Tan See Leng: Co-investing CPF in GIC risks interest rate fluctuations

On Monday (4 March), participating in the Committee of Supply 2024 debate for the Manpower Ministry (MOM), Workers’Party Member of Parliament for Sengkang GRC Mr Chua Kheng Wee highlighted a significant disparity in the returns of the Central Provident Fund (CPF) for its members when compared to the Government of Singapore Investment Corporation (GIC), which boasts a 20-year annualized nominal rate of return of 6.9%.

Mr Chua questioned the feasibility of allowing Singaporeans to co-invest a portion of their savings, contemplating the existing CPF Investment Scheme (CPF IS).

However, Minister of Manpower, Dr Tan See Leng, dismissed the proposal and cautioned that even though GIC has outperformed CPF interest rates over the past 20 years, there’s no assurance that this trend will persist in every future year.

He emphasized that passing these returns directly to CPF members could result in significant year-to-year fluctuations in the interest rates received by members.

Mr Chua’s renewed call for reform in Ordinary Account interest calculation

During the debate, Mr Chua reiterated the call for the reform of the outdated and archaic formula used to compute the interest for the Ordinary Account.

“This was last changed in 1999 when the ratio of fixed deposits to savings was updated from 50/50 to 80/20 to reflect the longer duration that CPF OA monies remained with the CPF Board. A reform is long due,” Mr Chua stated.

The concern is raised over the CPF deeming the deposit interest rates to be an unbelievable 0.66% despite higher market rates.

He also proposed the Implementation of the Lifetime Retirement Investment Scheme (LRIS) to enhance CPF returns, a suggestion put forward by a CPF review panel back in 2016 as an alternative to the CPF Investment Scheme, 

The LRIS is described as a low-fee, simple, and fuss-free scheme where CPF savings are pooled together, following a market index with fewer choices and less need for active management.

He urged a proactive review of CPF interest rates by the government to ensure their relevance in the prevailing operating environment, considering the backdrop of inflationary pressures and challenges in the global investment environment.

Dr Tan suggests “long-term view” of Ordinary Account interest rates

In response, Dr Tan reassured that the government continues to introduce measures to enhance retirement savings for older, lower-wage earners, homemakers, and caregivers.

He highlighted positive developments in CPF members’ savings, noting that over 70% of active members have set aside the Full Retirement Sum (FRS) by the age of 55.

Addressing concerns about the closure of the Special Account (SA) for workers aged 55 and above next year, Dr Tan explained the context and impact of this decision.

He clarified that only a small percentage of affected members would face challenges in fully transferring their savings to their Retirement Accounts (RA). Both the Special Account and Retirement Account currently earn 4.08% interest per annum.

“It is a matter of principle … it is not about savings costs for the government,” said Dr Tan.

Regarding Mr Chua’s call for the implementation of the proposed LRIS, Dr Tan acknowledged potential risks for retirees if implemented.

“But having said that, regardless, we will continue to study the LRIS proposal and work on making the CPF system even better for Singaporeans.”

Dr Tan also responded to suggestions to reevaluate how the Ordinary Account interest rate is determined.

“The government is aware that the OA interest rate has remained relatively stable, while the use of market instruments of comparable risk and duration has increased.”

He urged a long-term perspective, emphasizing that the CPF has consistently paid 2.5% interest, with the annual Ordinary Account interest rate being 1.7 percentage points higher than 12-month fixed deposit rates from 1999 to 2021.

“Nevertheless, we are monitoring the situation, and will continue to review CPF interest rates periodically, to ensure their relevance in the prevailing operating environment.”

Referring to concerns about CPF Life premiums’ interest not being included in payouts to beneficiaries upon members’ death, Dr Tan explained the concept of risk-pooling as necessary for providing monthly payouts throughout members’ lives.

He clarified that CPF Life is an insurance product, not an investment vehicle, and suggested that members can opt-out if they find similar or better alternatives in the market.

He cited the Business Times report that described CPF Life as “the best annuity in the market”.

“If Mr Chua knows of any similar or better products, he too can apply to opt out of CPF Life,” he said.

Mr Chua highlights the returns disparity between CPF and GIC

Following Dr Tan’s address, Mr Chua raised the issue of what some perceive as a form of “carry trade.”

“It’s hard not for some to see as a form of carry trade whereby the government is borrowing at 2. 5% or 4% for Singaporeans while the GIC makes 7%, both of which in the long term.”

Mr Chua questioned whether Singaporeans could be permitted to co-invest a portion of their savings, contemplating the existing CPF Investment Scheme.

While acknowledging the minister’s concerns about risk, Mr Chua highlighted that the advisory panel report suggested overcoming this risk through the use of the Lifecycle Fund.

He further inquired whether the minister would agree that the implementation of the LRIS, based on the provided numbers, would be beneficial for Singaporeans in the long term.

Minister Tan defends the government’s approach to stable CPF interest rates

In response, Dr Tan emphasized the limitations of relying solely on historical returns when evaluating investment performance.

He expressed scepticism about accurately predicting future returns, highlighting the challenge of being precise in forecasting returns on a guaranteed basis.

“But to make a projection in the future, I seriously wonder how many people can be that spot on and precise in terms of projecting future returns and on a guaranteed basis.”

Despite GIC outperforming CPF interest rates over the past 20 years,he cautioned that there is no assurance that GIC’s future returns will consistently surpass CPF interest rates annually.

“So if we pass some of these returns directly to members, you would then appreciate the fact that there would be significant year-to-year fluctuations in the interest rate that members receive.”

He explained that the government has used its buffer of net assets to ensure that CPF members receive fair and stable interest rates to grow their CPF balances for retirement adequacy.

He reiterated the core priorities of the government since 1955, which include funding retirement adequacy for members, providing housing, and ensuring healthcare.

Minister Tan clarified that the government is not putting the LRIS in abeyance. They continue to consider ways to ensure stable returns, taking into account the volatile economic environment of the last three to four years.

He defended the cautious approach, stating that it is not a fault but a necessity.

“I don’t think it’s a fault is that we are very very cautious because these are our members hard earned monies,” he said.