Retirement funds are basically of two types - provident funds and pension plans.
A provident fund is where employees and employers make contributions into their account and the money is invested in two ways - it either goes into a pool that the fund manager invests, or the contributor has a choice of how he wants it invested. Revenue from the investment is used to pay off fund management cost, and net earnings accrue to the contributors. In other words, all money received are invested, thus funds are available to pay members when they retire and start getting a regular monthly payout from their own account. In the case of CPF, the contributions go into a pool. What is unique with CPF is the funds are primarily invested in SSGS which is a non-marketable Special Singapore Government Securities paying a minimum rate of return of 2.5 % p.a. This means the retirement fund is guaranteed by the government. It is risk-free. By law, the government cannot spend the proceeds of the SSGS. The funds are pooled with the sovereign wealth fund GIC for investment.
A pension fund is where employees and employers contributions are collected by the fund manager who has full discretion on what to do with the contributions. The employers or the government comingle the contributions they receive with all other revenue and use it accordingly. They may or may not invest some of the revenue to support the pension funds. There is a liability to pay retired members, but no specific assets for this purpose. Upon retirement members are paid a fixed monthly sum according to a payment plan and the money that is used for these payouts come from current paying members. This is called unfunded liability. Most of the Western countries government pension plans are on this basis. There is a factor called 'dependence ratio'. This measures how many people are there in the working age group compared to the numbers in retirement. Most of the Western countries have a high ratio of about 67%. This means 4 working citizens are supporting 1 retired person.
In comparison, CPF is a fully-funded retirement fund while most of the Western government pension plans are unfunded. For these Western countries, negative population growth rate is a demographic time bomb as it will drag the dependency ratio down. The contributions from those currently working will soon not be sufficient to meet the regular payouts for those retired. This could perhaps be one reason for the mad open border policies of the Western countries in a crazy last ditch effort to increase their numbers.
Many decades ago I tried my hand at selling some investment products. Like all investment sales person, I pitched my product as one of the best, highest ROI and so forth. My referrals led me to a supposedly high-net worth guy in his 70s. After going through the charts and brochures, the senior gentleman thanked me for the presentation and taught me something. As a retiree, he had no interest in high returns if that means taking a teeny weeny bit more risk. He was happy with his low return low risk portfolio that provides some regular cashflow. That's exactly what CPF is all about. For a Singapore investor, our government issued securities are considered risk-free. Low-risk, low-returns for a retirees' fund.
Some may well say the CPF money goes to GIC that takes on a higher risk profile portfolio. Surely that's putting retiree funds at higher risk whilst guaranteeing a measly return on the SSGS. The government is ripping members off! Actually, it is strategically smart policy to pool CPF funds with reserves to be managed by GIC. There are many tangible and non-tangible advantages for a larger fund. Advantages include economies of scale which reduces transaction costs and unit cost of operation; better capitalised operation has better access to leverage and liquidity thus more opportunities; a bigger name has better access to markets and more direct and better deals; a bigger brand name has more influence and can negotiate better and impact prices; has better access to research resources, better risk management tools, and presence in markets; more leeway for diversification of investment portfolio; and lastly a huge fund can withstand the occasional ugly disastrous investment decisions that would cause a smaller fund to collapse.
There are no other retirement funds that operate like CPF. All of them make independent investment decisions. Pension funds face tremendous challenges in managing large pools of capital. Millions of retirees and their beneficiaries are at high risk from mismanagement, fraud, and risky investments. Regulatory agencies have failed time and again to prevent fund manager abuse especially in the matter of their arrangement with investment houses. Excessive fees paid to investment houses is common. Another issue against investment houses is the increasing allocation of exposure out of equities and bonds into high risk hedge funds and mutual funds. Here are some examples:
California Public Employees' Retirement System
This largest fund in US has faced multiple issues with investment fraud and mismanagement over the years, though it continues to be a prominent and significant pension fund. It has faced many corruption claims. The fund practices 'shareholder activism' (it tries to influence investee corporations) which is fertile ground for many insider trading activities. It is currently having unfunded liability issues.
New York State Common Retirement Fund
It was involved in a major scandal known as the "Pay-to-Play" scheme, where investment firms paid kickbacks to secure investments from the pension fund.
San Diego County Employees Retirement Association:
SDCERA outsourced their investment to a firm named Salient Partners to invest 50% of their funds. Heavy losses resulted from mismanaging funds by Salient.
Illinois Municipal Retirement Fund
It has faced issues with investment losses and has been criticized for the high fees paid to hedge fund managers and private equity firms.
Kentucky Retirement Systems
It has experienced severe underfunding and investment losses, and there have been allegations of mismanagement and poor investment decisions.
Public Employees' Retirement System of Nevada
It has faced criticism and legal challenges over investment losses and the fees paid to external managers.
Dutch Pension Funds
They faced substantial losses in the past, particularly during the global financial crisis of 2008, which led to a decrease in funding ratios and forced the fund to reduce pension payments.
Ontario Teachers' Pension Plan
The OTPP has experienced significant losses from time to time, particularly in the early 2000s when the dot-com bubble burst, affecting its technology investments.
Japan Pension Investment Fund
This is the world's largest pension fund. It has reported substantial losses in many fiscal years marked by global market downturns. For instance, in 2018, it reported a loss of $136 billion due to market volatility.
