Government Securities (Amendment) Bill

Mdm Speaker, first and foremost, I would like to declare my interest that I work in a financial institution and do engage in bond trading activities in my professional work. This amendment to the Government Securities Act facilitates the issuance of a new class of non-tradeable securities to the public.

I support the amendments and the ensuing introduction of the Savings Bonds. There are three reasons why. Firstly, it is an investment with almost zero risk of default, being issued by a rated sovereign. It will appeal to investors with very low risk appetite. Secondly, it offers holders of the bond a long-term Government bond yield pick-up and at an affordable denomination of just $500. Thirdly, it does not impose penalty or price risk should investors need to encash the bond before the 10-year maturity, yet enjoy interest coupons even when redeemed earlier. In other words, it allows investors to enjoy the higher interest rate premium from the longer end of the yield curve without having to give up on liquidity.

In this day and age, where markets are volatile and full of surprises, and where investment products are increasingly complex, the Savings Bonds are just what some financially less literate individuals would need – the peace of mind of a safe credit and steady stream of returns with flexible redemption options.

Given the simplicity of Government-issued Savings Bonds, we can expect investors to be spared the many pages of terms and conditions of a typical investment product as well as both the fine and bold prints.

Of course, the other plus is that the transaction cost for such an investment is likely to be lower than those offered by financial institutions. Hence, it is most suited to ordinary investors who just want a simple and low-cost investment alternative with reasonable

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returns and flexible tenures for their financial planning as well as to meet their long-term retirement needs.

Currently, the closest comparable investment product is SGS, which comes in higher denominations and investors would have to take the price risk when it is sold, as the bond is traded in the secondary market.

From a risk-return analysis stand point, the Savings Bond is certainly of more value than SGS as it comes with a free put option for investors to put the bond back to the Government if they need the cash. In market terms, this is known as the "free lunch" part of the Savings Bond. When the bond is being put, investors still get the returns for the shorter tenure they hold.

Given this free put option feature, I agree that the bond should be targeted and limited to individual investors and not to institutional investors.

Also, there is a need for the cap as, otherwise, we may potentially see a huge surge in bank deposit withdrawals due to the attractiveness of the Savings Bonds. The implication is that it may push up bank interest rates and result in a tighter monetary condition in the financial system.

While it is mostly pluses for the Savings Bonds, I would like to point out a few areas where investors of Savings Bonds ought to take note of.

Firstly, the interest rate for the bond is fixed at the time of the purchase and does not change for the life of the bond. So, in a rising interest rate or rising inflation environment, the return of the bond might not keep up with inflation or with rising interest rates. Of course, if the investors of the Savings Bonds take the view that interest rate or the inflation is rising, the investors can redeem the bond early and re-invest later when the rates increase. But that would require investors to understand the interest rate market, which is not something that is easy for a layman to understand. Hence, I hope that Government would consider to also issue inflation-linked bonds in future so that there is a safe avenue for retirement savers to hedge the inflation risk other than by way of investing in stocks or property which come with downside risks.

Secondly, based on current SGS yields, the Central Provident Fund (CPF) rates still offer better returns. It still makes sense to save most of the retirement money in CPF LIFE. However, in times of a changing interest rate environment, retiring investors may need guidance as to whether they should maximise their savings in CPF or withdraw some of the

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funds to invest in Savings Bonds.

During the Ministry of Manpower (MOM) Committee of Supply debate, I am glad to learn that the Government will be providing guided one-to-one retirement planning service for CPF members approaching retirement. Savings Bonds should feature as another instrument in the portfolio of retirement planning and the guidance will be helpful to CPF members who are approaching retirement.

I have a few questions for the Senior Minister of State. Firstly, can the Savings Bonds be transferred to or inherited by their beneficiaries should the investors pass away? Secondly, how would the Government intend to use the funds raised from the Savings Bonds the market condition does not have the opportunities where the Government could invest at a return higher than what the bond is paying and whether there will also be an overall cap as a proportion of the Government's total debt? Thirdly, would the Statutory Boards also consider issuing Savings Bonds in future?

Mdm Speaker, with our society ageing rapidly and individuals needing to save even more due to increasing longevity as well as in anticipation of the rising cost of healthcare, the Savings Bonds is a thoughtful initiative by the Government to help Singaporeans better plan for retirement and is another compelling investment alternative worth considering for the public at large. Madam, I support the amendment Bill.

