Thursday, September 20, 2007

CPF Dilemma

CPF returns vs GIC/Temasek returns

I would think this is the hottest topic now. For me, I'm kinda torn between wanting more returns, and the stability of the returns in the long run.

GIC has a 8-9% returns, and Temasek 18% returns over a long period of time. The keyword is long period of time. Therefore, it is highly possible that we can have few years of negative growth, but few years of super high growth, therefore resulting in a 9-18% returns. What will happen at the period where the investment is negative? Where will the payout come from if CPF is holding such an investment portfolio? Answer is from the years where you make money. Therefore, it is not possible to give a 8% guaranteed returns per annum, which payout every month. It's simply not sustainable, based on past history. A 5% is doable though, but quite difficult.

Therefore, as much as I like to compare the both of them, they are actually quite different because CPF requires a regular payout, while GIC/Temasek is really in for the long run, and is able to take losses for some of the years. CPF cannot afford to. I disagree with using the reserves for this too. Main reason... We are a little red dot, with 0 resources. Many had already said that its a miracle that we managed to survive, and thrive so well. The reserves are there to buffer us in case of some big calamity.

But still, the difference between the returns is too great to be ignored. One way is that a portion of the returns from GIC/Temasek to be ear-marked to be given back to Singaporeans. Might be in the form of the New Singapore Shares for example. Since this portion is not guaranteed, GIC/Temasek is free to carry on their current investment plans. Otherwise, we will always say that the big fat profits made by GIC/Temasek is used to raise the salaries of our government.

Given the lack of transparency, how can you blame us from thinking in this way??

10 comments:

superman said...

i am just curious, what has the returns of Temasek has anything to do with our CPF money? Don't get me wrong, I am all for the issue of transparency for this two huge investment vehicle but from what I understand, Temasek is a holding vehicle of what used to be state-owned companies such as SIA, DBS, etc. The cash they used to invest is the accumulated wealth from such companies over the years. So pardon my ignorance, what has that got to do with CPF money?

Gerald Tan said...

to clark:

That is the exact question Siew Kum Hong raised in Parliament which the minister REFUSED to answer. I.e. the government REFUSES to tell you what it does with your CPF money.

This is what is known so far, that Siew raised:

"Indeed, it seems that the GIC may already be managing CPF balances. It is just that CPF members are not benefiting from it. The CPF Board invests the bulk of CPF balances in Government bonds. These bonds pay a rate equal to the rate that the CPF Board has to pay members. But what does the Government do with the funds it raises?"

The FEER has this to say:

"The bulk of CPF deposits are held in nonmarket government bonds that yield a weighted average of the interest rates at the four big local banks: 80 percent weighted to 12-month deposits and 20 percent weighted to demand deposits. They are placed with the Monetary Authority of Singapore, which lends to government statutory boards for investment in infrastructure.

At the end of 1998, CPF members' accounts had a combined balance of S$85 billion, though that figure includes amounts deducted for housing purchases. Singapore has recorded big fiscal surpluses for decades and the fact that it can use CPF balances to fund infrastructure projects frees other funds for more profitable investment elsewhere. Many of the country's reserves are invested overseas by nontransparent, publicity-shy investment vehicles like the Government of Singapore Investment Corp. There's no way to accurately say what return authorities actually get on CPF funds. The only thing that's clear is that there's no link between their returns and what members get. The Review's questions to the CPF board on the subject went unanswered."

In other words, despite the government refusal to elaborate, this is what many people suspect:

Your money -> CPF (2.5%) -> Government Bonds (3.5%) -> Ministry of Finance blackhole -> HDB/PWD/PUB/etc. -> Budget "surplus" -> GIC/Temasek (8-13%)

Gerald Tan said...

Of course, it doesn't help the conspiracy theories that these proposals to limit CPF withdrawals come so soon after GIC lost billions of dollars in Shin + StanChart + Barclays....

Anonymous said...

can someone enlighten me on the usefulness of pegging cpf smr interest rate to 10 years government bond?

i always tot that singapore foreign exchange monetary policy is the controlling tool more than using interest rate, and that is why u can see bank deposits rate are so low, even bond rate is so low when compared to world standards because saving rates, foreign reserves are so high and foreign funds are so readily available, the the government bonds wee deleveloped jus for the sake of developing it only cos govt was never lacks of money to fund their mega project, that is why e bonds interest returns are so low for the lenders? am i rite wrong?

chantc said...

Like what gerald mentioned, CPF only buys bonds issued by the Singapore government. Therefore, you can say that Singapore is borrowing cheaply from us, to fund on-going projects.

In a way, you can see it as a sort of carry trade. Borrow cheaply and invest in something that yields higher.

Problem is we do not have a share of the higher earnings. We're still stuck with the 2.5% returns. We're totally clueless on what GIC/Temasek is doing. Why isn't there a law stating that a certain % of the profits only will be issued as a bonus to all Singaporeans? I'm not asking for all. I'm only asking for a %, and I'm not even asking for a guaranteed bonus.

Come on... If the government can think of giving bonuses to civil servants that is pegged to economy growth, I'm sure they can think up of a peg to return some of the profits back to Singaporeans.

chantc said...

Countries all over the world are having big problems with their pension systems, and most of the budgets are going to blow. High taxes, less babies = BIG pension trouble. Singaporeans are going towards that route.

Pegging to the 10yr bond rate + 1% gives a "hope" that the interest will go above 4%. However, if you negate the rates before the Asian Financial Crisis, the rates will always be lower than the 4%, even with the +1%.

As mentioned, Singapore reserves are very strong, and its not likely that our bond rates will go up as we do not even need to borrow.

Furthermore, the Feds will only cut rates from now on, making it easier to borrow money. There's no way I can see the interest rates going up for the 10yr bonds.

Therefore, I can only conclude that the reason for pegging it is the government wants to increase the CPF rates for the less well-off people, but they want some form of subsidy. Therefore, they peg it to the bond+1%, which will go below 4%, and use that extra few % points to fund the extra 1% of interest for the first $60,000.

This is my guess though... I believe keeping the status quo for the 4% is no problem, but they want to reduce the income gap. Therefore, they created this solution.

No complaints about this though. :p

Aaron said...

The Canadian Pension Plan is doing well. Check it out.

chantc said...

The whole problem lies with the government's steadfastness to outsource every single thing they have.

Therefore, they do not want the liability of managing the funds for us.

They do not want to manage this "pension" fund because of the high risks of doing it.

They want to promote self-reliance, whatever that means. So its like saying I know the problem, I give you the way of managing it, but I will not manage it for you.

Good or bad? I don't know... But it should be known that if you have too little investments, you're generally ignored. Size do matters in accessing of investment products.

James Chia said...

They made this whole CPF reform so complex that someone without financial background won't understand a thing about this bond rate thing. The only info they may get is from the state-controlled media.

chantc said...

The only reason they made it so complicated was to make sure the budget can be balanced even in the worst case scenario I guess.

I agree though that you need a person who understands some terms before the full picture can be seen. I've corrected many people who thought that the HDB Loan will be 3.6% (No its still 2.6%).

Main purpose why I posted an entry here so I can keep track of the changes. Even ST do not give the full picture whenever there's an update. They missed some parts out.

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