CPF investment returns: Getting Singaporeans their rightful share

Jeremy Chan

Over the past few years, a lot has been said about how CPF funds are managed. By now, most should be aware that the CPF Board does not do any investing of our CPF monies. Rather than take on the role of investment manager, it purchases Special Singapore Government Securities (SSGS) from the Monetary Authority of Singapore (MAS) to offload this task. CPF monies thus flow into the reserves to be managed by GIC and Temasek Holdings.

This mode of operation is interesting. The terms of SSGS are the basis upon which the CPF Board pays Singaporeans interest on their CPF monies. It is clean and also, according to the authorities, “essentially risk-free”.

But therein lies the rub. We know that GIC claims to be making 7% each year from investments. (Temasek claims it makes 17% but says that it does not manage CPF monies, so we will focus on GIC).  Presently, savings in Singaporeans’ CPF Special and Medisave Accounts (SMA) return the higher of 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, and Singaporeans’ CPF Ordinary Account (OA) monies return 2.5% per annum.

GIC’s returns are much higher than the rates that are being paid out. Therefore, the question must be: Are Singaporeans getting a raw deal?

A viable alternative?

A more equitable solution has to be arrived at. Barring a recession more chronic or severe than what we’ve seen in the past, CPF balances rise with time, at or beyond a base-line rate.

To achieve this, there has to be an intelligent way of giving back excess returns while making sure base-line returns (2.5% for the OA and 4% for the SMA) are still maintained in bad (recession) years. The obvious solution is to build up a “buffer” of excess returns. One might think of it as a storage tank. Each month, returns go first into building the “buffer” (filling the storage tank) with any excess returned to CPF accounts. If base-line returns are not achieved, then the “buffer” (storage tank) is used to fund these returns.

The question, then, would be how to size the “buffer”. Clearly one would like to be able to make pay outs even, and especially, in a recession and also in the years of recovery that follow. Given that recessions can last about two years, and a recovery might take some time, one might want to size the “buffer” such that “a full tank” will be able to fund approximately 5 years of base-line returns. This might mean something on the order of about SGD 20 billion to SGD 30 billion. (Over time, we might even want to a 10-year capacity tank.)

Unfortunately, it seems like such a buffer would have to be built from scratch because from an accounting stand-point, the excess returns have gone into the reserves and are “irretrievable”. The CPF has purchased the cash flows associated with SSGS, and these are registered as liabilities to MAS to be funded by the investment returns. Not a single dollar of the returns, or even the principal used for investment, is tagged “CPF Board”.


Jeremy Chen is pursuing his PhD in Decision Science at the NUS and is a member of the SDP’s housing policy panel.



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