CPF Private Pension Plans to be revisited?
Some Singaporeans have been pressing the government to give a higher return in their CPF savings. Perhaps under pressure, Deputy Prime Minister Tharman Shanmugaratnam surprised participants of the Institute of Policy Studies forum on CPF and retirement adequacy that for those who can shoulder higher risks and want higher returns, the CPF private pension plans remain an option for the future.
I believe the government will be announcing a major change in CPF scheme soon and likely this has to do with CPF private pension plans .Frankly speaking, I am getting very tired of keeping up with non-stop changes in CPF schemes. To keep up with the ever changing goal post is really tiring! My work as a professional financial planner requires me to be kept abreast of the latest developments in the financial industry.
CPF Private Pension Plans not new
The idea of CPF private pension plans is not new. An extensive consultation by CPF Board was made in 2004. A total of 43 industry players and another 45 individuals submitted their comments and responses. In that 2004 CPF private pension plans consultation paper, CPF proposed that the CPF private pension plans were to be structured as unit trusts with the key features of well-diversified portfolios and low investment cost.
It was not until 2007 when Dr Ng Eng Hen, Minister for Manpower, made known in Parliament that the CPF private pension plans proposal were shelved because majority of CPF members do not have large balances and it would be too risky for older members. To get higher returns, members must expose their CPF money to more market risk. Dr. Ng Eng Hen said that the government tried to “devise many schemes to shield members from volatility yet delivering higher returns. But it was neither possible nor right. It would mean subsidising losses using other members' or tax payers' money.”
Having read the 2004 CPF private pension plans consultation, I find that it was flawed on a few counts:
- There appear to be no cap as to how many CPF private pension plans providers. Hence it is difficult to achieve economy of scale.
- Asset management companies which responded were active managed fund managers. It is difficult for active managed funds to achieve low cost which is a key feature of the CPF private pension plans. Moreover, they tend to underperform the market on a long-term basis. There was no passive fund manager which responded and this showed that they were not interested.
Sure lose money
- In that 2004 CPF private pension plans proposal, CPF Members would have been allowed to perform switches between different funds at no cost. This means CPF Members will surely lose money on a long run because there is strong evidence which showed that CPF Members are notoriously lousy in timing the market. By the way, latest statistics showed that almost half of CPFIS-OA investors (47 per cent) incurred losses on their investments between 2004 and 2013, while 35 per cent obtained net profits equal to or less than the default OA rate of 2.5 per cent. Only 18 per cent made net profits in excess of the OA interest rate.
Or put it this way, 82 per cent did worse than the CPF OA interest rate!
(As a financial adviser, I am often helpless to prevent my clients from investing at the peak as I have totally no control when my clients invest. You see, when market is right at the peak, I received many queries from investors who want to invest for the ‘long-term’ which turns out to be usually false. If I turn them away, they accused me of arrogant and look down on small investors. During market downturns, nobody wants to invest. It is this reason why I insist on a full financial plan before any clients invest. In this way, I know exactly whether are they truly long term because I know exactly what are their plans. Normally people have no plan and so it is my job to create a plan for them.)
A successful CPF private pension plans can only be achieved if:
- There is only one provider for CPF private pension plans so as to achieve economy of scale. Obviously the provider has to be the government because private sectors seek to maximize shareholders’ value, not investors’.
- CPF private pension plans should only invest in passive managed funds in order to achieve above average returns. By right, passive managed funds can only achieve average returns before cost. But active managed funds are so expensive that after cost, passive managed funds perform above the average.
- CPF Members must not be allowed to perform any form of discretionary decision such as switching, buying and selling because they are lousy market timers. When CPF Members contribute to their CPF, CPF monies would be automatically be invested similar to dollar-cost averaging.
I also got other ideas on how to achieve potentially higher return which I have sent to Straits Times for publication.
In the meantime, I wonder how would the 2014 CPF private pension plans look like? What is for sure is that the goal post will be changing again. All thanks to all the protests on CPF. If this was 2008, everybody will be so thankful that CPF monies are invested in Special Singapore Government Securities.
By the way, did anyone notice that the DOW reached its 129 years all time high of 17,100.18 on 18 July 2014?
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