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Budget2007: Straits Times (1 March 2007) - Challenge to CPF Board: Help grow savings by 8-10%

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  • Jeffrey Ho
    To provide CPF members the potential for better returns, allow them another option to have their money invested via the GIC or Temasek (Shin Corp investment
    Message 1 of 1 , Feb 28 7:05 PM
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      "To provide CPF members the potential for better returns, allow them another option to have their money invested via the GIC or Temasek (Shin Corp investment notwithstanding) since both of them claim to have long term returns of 9% (over 25 years) and 18% (over 30 years) respectively. If this option had been available to CPF members, every $100,000 they had would have returned $862308.07 if compounded over 25 years at 9% pa (using the lower GIC’s returns) as compared to $185394.41 when the 2.5% return is used, a shortfall of $676,914 for every $100,000 of CPF members’ deposits!! " (My email to MAS Chairman, SM Goh Chok Tong on 31 Oct 2006 see below for details)
       
      To: REACH
      cc: MAS - Attn: Mr Goh Chok Tong - Chairman
      cc: MP Ong Kian Min
      cc: Finance Minister - Mr Lee Hsien Loong
      cc: CASE - Mr Seah Seng Choon
      cc: Opposition MPs/NCMP
      cc: Straits Times/Today
      cc: Dr May Khor - REACH Chairwoman
      cc: sg_review
       
      1 Mar 2007
       
      While I was hoping the Opposition MPs/NCMP would bring this up, I am nonetheless glad that PAP MP Ong has seen it fit to do so (see my suggestion - Item 4 - in email to SM Goh on 31 Oct 2006 below).
       
      Now that the gaunlet has been thrown, would the CPF Board and/or MAS and/or Ministry of Finance take up the challenge?
       
      In the words of MP Ong, "Is the high net worth individual or his private banker satisfied with a return of 2.5 per cent or 4 per cent per year? Surely not. If not, why should the CPF depositor?" (MP Ong gave an example of initial sum of $10,000 invested at 4% p.a over 40 years to retirement will get $48,000 but if invested at 10% p.a., it will grow to $453,000 - "almost 10 times more").
       
      But wait a minute, I can almost hear the government's (MOF or CPF) reply, "But CPF members' money is invested in 100% safe Singapore government bonds, hence the lower guaranteed returns for the security of the bonds. Going for higher returns would entail increased risks.....".
       
      The again, if we follow the trail of CPF members' money, he or she deposits the money with the CPF Board which then invests in government bonds. Thus, effectively, the Singapore government "borrows" from CPF members cheaply at 2.5% p.a..
       
      What does the government do with the billions? Probably invests it via GIC or Temasek which has achieved returns of 9% p.a. over the last 25 years or 18% p.a. over the last 30 years respectively.
       
      So, you see, the government is in a position to (and should) give better returns back to the CPF members, but whether it chooses to do so is another matter.
       
      At the end of the day, would the government be "altruistically" willing to forego this cheap source of funds - for the benefit of CPF members rather than "self"? That, in a nutshell, is the billion-dollar question!
       
      Rgds
      Jeffrey

      Jeffrey Ho <jjceho@...> wrote:
      To: REACH
      cc: MAS - Attn: Mr Goh Chok Tong - Chairman
      cc: Finance Minister - Mr Lee Hsien Loong
      cc: CASE - Mr Seah Seng Choon
      cc: Opposition MPs/NCMP
      cc: sg_review
       
      29 Jan 2007
       
      I refer to my earlier email on 31 Oct 2006 attached below.
       
      Since that email, I am happy to note that the ABS has acknowledged the need for more transparency amongst the banks in Singapore, especially relating to home loan pricing - the "debit" side of the citizens' balance sheet (See the article in The Straits Times (26 Jan 2007) - "Home loan rates set to become more transparent"). This addresses Item 1 of my Oct 31st proposal relating to Mortgage Loan pricing by the banks (see below).
       
      However, another important side of the equation (the "credit" side) relating to CPF money (Item 2 of Oct 31st email) is still not addressed, as elaborated by a letter writer in the Today newspaper of 29 Jan 2007 - see attached article, "Is the CPF interest rate out of date?" by Mr Alan Greene.
       
