In the ST Forum letter appended below, Jacqualine Poh, an executive from the Ministry of Finance, says that the CPF funds are invested in government securities, of which the proceeds go to fund part of Temasek's and GIC's investment activities. Ms Poh calls this "complete de-linking."
Secondly, Ms Poh says that the government is not using CPF as a cheap source of funds because "the Government does not need more funds to invest. Even if it did, it could raise funds more cheaply by issuing treasury bills and government securities, instead of using CPF funds."
Thirdly, she says that "we cannot assume that GIC and Temasek will do as well in future. The past two decades have been an exceptional period for global financial markets. Looking ahead, we cannot rule out protracted market downturns, lasting several years. Most CPF members have small balances and will not welcome these risks. "
Fourthly, Ms Poh says that Temasek's & GIC's returns above the CPF interest rate is not 'earning a spread at the people's expense.' She claims that what the government earns above the CPF interest rate is used for the benefit of the people through the annual government budget.
Well, issuing bonds to the CPF is not 'complete de-linking.' The risk of government default, however small, still exists. CPF members' returns are intrinsically linked to the stability of the Singapore government.
Also, implicit in the current structure of the CPF is the assumption that Singaporeans want to invest their pension monies in government securities. In other words, the government has IMPOSED on Singaporeans that their CPF monies have to go towards purchasing the government securities. The CPF may not be a 'cheap source of funds,' but it is an IMPOSED source of funds. Singaporeans' CPF savings are wrested from them by the force of law into the hands of government and its investment bodies.
Ms Poh also assumes that everyone would automatically choose the fixed-rate interest on their CPF funds. And then she extrapolates that because the majority would choose this, therefore everyone else has to accept the same fate. Talk about the tyranny of the majority. Or maybe it's the tyranny of the handful in power.
Finally, again she assumes that Singaporeans want the spread on the returns to be given back to them through the annual budget, at the government's whim and fancy. Well guess what, Ms Poh, I want my pension returns to be the way I want it. Not the way you and your ministry deem right.
The CPF issue is simple. It's about who retains the power to manage the people's savings. And why should it be the government's by default? Who gives them the right to say what should and should not be done with our pension money?
If Singaporeans don't stand up for their rights to decide how their savings should be managed, then the government will take it from them with glee.
read more about this issue here.
GOVT INVESTMENT DE-LINKED FROM CPF FUNDS
IN 'CPF finances: Clarity needed to clear the cloud of confusion' (ST, Sept 20), Ms Chua Mui Hoong questioned whether the CPF provides a cheap source of funds for the Government's investments. Subsequent Forum letters also raised the matter of how the return on CPF funds is calculated, and what constitutes a fair return.
The interest members receive for their CPF money should reflect what they could earn by investing in the financial markets, in investments which have comparable risk and duration. All CPF balances are guaranteed by the Government and hence free of risk. Hence the Special, Medisave and Retirement Account (SMRA) interest rates will now be pegged to long-term government-bond yields. Furthermore, the first $60,000 of each person's CPF balances, to be held for the long term, will attract an extra 1 percentage point in interest. This means that they will always earn at least 3.5 per cent interest.
No commercial bank or fund manager offers more generous terms on such investments. Members seeking higher returns can take out their funds to invest through the CPF Investment Scheme (CPFIS). However, 83 per cent of CPF members who invested their OA savings in the CPFIS from 2002 to 2006 realised less than 2.5 per cent returns - the base rate of the OA. Half of all members who invested experienced negative returns, losing some part of their capital sum.
The CPF Board invests members' savings in special securities issued by the Government, which pay the CPF Board the same interest rates that its members receive. The Government pools the proceeds from issuing these securities with the rest of its funds, and invests them professionally for long-term returns. This is completely de-linked from the CPF Board and CPF members. Were this not so, CPF members would be exposed to the investment risks and could not receive guaranteed minimum interest rates.
Up to now, both GIC and Temasek Holdings have earned returns that exceeded CPF interest rates, on average over the years. But this does not mean that the Government is making use of the CPF as a 'cheap source of funds', or earning a 'spread at people's expense'.
First, the Government does not need more funds to invest. Even if it did, it could raise funds more cheaply by issuing treasury bills and government securities, instead of using CPF funds.
Second, Temasek and GIC achieve higher returns on average only by taking on more investment risks. Hence these returns are volatile - they can be low or even negative in some years. Furthermore, we cannot assume that GIC and Temasek will do as well in future. The past two decades have been an exceptional period for global financial markets. Looking ahead, we cannot rule out protracted market downturns, lasting several years. Most CPF members have small balances and will not welcome these risks. Neither will older members waiting to withdraw their retirement funds.
Third, Singaporeans benefit when GIC and Temasek investments do well. Every year, the Government draws part of these investment returns to fund the annual Budget. The revenue is spent on worthwhile investments and social needs, including subsidies for housing, education and health care. And from time to time, the Government distributes accumulated budget surpluses to citizens through CPF top-ups and other schemes.
The Government does not rule out the possibility of introducing private pension plans for those with balances above $60,000 and a higher capacity to take risk. However, it would be unwise for members with low balances to take excessive risks on their basic retirement savings.
The current arrangement thus enables all CPF members to earn fair and risk-free returns on their retirement savings, while benefiting from the good performance of GIC and Temasek through the annual Budget. This is the right way to help Singaporeans save for their old age, and enjoy peace of mind in their golden years.
DIRECTOR (SPECIAL DUTIES)
MINISTRY OF FINANCE
29 September 2007