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CPF Board to Study Tip on Institutional Bargaining

Ministry of Manpower (02 April 2007): CPF Board to Study Tip on Institutional Bargaining

The Straits Times (24 March 2007): CPF Board Can Achieve Higher, Risk-Free Returns

CPF Board to Study Tip on Institutional Bargaining
- The Straits Times, 02 April 2007

Please refer to the letter "CPF Board can achieve higher, risk-free returns" by Mr Roland Tan Shui Long (Straits Times, 24 Mar 2007).

2. We will study Mr Tan's suggestion to leverage CPF Board's institutional bargaining position and review how this could be best done for the benefit of members.

3. However, Mr Tan's second suggestion of investing in other government or supranational bonds may not make members better off. CPF Board invests in special Singapore Government Securities that are risk-free and earn an interest rate higher than market rates. Investing in other government or supranational bonds exposes members' funds to more risk, particularly currency risk, which can be considerable.

CPF Board to Study Tip on Institutional Bargaining
- The Straits Times, 24 March 2007

I refer to the recent debate on ways to improve the Central Provident Fund (CPF) rate of return on members' balances. Any investor worth his salt knows the trade-off between risk and return. Little wonder the experts' views on this were uninspiring because one cannot expect a higher '8 to 10 per cent' return without leaving safe haven. But that is not the point. The CPF savings, being a retirement nest egg, must never be subject to investment risk. Hence, any proposition to improve the rate of return with a greater risk tolerance is a non-starter.However, the savings must also not be left to stagnate with a less-than-decent return than what most bank time deposits would have us be contented with.We want CPF Board to stretch our dollar by trimming its operational costs, improving its efficiency in managing the interest-rate environment and generating a higher guaranteed interest payout to members.

If a retail depositor can manage his $100,001 cash float at an average of 3 per cent upwards by shopping for the best rates in time deposits (considered almost risk-free) consistently for the past years, CPF Board with its paid fund managers and over $120 billion funds cannot do any less. At the risk of over-simplifying matters, let me give some concrete suggestions:

  • Negotiate with banks to give a higher rate on fixed deposits. Retail depositors have been known to get that few extra basis points by talking to the manager. (CPF Board garnered between 3.2 and 3.4 per cent on its deposits with banks in 2005).
  • Use collective bargaining to save costs. An anomaly exists currently in that members can get about 3 per cent returns by moving their funds from the Ordinary Account to fixed deposits with financial institutions.

This is a duplication of resources as members have to bear additional costs and CPF agent banks' charges.Why can't CPF Board place the funds directly with these parties and get a better rate so that everyone benefits?

  • Invest in risk-free government, supra-national bond issues which often pay decent coupon rates and are outside the reach of retail investors.

Due to economies of scale, whatever administrative, bank and custody charges would then become negligible as a proportion of the total holdings. At the end of the day, CPF Board as a trustee and wholesale lender of our funds must act with clout to extract optimal and risk-free rates from the market for its members.