PensionReforms' summary and comments
Although Singapore's Central Provident Fund (CPF) has been going since 1955 and dominates the financial lives of Singaporeans, some 50 years on, the total value represented only 15% of their net wealth by 2005. Given that contributions are 34.5% of pay (and have been as much as 40%) this seems surprising but is easily explained.  A lot of money goes into the CPF but most is not invested for retirement - only the "Special Account" must be applied for that purpose.  The rest of it (the "Ordinary Account") can be withdrawn to help buy a home, for medical costs and for expenses associated with education.

Housing in fact comprises 46% of Singaporeans' net wealth in 2005.

Until 1993, CPF members had no choice about where their retirement savings were invested.  The CPF made that decision and lent nearly all of it on favourable terms (lower than market rates) to the government.  The government then used the money to make investments in its own name.

In 1993, savers were given some choices and these were widened in 2001.  However, as of December 2006, only 28% of available funds had been invested outside the government's 'default fund'.  That means 72% is still lent to the government.

Of the 28% invested in the "CPF Investment Scheme" (CPFIS), 67% was invested in insurance policies, 16% in shares and 14% in one of 231 approved unit trusts (mutual funds).  As might be expected, the fees charged by the unit trusts are many and varied, "...including an initial sales charge, a transaction charge on purchase, a realization charge, a redemption fee, and a switching fee."  Finding the detail of these in the formal disclosure documents proved to be "tedious work."  Presumably, the report notes, it would be even more difficult for members.

"Our empirical results show that foreign ownership, active style of management, and equity/balanced funds are associated with higher expenses."

The report suggests that members have probably not embraced the alternative CPFIS offerings because of what seems like the relatively secure, promised return from the default, capital guaranteed option; also inertia, the "bewildering range of sales charges, transactions fees, portfolio management costs, fund administration expenses, and other miscellaneous costs"; also poor, complex communication may be at fault.

Apparently, the CPF Board sees its role as including the improvement of expense reporting for more transparency.  It has also directly intervened on the fee issue with capped sales charges (from July 2007) and a cap on expense ratios from January 2008.  The paper looked at some policy options to reduce costs associated with CPFIS.

PensionReforms is slightly surprised that the CPF Board has taken so long to do something about improving communication of the alternative CPFIS options, including costs.  Given the reporting relationships and its monopoly position, the CPF seems ideally placed to do something about this on behalf of its members.

It has seemed to PensionReforms that the introduction of investment choice for CPF members did not sit easily with the Singaporean way of doing things so the cost, opaqueness and complexity of the alternatives under the CPFIS may have suited the CPF in the past.  After all, $S79 billion was lent to the government (as of 31 December 2006) at lower than market rates of interest.

PensionReforms therefore agrees with the steps now seemingly underway to improve the lot of CPF members but the 2008/09 financial meltdown will not, presumably, have improved things for those members who have taken the private alternative.  (File size 179 KB;  48 pp)  284

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