Committee of Supply Speech (Part 2) by Dr Ng Eng Hen, Minister for Manpower, 08 March 2007, 10:55 AM,

Dr Ng Eng Hen, Minister for Manpower

Helping More Members Improve Their CPF Balances

(I) PROGRESS FOR ALL

Workfare Income Supplement

1.   We should find ways to make it easy for self-employed to make regular contributions. They can already so do now. Apart from cheque payments, other modes include e-payments via the CPF website, NETS or Cashcard at any AXS station. Members are also allowed to pay by monthly instalments through GIRO and as at end 2006, 51,200 of them are doing so. The key is to encourage them to put away small sums on a regular basis, rather than as a lump sum to benefit from WIS. We will work out schemes to facilitate this. I also welcome other innovative ideas as to how best to achieve this. MOM will explore the use of lucky draw to encourage the self-employed to put more in Medisave.

2.   My Ministry will also look into getting the principals of self-employed persons to help contribute CPF on their behalf. However, ultimately self-employed persons, like formal employees, are responsible for making regular contributions to build up their Medisave for their own healthcare needs.

3.   Regarding getting informal workers to be paid CPF, let me reiterate that employers are liable to pay the CPF of all employees, formal or informal. We will be sympathetic to employers who had previously not made CPF contributions but who wish to do so now. But going forward, we will intensify our efforts to improve the compliance rate.

4.   On whether we could allow grandparents who look after their grandchildren to qualify for the Workfare Bonus, and presumably in future for the WIS, this question touches on a larger issue about which types of informal working relationships would be eligible for WIS. And indeed, we expect many variations of such informal working relationships which we would have to decide if they are eligible for Workfare. For these cases, we want to guard against flagrant abuse of the system because that would over time undermine and derail the entire purpose of Workfare. However, in instances where there is genuine work, and specific details of work honestly provided with the prescribed Medisave contributions, we will be sympathetic.

(II) PREPARING FOR THE FUTURE

CPF Changes & Retirement Adequacy

5.   Sir, let me move now to CPF related issues. On the need to use the CPF to better prepare ourselves for a greying population, this is indeed why we have linked Workfare for low wage workers to CPF. We also increased CPF by 1.5% points for the rest and with this a median new CPF member at age 21 who earns $1,700 a month will enjoy a 12% increase in his CPF balances by the time he reaches the age of 55, or $17,900 in real terms. A median member aged 45 years old earning $2,967 will enjoy a 6% increase in his CPF balances at age 55 or $5,900 in real terms.

6.   I also want to announce certain relaxations to enhance measures for family members to help one another build up their CPF balances, particularly for those who are not working. We will expand the CPF top-up scheme to achieve this.

7.   First, to further encourage top-ups, we will use the present Minimum Sum level to determine the top-up limits for various age groups among the elderly. This is a significant increase as the current scheme uses the Minimum Sum level of the recipient, which could be as low as $30,000 for the first Minimum Sum Scheme cohort from 1987.  This will allow older Singaporeans and their family members to receive a regular income over a longer period.

8.   Second, we will expand the list of recipients. Currently, members can only top-up their grandparents' Retirement Accounts using cash and not CPF funds. We will now allow grandchildren to transfer funds from their CPF Ordinary Account to their grandparents' Retirement Account, subject to both meeting the top-up criteria.

9.   We will also now allow, as a new initiative, members to top-up their siblings' Retirement Accounts with savings from their own CPF accounts, or in cash. As announced by MOF, a tax relief for cash top-ups of up to $7,000 a year will be given if the sibling receiving the top-up earns not more than $2,000 a year and is 55 years old or above.

10. In addition, we will allow top-ups for spouses and siblings below the age of 55. The top-ups can be made into members' Special Accounts, subject to limits.

11. The changes will take effect from 1 Oct 2007, except for top-ups to members below the age of 55, which will take effect from 1 Jan 2008. The purpose of the top-up scheme is to build up the CPF for long term needs. It is not to allow for premature withdrawals. Appropriately, top-up amounts must be kept in the CPF accounts of recipients to be used to provide a steady income stream during retirement, and cannot be withdrawn as a lump sum. However, remaining sums from top-up amounts will revert to the donor, at the demise of the recipients. CPF Board will release more details later.

12. Regarding making annuities, at least of some amount, mandatory for all members, MOM certainly welcomes a higher sign-up rate for annuities which is currently allowed but on an optional basis. About 9% of members covered under the Minimum Sum Scheme have chosen to purchase annuities. Younger members who are below the age of 55 and who wish to prepare early for their retirement can also purchase deferred annuity policies under the CPF Investment Scheme (CPFIS) using their CPF Special and Ordinary Account monies. We also have to educate members about how annuities work. Annuities pool risks and provide protection for those who live longer than the average life expectancy. But most members, as loving and caring parents, wish for their CPF sums at their demise to pass on to their children.