      As I mentioned in my Oct 31st email, CPF members are shortchanged by the CPF when enjoying only 2.5% returns on their Ordinary Account savings - by almost 1% based on Mr Greene's calculation (average interbank swap rate of 3.483% less 2.5%).
       
      If we use Mr Greene's number of "more than $50 billion" in the CPF Ordinary Account funds, a 1% point difference would amount to some $500 million annually!
       
      So, who benefits from this mis-match? CPF Board? Banks?
       
      Rgds
      Jeffrey

      http://www.todayonline.com/articles/168600.asp
      Is the CPF interest rate out of date?
      Alan Greene
       
      It is good to hear the politicians engaging with focus groups on GST rises, increasing the CPF levy on employers and targeting support for the less fortunate.
      .
      However, a workable balance will be difficult to achieve while there is more than $50 billion of mis-priced money in the economy, in the form of CPF Ordinary Account savings.
      .
      The computed CPF rate is based on an inappropriate blend of interest rates. Acceptable in the 1980s and 1990s when the local banks needed support and the financial markets were under-developed, the formula is past its sell-by date.
      .
      Singapore's money markets have globalised, and there are now long-term financial assets available to match the duration requirement of retirement fund investments.
      .
      Based on the average of the one-year fixed deposit rates and the savings rates offered by the four local banks, the formula was last adjusted in 1999, when the calculation was weighted towards the one-year rate.
      .
      Since then, we have lost a local bank and money markets in Singapore enjoy liquidity up to five years and beyond.
      .
      Local banks are probably very happy with the situation. The distortion allows them to keep deposit rates down and not only make an enhanced interest spread; it also encourages CPF members to dabble in bank-arranged CPF investment schemes, thus supporting the banks' fee income.
      .
      The irony of the situation was rammed home to me recently when one bank offered a rate of 3.15 per cent on one-year fixed deposits using CPF money.
      .
      For the purposes of the CPF rate calculation, this bank's savings rate is 0.3 per cent and its one-year fixed deposit rate is 0.825 per cent. The current computed rate is 0.74 per cent, and so, the actual rate applied is the legislated minimum of 2.5 per cent.
      .
      Outside the cosy world of the local banks, there are other banks giving 2 per cent or more on Internet savings accounts, and some, 3 per cent on one-year fixed deposits.
      .
      However, given the long-term nature of pension funds, the CPF should be benchmarking its rate to longer-term money.
      .
      For example, a simple average of the 1-, 3-, 5- and 10-year interbank swap rates quoted on Jan 26 is 3.483 per cent.
      .
      If 30 basis points is deducted from this number to reflect the credit risk differential between the Government and the banks, then we still have some 3.18 per cent.
      .
      This is a more realistic rate for CPF funds — well above the 2.5 per cent currently paid.
      .
      So, if the $50 billion of money is properly priced, what might happen?
      .
      The froth would come off the property markets, CPF savings would increase at a greater rate and the economy would benefit from less emphasis on fixed asset creation and more on consumption.
      .
      GST receipts would potentially rise and diminish the need for the 40-per-cent increase in the tax. CPF balances would rise, coupled with less risk of employers reducing their workforces. The less well-off would benefit because the level of the regressive GST levy would be lower than is currently envisaged.
      .
      The CPF is not broken, just in need of some upgrading.
      .
      The writer is a financial analyst and CPF member.


      Jeffrey Ho <jjceho@...> wrote:
      Date: Mon, 30 Oct 2006 23:48:58 -0800 (PST)
      From: Jeffrey Ho <jjceho@...>
      Subject: Why CPF members are shortchanged by Singapore banks and the CPF Board: double-whammy
      To: Chok Tong Goh <goh_chok_tong@...>,
      Hsien Loong <lee_hsien_loong@...>
      CC: Thia-Kiang Low <ltk@...>, sylvia_sl_lim@...,
      SeeTong Chiam <chiamst@...>, CASE <complaints@...>,
      Feedback Unit <reach@...>

      To: MAS - Attn: Mr Goh Chok Tong - Chairman
      To: Finance Minister - Mr Lee Hsien Loong
      cc: CASE - Mr Seah Seng Choon
      cc: Opposition MPs/NCMP
      cc: sg_review
      cc: REACH
       
      31 Oct 2006
       
      Dear Messrs Goh/Lee,
       
      I am writing in to complain about the ways Singapore's banks (especially the local banks whose Fixed Deposit rates are used by the CPF Board to benchmark what rates to pay for CPF members' accounts) may have been artificially depressing their FD rates (official board rates) much to the detriment of millions of CPF members who are at the mercy of the CPF Board (hence I am also directing this email to the Finance Minister whose ministry has oversight of the Board).
       