South Korea’s National Pension Service
NPS has experienced major losses due to investment in underperforming assets, including a controversial investment in Daewoo Shipbuilding & Marine Engineering, which led to significant write-downs.
Once in a while a huge financial scam or scandal comes along. Each time, Pension Funds are amongst its victims. The path to chasing higher yields for investment money is littered with such victims. Here are some examples :
Bernie Madoff scam:
No doubt Singaporeans will not see CPF any differently after reading this blog. They will most likely say the funds are placed with GIC for higher-returns higher-risk investments. GIC may well suffer the same experiences of above-mentioned pension funds chasing higher yields. And indeed, GIC has had numerous disastrous outcomes in their investment decisions. This is a fair concern. I have mentioned in blogs past that GIC is supposed to maintain a lower risk profile than Temasek. It is not possible to look through the opaque wall of GIC to assess their risk exposures. But looking at reported transactions from investment intel, it is clear there is increasingly no difference between GIC and Temasek in the way they invest. They have gone into very high risk venture funds backing various start-ups. I have mentioned in the past that considering GIC is investing pension money, the caution of that 70 year old prospect that I approached to sell investment products has a certain ring for attention.
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Bernie Madoff scam:
Massachusetts Pension Reserves Investment Management
Los Angeles County Employees Retirement Association
New York State Common Retirement Fund
Royal Dutch Shell Pension Fund
Banco Santander Pension Fund
HSBC Pension Fund: HSBC,
Bre-X Minerals (gold mining scam):
Canadian Pension Funds:
Ontario Teachers' Pension Plan
Public Sector Pension Investment Board, Canada
Austrian Pension Funds
Firms that manage pension funds :-
- Caisse de depot et placement du Qubes
- Alberta Investment Management Corporation
- British Columbia Investment Management Corporation (BCI)
Barings Bank:
Norwich Union
Merseyside Pension Fund
British Coal Staff Superannuation Scheme:
Tyco International scandal:
California Public Employees' Retirement System
Florida State Board of Administration
Enron scandal:
Florida State Board of Administration
California Public Employees' Retirement System
New York State Common Retirement Fund
Teachers Retirement System of Texas
Ohio Public Employees Retirement System
British Columbia Investment Management Corporation
Ontario Teachers' Pension Plan
Government Pension Fund of Norway:
Worldcom scandal:
California Public Employees' Retirement System
New York State Common Retirement Fund
Florida State Board of Administration
Ohio Public Employees Retirement System
Teachers Retirement System of Texas
Minnesota State Board of Investmen
Dutch Pension Funds:including Algemeen Burgerlijk Pensioenfonds
The problems of unfunded liabilities of pension funds all over the world are massive and there is in reality, no solution in sight, and neither are authorities talking about it or working at it. For example, a study by Ted Dabrowski and John Kllinger in 2020 on pension funds in the state of Illinois, US, showed pension funds in the state has a total shortfall of US$500 billion.
Back in 2017 I wrote a guest blog on another platform about Social Security System, Philippines (SSS): The SSS had 31 million members. A 2015 study determined the actuarial life of the fund was 14 years, meaning the unfunded liability is massive. The fund is in deficit and payments to retirees will run out by 2029 unless certain parameters are changed -- reduction in payout, increase in contribution rates, or increase in membership, etc.
No doubt Singaporeans will not see CPF any differently after reading this blog. They will most likely say the funds are placed with GIC for higher-returns higher-risk investments. GIC may well suffer the same experiences of above-mentioned pension funds chasing higher yields. And indeed, GIC has had numerous disastrous outcomes in their investment decisions. This is a fair concern. I have mentioned in blogs past that GIC is supposed to maintain a lower risk profile than Temasek. It is not possible to look through the opaque wall of GIC to assess their risk exposures. But looking at reported transactions from investment intel, it is clear there is increasingly no difference between GIC and Temasek in the way they invest. They have gone into very high risk venture funds backing various start-ups. I have mentioned in the past that considering GIC is investing pension money, the caution of that 70 year old prospect that I approached to sell investment products has a certain ring for attention.
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5 comments:
Without the CPF we will still be living in kampongs and slums. The CPF built the HDB. Can you name another country where 100% of the people live in modern housing with electricity, gas, water and broadband?
1. If you meant another city where people live with electricity, etc -- yes, thousands of them.
2. CPF didn't built those houses. HDB built them.
Your reading skills are very poor. I said 100% of the people. Name me one city where are no homeless and no slums, even in rich countries. Have you seen the slums in London, Paris or New York? I have.
HDB built the flats with CPF money.
Your reading skills are very poor. I said 100% of the people. Have you seen the slums in London, Paris and New York? I have.
HDB built the flats with CPF money.
Look, the general tone of the post is CPF is good.
But I would not go around and say there is no homeless people in Singapore. I have not walked the streets of Singapore. Apparently you have walked every square inch of the island to know there is 100% zero homeless, despite a report by a study group that found 1,000 of them in a few nights.
Neither would I say HDB build the houses with CPF money as if it's manna. HDB build with fiscal resources of the government, which is taxpayer money . We buy those houses by taking a loan from bank or HDB and then use our own money parked with CPF to buy those houses. In other words taypayer money built those houses, and taxpayer use their own money in the CPF to payback HDB so they can repay the taxpayer money provided by the fiscal allocations by the government.
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