13. Mr Ong Kian Min asked if returns to CPF monies can be enhanced. Mr Ong asked if people like Warren Buffett and George Soros can earn supernormal returns, why could not our CPF savings attract higher returns?  Like him, I too wish that we could identify people like that who could guarantee higher returns for us all – it would solve many problems! But Mr Ong, I presume, was using extreme examples to exaggerate a point, and not seriously expecting that our CPF funds offer a return of 21.4% annually like Warren Buffett's Berkshire Hathaway. In fact, Warren Buffett himself said in 1999 that "if I had to pick the most probable return … that investors in aggregate would earn in a world of constant interest rates, two percent inflation, and those ever hurtful frictional costs, it would be six percent … that is 4% in real terms."

14. As all investment products point out religiously in their brochures – past results do not guarantee or predict future performance. And as Mr Ong himself pointed out, expected higher returns do require higher risk tolerance and volatility. Even within the short span of 2 weeks across the Budget debate, the STI plunged by about 328 points or almost 10% from a high of 3,310 points¹. Volatility and possible losses are inherent in any investment. Every investor knows that he is exposed to market risks. He may decide to ride through a bear cycle and if he comes through with positive returns, congratulate himself for being astute and steady. Those that suffer losses will lick their wounds and reflect on what lessons are to be learnt.

15. But we can expect the reactions, especially in a protracted bear market, to be quite different if CPF Board invests on behalf of its members. Indeed, this is exactly what one member of the public wrote in response to Mr Ong's impassioned speech for CPF to seek higher returns. Mr Phillip Ang's letter in March 6, TODAY said: “Mr Ong's expectations of an 8 to 10% yield…is rather unrealistic…the CPF Board should not take more risks for its members in search of higher returns as they are significant risks involved. We should not look at only one side of the coin where private bankers are expected to make 8 to 10% returns for their clients. What about those whose performance pale in comparison to CPF returns? For Mr Ong's suggestion to come at the tail-end of a stock or property bull market, it seems we have not learnt from the painful past experiences. The element of luck in investment should not be discounted. If the CPF Board had introduced policy changes prior to the 1997 financial crisis or the 2000 Internet Bubble and had allowed CPF funds to be managed by fund managers, many will probably not be looking forward to retirement today.”  This is a mature and balanced view of investments, risks and rewards.

16. Let me put the issue of expected rate of returns on investments into perspective by giving a brief survey of what exists currently in the market. Returns on investments are a function of risk exposure and the tenure of the investment. Low-risk bank savings deposits attract around 0.3% interest. Fixed Deposits and short-term bond instruments like Singapore Government Treasury Bills or some low-risk Singapore bond funds provide 0.5% to 3% at minimal risk. Further along this risk/tenure spectrum are capital protected or guaranteed funds. In the case of capital guaranteed funds, the bottom line they promise is that if you put in $1,000 dollars, all that is guaranteed after X years of investment is your original investment less sales charges – that is, in the worse case scenario, no yield or interest, and a small outlay as commission to the bank or broker. The capital guaranteed and protected Unit Trust funds that are outstanding under the CPFIS currently have earned annualised returns before sales charges  of  between -0.10 to 4.85% over the last 3 years.

17. At the other extreme are those that offer higher returns but with higher risks. For example, some funds such as the APS Alpha Fund do not charge any fees or expenses unless it beats a target return of 6% per annum, but they would charge 25% of annualised returns as a performance fee if returns exceed the hurdle rate of 6%. Basically, your higher risk tolerance allows the fund managers to adopt a more aggressive investment stance. If they don't meet your expectations, they bear some loss, but they will extract a higher cost from you to cover that risk. That is why expense ratios for higher risk CPFIS funds are on average about 2 to 3 times that of lower risk funds.  Exposure to equity markets is accompanied by higher risks, which is why a 35% cap has been imposed on the proportion of CPF savings which can be used to purchase shares under the CPFIS.

[Please refer to charts at Annex: Returns, risks and costs of Singapore Government Securities, CPFIS Unit Trusts and Investment-Linked Insurance Products]

18. So indeed Mr Ong and other members are quite right – there is no running away that commensurate risks are inseparable from expected returns. Even a balanced portfolio, as mentioned by Mr Ong, can mitigate but not eliminate market risks. There have been bear runs in the past that were protracted. Between the peak in March 2000 and the trough in September 2002, the MSCI World Index fell 48%. All types of boats fell with the sinking tide.

19.So, I think that as a mainstay of our pension system the present scheme is correctly positioned. Members do not have to worry about the interest rate environment, yields and stock market volatility. They have the full assurance backed by Government and earn risk-free returns of 2.5% on their Ordinary Account and 4% on the Special, Medisave and Retirement Accounts, which by and large are above market rates when compared against products of similar risk and tenure.

