free interest rate, revamped CPFIS or LRIS," Mr Lim told reporters after a dialogue with grassroots leaders.

Plans to review the CPFIS were announced last month by Deputy Prime Minister Tharman Shanmugaratnam, who noted that most members would have been better off leaving their funds in their Ordinary Account, with a guaranteed interest rate of 2.5 per cent each year.

The CPF Board is educating people about the changes at events like yesterday's dialogue. Organised by the People's Association, it is part of a series for grassroots leaders to learn about policies so they can better explain them to residents.

Last month, the panel reviewing the CPF also proposed an escalating payout option for CPF Life, to help those worried about inflation.

Mr Lim said the feedback was that "people find the CPF system is getting harder and harder to understand". As a result, when deciding on which CPF Life plan to adopt, some people were confused.

"Like Pokemon, the CPF system is evolving over the years... because the needs of CPF members keep changing," he said. But the core purpose of the CPF has not changed: CPF savings are meant for basic retirement, housing and healthcare needs - not for financial emergencies, and definitely not for luxuries.

This is why the scheme does not allow people to withdraw their money as and when they want.

Neither does the CPF allow people to postpone getting a monthly allowance until say, age 80, so they can take advantage of the higher interest rates offered to save more money for the finer things in life.

"The scheme addresses very basic retirement. So if everybody wants to eat shark's fin every day, that's not of concern to the CPF. We worry about the masses," he added.

For now, the main misconceptions stem from people misunderstanding what the savings are for, Marine Parade grassroots leader Nicholas Cheong, 53, told reporters.

"The main grouse is, 'It is my money; why can't I get to decide how I want to use it? If an emergency comes along, why can't I use it for that emergency? After all, it's my money'," said Mr Cheong of the feedback he has received.

Addressing this concern at the dialogue, Mr Lim said: "The CPF was not set up to take care of financial emergencies. That's why we will not modify the CPF system to allow quick withdrawals to overcome a crisis, and then later top up again."

He also explained the different payout levels for the CPF Life annuity scheme, which pays out monthly lifetime allowances for members.

These options were kept as simple as possible while being tailored to different needs, he said, likening them to "laksa, chicken rice and nasi lemak". "I cannot say which is better for you, because it depends on what you're looking for," he added.

"We don't know how long each one of us will live... The purpose of the CPF Life is for us to pool our risk... At the end of the day, you buy insurance because you have no idea (what the future is)," Mr Lim said.

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