      This letter was prompted by the recent letters complaining about the numerous hikes in their housing loan interest rates this year alone (“First 'discounts', then, spiraling rates “ - Today, 5 Oct 2006) and the complaints about the banks’ lack of transparency with regards to the banks’ multiple Floating Board Rates or FBRs (“The rate debate: Banks defend FBR, but Case asks for more transparency” – Today, 25 Oct 2006.
       
      With the recent hikes in banks’ housing loan rates, a deeper review into the homeowners’ predicament reveals how they have been “systematically” shortchanged off by both the banks (especially the local banks) and the CPF.
       
      Whether one is on the ‘credit’ side (the depositors without bank loans) or ‘debit’ (those with bank loans), or both, CPF members are being systematically marginalized and shortchanged.
       
      For the unfortunate homeowners now subject to rising interest rates, they have been repeatedly told that the rises were the result of market “Supply and Demand” as interbank rates (Singapore Inter Bank Offered Rate or SIBOR) – the rates at which banks charge one another when lending/borrowing between themselves – have been rising steadily over the last 2 years, from 0.7% to 3.5% p.a. now (“How to pick the right financing for your home” – Today, 20 Oct 2006). What is/are behind these rises? Integrated Resorts (IRs) requiring billions in financing? Financing of developers’ en-bloc purchases ($6 billion so far this year – “building up to a 2007 collapse?“ – Today, 6 Oct 2006)? Foreigners buying up high-end properties (more billions)? Fixed Deposit (FD) customers playing musical chairs switching from bank to bank offering better FD rates because these banks are not valuing loyal customers when they seek to pay rates of 3% only to new money from other banks, thus encouraging switching?
       
      However, banks readily admit that SIBOR is not the one and only reference rate being used as different banks have their own FBRs and even within the same bank, different rates are being used for different customers (like DBS’ ‘Mortgage Financing Rate’ for some and ‘Base Rate’ for others, depending on when one takes up the loan).
       
      As suggested by the letter writer in Today’s 5 Oct, “MAS must stop or regulate practice of multiple rates”, I question how Singapore’s central bank, the Monetary Authority of Singapore (MAS) could turn a blind eye and condone/allow such “opaqueness” as obviously, customers are being marginalized and taken full advantage of without full transparency on how these oligopolistic local banks charge their customers in the absence of a uniform reference rate like SIBOR for instance? Isn't this akin to how Singapore motorists are "confused by complex discounting" by oil companies, for which CASE's Mr Seah Seng Choon has expressed concern? (today's Straits Times, 31 Oct, "You need to be maths whizz to figure out petrol discounts").
       
      What’s worse is that loan rates are expected to rise in the coming months and years when demand for Singapore Dollars (S$) is expected to rise with the Integrated Resorts (IRs) coming on stream, more en-bloc purchases by developers and foreigners buying up more high-end properties expected.
       
      The irony is that while the housing loan rates (the “Demand” side of the equation) have been rising steadily the last year or so (at least 4 times this year to about 5.5% or so), CPF members’ deposit rates (the “Supply” side) have hardly moved. Granted, CPF members’ rate of 2.5% is better than the banks’ 0.74 average of savings rates and “official Board” FD rates for the Oct to Dec 2006 period, but the reality is that the banks are “manipulating” and “disguising” the true market demand for deposits by offering so-called “promotional” rates (ongoing for more than a year already? – reminds me of the “perpetual sale” tactics adopted by many companies) of as much as 3.1% p.a. for 3/6 month FDs without changing their official “Board” FD rates!
       
      However, these “Board” rates which the CPF Board benchmarks are “artificially” depressed, to the detriment of CPF members!! Why the MAS, Consumer’s Association of Singapore (CASE) and CPF Board have been silent on this is a great mystery (or is it?). Perhaps it’s not so much of a mystery as far as the CPF Board is concerned as such ‘silence’ and ‘both eyes closed’ mean they have to pay members less on their deposits, but morally, is it right when such savings are ‘compulsorily’ held at the Board whether members like it or not?
       
