This was taken from one of the online Singaporean forums. Some interesting facts and figures on the workings of CPF. I figure Singaporeans need to read up on this issue to fully understand what annuity effect has on your money. Thanks to Scroobal for the following information:
I do realise that not many people are not aware how CPF functions. Here are couple of points. More than happy if folks out there can correct if the understanding is wrong.
- CPF Board is an accounting and administrative body. It plays no part in managing CPF funds for investment purposes. By law it is not allowed and neither is it equipped. There are exception which are Insurance schemes where funds are relatively small.
- In 2006, out of current members' balance of $125B, $108B are in long term deposits
- The $108B was handed over to MAS in return for Special Issue Goverment Securities. This is where it disappears into a black hole as I can't it in the MAS financial records.
- The interest received in return was $4B which makes this about 3.7% interest return.
- The CPF Board determines the interest for this investment but the methodology is not revealed. However the interest given to member balances cannot exceed 2.5% unless approved by Minister of Finace. The methodology for determining member interet is well known and published in their website.
- By this arrangement, technically if the $108B yielded 20% return via investment, the Govt is not obliged to declare a bumper bonus and has never done so. It has never returned anything higher.
- Granted that CPF balances are guaranteed by the Govt, and a fee may be order to acknowledge this but retaining excessive profits is basically placing an indirect tax on the returns.
- Financial Report also shows that surplus income of CPF Board gos to the Consolidated Fund and this amounted to $66M in 2006. This is despite CPF performing a number of functions for various Govt bodies and which are only billed on a cost recovery basis.
From the above, one can surmise the following
- Additional returns no matter how high are retained by the Govt
- Someone is making management fees from the funds invested
- In view of the indirect tax, CPF members incur higer rate of taxation.
- Did the money given out on the eve of elections come from these returns
- If from the onset, all returns from investment are returned to member balance via higher interest minus of course management and guarantor's fees, the compunding effect on the balances would have been tremendous over 25 years using an accepatble Global Pension Fund as benchmark
Some interesting tidbits
- Academic in Universities in the past were allowed to run their own Provident Fund which was managed by OCBC. Wonder why the special allowance. To many questions from smart people and to buy their silence. One wonders
- No wonder the selfemployed and businessmen never found CPF attractive
- Admin and Intelligence Service now and the rest of the Civil Service in the past were on pensionable service and therefore their opportunity cost was lesser. Certainly no motivation to improve the CPF system as it does not affect them.
I bet my bottom dollar that the investment returns retained by the Govt over 48 years in total was higher than the returns given to CPF members.
Is the current scheme morally wrong? Is this a bad deal facilitated by legislation? Will transparency help address misconceptions and wrong perception? Is there room to improve?
