CPF fundamental review drawing to a close

The mutual fund industry could benefit from a streamlined Central Provident Fund system.
Singapore is undertaking a fundamental review of its Central Provident Fund system, the results of which will be announced in the next few weeks. The committee responsible for this review is said to be considering far-reaching reforms, including privatizing the entire thing, but their final recommendations are likely be much more modest, according to people familiar with it.

The ERC results are particularly eagerly awaited by developers, as CPF money is a prime source of income for property companies. The housing market has been stagnant in anticipation of possible changes arising from the ERC.

In October 2001, Goh Chok-tong, the prime minister, established the Economic Review Committee (ERC) to take the pulse of Singapore’s development strategy and come up with a blueprint to restructure the economy, which has been mired in recession and faces competitive pressures from other countries such as China.

Tharman Shanmugaratnam, ministry of trade & industry and education, is heading a sub-committee addressing CPF as well as taxes, wages and land. People familiar with the discussion say that although the government enjoys a substantial majority in parliament, it is wary of making any unpopular changes, so sensitive is the CPF issue in Singaporean society. But two areas that may change are how members can use CPF savings, and reviewing the ways they can invest CPF money in mutual funds.

Currently CPF savings go toward housing, medical insurance, education, mutual fund investment, buying home computers and a list of other benefits. As a result, however, many people face retirement without sufficient funds left to live on. The ERC will probably call for focusing CPF funds’ use for retirement, housing and medical provisions, and limit its use for other things.

The government tries to encourage citizens to invest more CPF funds into mutual funds and unit-linked investments, to bolster their retirement savings. But it is expensive, partly because this forces people to pay retail prices for funds, instead of leveraging off the CPF’s giant size to secure fee discounts from money managers. Moreover there is a double layer of fees, because CPF money first goes through local bank conduits, which in turn invest into CPF-approved funds.

Although sources won’t say exactly how the ERC proposes this be changed, it is possible the bank middlemen will be cut out, and CPF could use its size to secure cheaper fees. While this seems like a loss for banks and fund managers, the changes could result in far more investment into mutual funds (and banks themselves have large asset management divisions) and competitive players should stand to benefit.

The ERC is also expected to affirm the CPF structure overall. Having a single, centralized fund administrator means fees on savings are very low. In Hong Kong, industry officials reckon the Mandatory Provident Fund scheme eats up nearly 20% of savings for recordkeeping, trust work and fund administration. “Singapore has just one back office, allowing fund management companies to concentrate simply on investment,” says one person familiar with ERC’s work.

But because every citizen is a CPF contributor, Singapore has never developed a competitive pension funds market. If this is desirable – and many industry players say it is – then the ERC’s recommendations are unlikely to fundamentally shift the Lion City in that direction. People familiar with ERC say it has indeed looked at the topic, but doesn’t believe now is the right time for such a dramatic move. But Singapore also has one of the world’s most rapidly ageing populations, and in the longer term, CPF is likely to require substantial overhauls to ensure most Singaporeans lead a dignified retirement.