Central Private Fund?

Central Private Fund?

It was an intriguing question: Would a privately-managed Central Provident Fund (CPF) be able to pay the same or better returns? And guarantee the returns even when the economy is bad?

Finance Minister Tharman Shanmugaratnam’s (below) answer to the question, posed by Workers’ Party chief and Aljunied GRC MP Low Thia Khiang: No.

Mr Tharman, who is also Deputy Prime Minister, told Parliament that no private sector fund manager would take up the task of fulfilling the obligations of the CPF and being able to pay the guaranteed minimum rate.

CPF accounts are categorised into four accounts: The Ordinary Account (OA), and the longer-term Special, Medisave and Retirement accounts (SMRA) meant for retirement.

Mr Tharman said the CPF pays a guaranteed minimum rate of 2.5 per cent to 3.5 per cent depending on the amount of balances in the OA.

For SMRA funds, interest rates are pegged at 1 per cent above the yield of 10-year government bonds rate.

But is the idea of a privately-run CPF possibly paying higher returns utterly nonsensical?

Financial experts who spoke to The New Paper said it is not impossible for private fund managers to manage the CPF and generate better returns.

Said CIMB regional economist Song Seng Wun: “Of course, outsourcing it to private fund managers could mean better returns. Why outsource if not for better returns?”

The flip side is that higher returns constitute higher risk — something you would not want public funds to be subjected to, he said.

“At the end of the day, the Government can give the assurance that you will get your money back, plus the returns.

“If a private firm were to do that, it would come with a cost. And this will be paid for with taxpayers’ money,” he said.

He added that if citizens were looking for higher rates, they could invest on their own.

 

Private firms

Would private firms be able to handle and fulfil the obligations of the CPF?

Mr Song said yes.

“In the long run, a large private firm will be able to pay the guaranteed returns as these will be stretched out over the long run,” he said.

“On some periods, their returns may not be good, but other times, their returns may be higher.

“The law of averages means that they can still meet that minimum over the lifespan of a citizen.”

But the task may be too big for just one firm to handle on its own, said a trading representative from the finance industry who wanted to be known only as Mr Tan.

“If you get multiple firms to each manage a portion, it’s possible,” he said.

But these fund management firms would have to be selected very carefully, he added.

“They have to have long-term plans with our CPF money and be able to manage it for 10, 20 years,” he said.

The biggest issue will be of trust: Whether the CPF member would trust “outsiders” to manage his savings and retirement nest egg, said Mr Song.

“There is a risk that the private fund management firm could close shop and run away with our money.

“This is an extremely important issue as it is people’s pensions that we’re talking about.”

 

The Government can give the assurance that you will get your money back, plus the returns. If a private firm were to do that, it would come with a cost.

— CIMB regional economist Song Seng Wun


This article was first published on July 09, 2014.
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