Managing CPF funds is one thing; reviving the stock market is another

Managing the country's retirement savings and giving the stock market a boost are two very different goals that should not be conflated.

If the government were to accept the Singapore Business Federation's (SBF) proposals to boost the Singapore stock market by changing the way that Central Provident Fund (CPF) monies are managed, it would require CPF account holders to accept either lower guaranteed returns or greater risk to their retirement funds.

Whether SBF's proposals will even have a meaningful impact on the Singapore stock market is also questionable.

In a paper announced on Wednesday, SBF called for the government to stop managing CPF savings as part of an invest-offshore-only pool of assets and instead create CPF pension funds that will invest in Singapore stocks. The presence of a large and active institutional player in the market, it was argued, will give the currently lacklustre Singapore equity scene a shot of vigour.

Impact on returns

What SBF neglected to mention was the impact that its proposal will have on CPF returns if carried through.

CPF savings enjoy a guaranteed minimum yield - 2.5 per cent for the Ordinary Account and 4 per cent for the Special and Medisave Accounts - which on a risk-adjusted basis make them better in many instances than commercial savings rates.

To provide that yield floor, the government pools CPF monies with the rest of the country's reserves and manages all of that money through sovereign wealth fund GIC - which, because it is also tasked with preserving and enhancing Singapore's international purchasing power, is not allowed to invest locally or in Singapore companies.

When the CPF's yield floor is triggered in periods of low interest rates or when withdrawals are much higher than expected, being part of a much bigger pool of assets provides a buffer that ensures CPF will not default.

What will happen if CPF assets are managed on their own? To provide the same yield floor without a buffer, the CPF pension fund will have to invest in riskier assets. Alternatively, if the CPF pension fund does not want to take on more risk, then it will have to lower the returns that it offers CPF account holders.

Neither outcome is desirable when the subject is national retirement savings. The CPF is meant as a safety net for Singaporean workers, and neither the act of putting retirement savings at greater risk nor cutting returns is consistent with that mission.

It is possible that the Singapore government can afford to take on more risk in the way that it manages CPF monies, but to do so just to boost the stock market is misguided.

It is not even clear that a CPF pension fund will necessarily give the Singapore stock market the benefits that SBF is claiming.

Like any other fund manager, the proposed CPF pension fund will have to go where the best returns are.

If the Singapore stock market is already struggling to attract capital at the moment - the impetus for SBF's proposal - it would seem that equities in the Lion City simply are not that attractive right now.

A CPF pension fund that observes its fiduciary duty will probably not make significant allocations in Singapore under such conditions, which would dull the impact that SBF is envisioning.

It is possible to mandate the CPF pension fund to invest the bulk of its assets in Singapore stocks, but that will raise geographical and asset class risk and would not be in account holders' best interests.

Inappropriate role

SBF is proposing a CPF pension fund as a counter-cyclical stimulant, which may not be a very appropriate role for the nation's retirement funds.

Even if a Singapore-bound CPF pension fund generates enough liquidity to revive the market, the benefits will be concentrated in all but the largest companies.

That is because of the practical difficulties that large funds face in taking positions in small stocks, and the Singapore market - with its long tail of many small stocks - comprises mostly companies with small market value.

SBF has identified a real concern for Singapore. A robust capital market is essential for businesses, and it should be a priority for the Singapore government to figure out how to pull the stock market out of its multi-year slump.

But to wield the nation's retirement funds as a tool in the manner that SBF is proposing will not solve the problem, and may create new and serious ones.

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