Mdm Speaker, as the Senior Minister of State has explained, the amendment to this Bill is to prepare for the recently announced Government of Singapore Savings Bonds. The Senior Minister of State has also explained the mechanisms of the Savings Bonds. These bonds have a 10-year term with step-up interest and whose rates are linked to the long-term SGS rates. Unlike the existing SGS, the new Savings Bonds will not be transferable, hence, necessitating this amendment to the Bill.

Madam, I support the Bill.

Interest rates in Singapore have been low. The average member of the public has few alternatives to invest in very safe asset classes to meet their long-term financial goals and to save extra for retirement needs. Yields on bank savings have been extremely low. Fixed-term deposits, or FDs, with banks have slightly better rates but are of relatively short duration of up to around two years. Even with their better yields, fixed-term deposit rates from banks have lagged behind the inflation rate for many years already.

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Corporate bonds have better yields, but most required investments of $250,000 and above per transaction. More retail corporate bonds have recently been launched since changes to our policy on corporate bonds which have made it easier for companies to issue retail bonds. But the interest of companies to issue such bonds is still low. There are also risks in corporate bonds as they are primarily based on the financial stability of the issuing company. Ten-year SGS, whose recent yield has been between 2% and 3% per annum, can already be purchased in tranches of $1,000 and above. However, there appears to be low interest in SGS by retail investors. Not many understand the mechanism nor how to trade this on the secondary market, if they wish to cash out before maturity, and there may be capital loss when sold on the secondary market.

In the search for better returns on savings in this period of low interest rates and high liquidity, many small investors have dabbled in risky investments or penny stocks without fully understanding the risks, with some losing a good part of their hard-earned savings while trying to beat returns from bank savings. The to-be-launched Singapore Savings Bond is, therefore, a useful new instrument that can help the average small investor save for the long term and get yields close to the inflation rate. Investors should keep the Savings Bonds to maturity to maximise the returns but can sell back to the Government at any time at a lower interest rate, depending on the durations that the bonds had been kept for. They act like FDs offered by the banks but have more flexibility in withdrawals. SSBs could push banks to work harder on making their FDs more competitive.

I have three questions for the Senior Minister of State regarding these Savings Bonds.

First, I would like to know what will happen should a person who owns such Savings Bonds passes on. The Bonds will form part of his estate. However, this Bill makes such Bonds non-transferable. These Bonds would then have to be sold back to the Government and the monies returned to the estate. However, the family members would then lose the advantage of the step-up interest rates. Can the Bonds be transferable in the event of death if one wishes to hold on to the Bonds received through inheritance? Are there special circumstances where the Bonds can be made transferable?

Second, I would like to know how investors' education would be conducted with the launch of the Savings Bonds and how purchases can be made easily. I think the Bonds can encourage people with spare cash to save more for retirement in a safe instrument while maintaining the flexibility to cash out on the investments if needed. It would be a pity if the take-up rate is low due to a lack of understanding of the product and also due to maybe difficulties in purchase. The Bonds can be sold through existing financial institutions, as the Senior Minister of State has said. Are incentives attractive enough for banks to promote these Bonds, given that they may sell other instruments that may pay better commissions but may be riskier for investors? Furthermore, the Savings Bonds compete directly with FDs

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offered by the banks. So, banks may not be interested to market these.

Third, I understand from reports that there is a cap on the amount that can be invested on the Savings Bonds by any persons. I would like to know how the cap will be set because, if it is set too low, it may not be attractive enough to encourage retail investors to bother with yet another investment to keep track of. If yields on the Savings Bonds are equivalent to the SGS 10-year bonds, may I know why there is a need to restrict the amount that can be invested by any one person?

Mdm Speaker, I rise in support of the Government Securities (Amendment) Bill. We know the main reason for this deck of amendments is to facilitate the issuance of the Singapore Savings Bond. I applaud this move by the Government to introduce this "first-of-its-kind" and "one-of-its-kind" financial instrument for the benefit of the people of Singapore.

I recall after the sub-prime crisis in 2008 and the collapse of Lehman Brothers that many Singaporeans, including numerous organisations, suffered deep and painful monetary losses. Those affected delved into products, such as the High Notes and Pinnacle Notes, which were actually instruments whose risks were not apparent to many investors. Many Singaporeans burnt a big hole in their pocket thinking that 4% to 5% returns placed them in better stead for the same period than in fixed deposits and other structured instruments.