20. To achieve better returns, members can transfer their CPF savings from their Ordinary Account to their Special Account which yields a higher interest rate, up to the prevailing Minimum Sum. For members who have an appetite for higher risks, they can choose to invest their CPF savings under the CPFIS on their own. CPF Board has already been taking steps to help members achieve better returns through CPFIS by setting more stringent criteria for the admission of new CPFIS funds from February 2006, capping sales charges from July 2007, and capping expense ratios from January 2008.

21. However, between the risk-free 2.5/4% and CPFIS, avenues for investments options with acceptable risks and volatility and possibly higher returns can be provided. 

22. One possibility is to increase the returns on Ordinary Account. This account functions as a withdrawal-on-demand account and the 2.5% interest rate is reasonable. However, many members do not withdraw from their Ordinary Account continuously and yet may not want to transfer these amounts to the Special Account to be locked up. For example, the yields for short term instruments like the 3-mth or 1-year Singapore Government Securities (SGS) are currently above the Ordinary Account interest rates – at around 3%. Members who do not need to use all their Ordinary Account balances could actually earn higher returns with these instruments. However, I understand that purchasing SGS can be cumbersome and I have asked the CPF Board to consider playing a facilitative role as an intermediary. They will study this.

23. Along this line of options which provide acceptable risks but possibly higher returns than the current 4% in Medisave and Special Accounts, I have also asked the CPF Board to study more options for members. Some exposure to equities, bonds or other asset classes may provide better returns.  As previously mentioned, we are studying the proposal for the CPF Board to play an aggregator role. We have made progress in this study. It is clear from our public consultation that in this case, having more choice is not necessarily better.  What we want to provide is a simple system with acceptable risks and returns that the majority of members can understand and participate in. Any such scheme should be positioned over a long term horizon so as to offer better rates than the 2.5/4% when the member retires.  I ask members to be patient, but want to reassure all that this is still very much on the radar screen.

24. Let me now address the issue of divorced wives who get very little from the sale proceeds of the matrimonial property because the husband is required to set aside the Minimum Sum. In the division of matrimonial assets, there is currently no discretion to allow some portion or all of the CPF monies used to go into the other spouse's account. This has created practical difficulties and in some cases, the wife has had to sell the property even if husband is willing to transfer the house to the wife. MOM has studied this problem and I am pleased to announce that later this year, we will make changes to the CPF Act to bring about a smooth and equitable distribution of CPF monies arising from division of matrimonial assets to either member's account. These changes will allow an immediate transfer of CPF monies from a Member to the ex-spouse's CPF account.

25. To explain how things will change, suppose the sale proceeds of the matrimonial property is $100,000. Under current rules, all $100,000 will go to the member's CPF account, even if the Court had awarded the ex-spouse half the proceeds, or $50,000. With the change in rules, the courts can now issue an order to transfer $50,000 from the $100,000 refunded to the member's CPF account to the ex-spouse's CPF account.

26. We will also be making amendments to facilitate the immediate transfer of property to the ex-spouse by allowing CPF monies embedded in a property to be transferred, provided that a charge is placed to secure the refund of CPF monies in the event of a sale. This refund will go either into the CPF member's account or the ex-spouse's CPF account. In other words, if the member had used his CPF for the property, but the court had ordered that the ownership of the property be transferred to the ex-spouse, we will no longer require the member to refund his CPF in cash before a transfer can take place. Instead, a charge will be created in the ex-spouse's interest so that she will need to refund the same amount into her CPF account should she sell the property later.

27. I have also decided to address another practice not quite in line with our Minimum Sum policy. When members sell their properties which they have used CPF money to purchase, they are required to return the CPF that has been utilised together with the accrued interest from the sale process and to secure the payment of the Minimum Sum – this is existing policy and common knowledge. But while we have enforced this policy for all those below the age of 55, the CPF Board has not enforced this rule uniformly in the past for those above 55 years old.  Specifically, we have only recovered the property pledge from them and not the shortfalls for the cash portion of the Minimum Sum. I have asked the CPF Board to rectify this and apply the rule uniformly. However, to give prospective home sellers who are above 55 yrs old adequate notice, we will enforce this from 1 Jan 2009.

Conclusion

28. In closing, Mr Chairman, the changes I have outlined in this Budget will strengthen the CPF system. It will open up ways for family members who have accumulated adequate amounts to help their family members and spouses, even ex-spouses. We are studying more ways to help members achieve higher returns.

¹ The STI closed at 2,982.29 on Monday, 5 Mar 2007, 328.15 points lower than the 52-week high of 3310.44 on 23 Feb 2007.