      Therefore, unless the CPF Board changes how it’s deposit rates are benchmarked, its current system of pegging its rate to the local banks’ artificially depressed savings and FD rates will continue to give the impression that the 2.5% is a much improved return on their savings when compared to the banks’ rates because such banks’ savings rates have been hovering below 1% since time immemorial and will remain so for more years to come with the way these local banks have been allowed to play such “perpetual promotional rates” games.
       
      CPF members have been deprived of better returns for far too long (for almost 20 years or so since the near-zero interest rate environment?), and with the rising housing loan rates, the government needs to review (and change the basis of benchmarking) the CPF deposit and bank housing rates to ensure members have sufficient funds for their retirement while making sure home ownership (which the government has been actively promoting) remains affordable. Furthermore, now that the CPF contributions to members’ accounts have been declining (with recent changes to reduce employers’ cost of doing business here), it is increasingly important for the government to ensure CPF returns on members funds are sufficient to compensate for the declining contributions.
       
      With the above in mind, I’d like to propose the following:
       
      1. Banks’ housing loan rates to be benchmarked to a uniform reference rate like SIBOR or the average of banks' "Board" and "Promotional" FD rates (better even if such promotional rates are done away with to reflect just one true rate) or the average of SIBOR and banks' FD rates or whatever rates that are transparent and reflect the "true market rate" (eg SIBOR plus x%) to ensure transparency in how banks charge their customers for housing loans (the “Housing Rate”);
      2. Correspondingly, CPF members’ deposit rates (on Ordinary Account) should also be pegged to the higher of 2.5% and SIBOR or the above “Housing Rate” (eg SIBOR/Housing Rate minus y%). This way, CPF members will not be as affected even if the  banks were to artificially depress the true market demand rate for deposits. (Note: The present anomaly in CPF members’ deposit and loan rates is due primarily to a combination of the lack of a uniform reference rate (hence banks take full advantage of this by coming up with various ways to circumvent or by being “opaque”) and the artificially depressed FD rates, to the detriment of CPF members.) The end result may well be CPF members possibly bearing the brunt of the loan interest increase in the market to finance the IR and/or developers’ purchase of en-bloc properties and/or foreigners’ purchase of high-end properties while not benefiting from the corresponding rise in deposit rates!
      3. A “For-CPF members-By-CPF members” scheme – MAS can help stabilize the Housing Rate by its “lender of last resort” role to finance the demand spikes of banks’ housing loan financing for citizens (at least for owner-occupied properties). This way, the Housing Rate will not be affected by the extra demands on S$ for other purposes like IRs, en-bloc purchases or foreigners’ property purchases.
      4. To provide CPF members the potential for better returns, allow them another option to have their money invested via the GIC or Temasek (Shin Corp investment notwithstanding) since both of them claim to have long term returns of 9% (over 25 years) and 18% (over 30 years) respectively. If this option had been available to CPF members, every $100,000 they had would have returned $862308.07 if compounded over 25 years at 9% pa (using the lower GIC’s returns) as compared to $185394.41 when the 2.5% return is used, a shortfall of $676,914 for every $100,000 of CPF members’ deposits!! This $676,914 would have made a world of difference for someone retiring at 62 who is expected to live for another 15 to 20 years. (Or one can use the common Rule of 72 which will give a good estimate of how such investments can double in half the time when the returns are doubled, or one-third the time when returns are tripled, etc..). Both GIC/Temasek and CPF members’ deposits share 2 very basic criteria and investment philosophy: maximizing returns and investing for the long term, so why deny CPF members this opportunity to obtain better returns? Granted, there are risks but isn’t allowing CPF members to do their own investing like they do now under the CPFIS scheme (without the benefit of the experience and expertise of GIC/Temasek’s fund managers) even more risky?
      Would the relevant authorities (MAS, Finance Ministry, CPF Board, etc..) take the above suggestions into consideration to give CPF members a fairer deal (on their housing loans and deposit interest) while possibly also giving the option for better returns on their savings with the CPF Board?
       
      At the same time, would CASE continue to champion on behalf of CPF members on the numerous complaints brought against the banks on their practices listed above, much to the detriment of CPF members?
       
      Rgds
      Jeffrey



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