Since that saga, I believe many local investors have become more apprehensive and careful with the rich diversity of financial products available in the local market. There have also been many who have urged the Government to offer alternative savings plans, other than the CPF, which can afford security and guaranteed returns but allow for flexibility and liquidity. It is with this as a backdrop that this Bill is introduced and comes, with it, the new Singapore Savings Bond which will be introduced later this year to offer a new instrument which is safe, secure, guaranteed, flexible and yet affordable for the general populace to benefit and save their excess cash for a rainy day.

There are three reasons why I strongly support the introduction of these amendments and the Singapore Savings Bond.

Firstly, the building of retirement savings. The step-up interest provided under the Singapore Savings Bond encourages savings for the longer term yet does not penalise early termination nor withdrawals which sometimes are done for exigencies or a sudden need for cash. This will also fill the lacuna of fixed deposits which are traditionally for one- to two-

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and, sometimes, three-year periods. It also provides a much better yield than putting your cash into a savings account whose interests rates are a far cry and pale in comparison with the payoffs from the Singapore Savings Bonds.

Secondly, principal protection and it is flexible. Laudably, it is going to be a low-risk and safe long-term savings instrument for excess cash. The Singapore Savings Bonds will be backed by the Government and will not be traded and there is no risk that an investor gets back less than his investment. The flexibility also gives Singapore Savings Bonds an edge over a fixed deposit with a bank, which pays no interest if the principal is withdrawn before the account's maturity.

With the potentially low tranches in denominations of $500, many Singaporeans will be able to benefit from it. In particular, many middle-income Singaporeans, especially professionals, managers and executives (PMEs), and those who have cash in bank which they set aside for rainy days, can utilise this long-term and secure savings instrument and benefit from the steady interest payouts. This is particularly so as there is a cap in the amount which a person can lock into his CPF account as well as the Supplementary Retirement Scheme (SRS). Having this new instrument will provide more options and encourage more Singaporeans to build up their nest egg in a safe and flexible manner. This will also circumvent the unnecessary risks associated with instruments like those affected during the 2008 and 2009 financial crises.

Thirdly, there is no lock-in period and it is liquid. What is most attractive about this Savings Bond is that there will be no lock-in period as they are going to be issued at regular intervals and can be redeemed the same. There are also no penalties and one still earns the accrued interests for early redemptions. This will offer strong liquidity and also peace of mind for Singaporeans who place their monies in them.

Albeit a great boon for Singaporeans, I have some reservations and questions which I urge the Senior Minister of State to address and answer.

From a macro perspective, I wish to know the costs and estimated budget involved in running this scheme and the issuance of this new instrument as it is not clearly forecasted. Is it going to be sustainable for the Government to run this scheme in the long term?

Bankers and analysts have shared that there is, in fact, no need for the Government to raise capital this way. As such, I am concerned how the monies from these bonds will be utilised and how is the Government to hedge for market and economic fluctuations.

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How will the Singapore Savings Bond adjust and reflect market sentiments, especially when interest rates rise much above the coupon rate and in instances where they fall rock bottom or when inflation propels? With guaranteed and fixed interest payouts, how is the Singapore Savings Bond going to stay true to its credo of being flexible, safe and protected? On this note, I agree with hon Member Mr Liang Eng Hwa's suggestion of having inflation rate-linked bonds as well.

From a micro and individual investor point of view, it has not been shared how much the cap on the Savings Bond for each individual will be. I hope that all Singaporeans will be able to tap on this savings scheme and the cap be at a level which will benefit all Singaporeans, including those who have excess cash which they want to save for the longer term.

I am also urging if the Government can allow SRS monies to be used to purchase these bonds since, unlike CPF monies, SRS monies left with the bank earn a meagre interest rate.

In the same vein, I want to clarify that the interest earned from these bonds will not be taxable. If, indeed, they are going to be taxable, I urge the Government to consider rendering these special Savings Bond interests be made non-taxable to encourage savings.

Finally, I hope the Government will make the purchase and redemption of these bonds easy and accessible by all Singaporeans and only Singaporeans. The passing of this Act and introduction of this bond is a milestone. But the follow-through, implementation and execution will be crucial as the beneficiaries are individual Singaporeans. I urge the Government to enhance the communication of this product so that even more Singaporeans can be made aware and benefit from this scheme, particularly the middle-income and PMEs and any Singaporean who have cash to save for a rainy day. Mdm Speaker, in Mandarin.

(In Mandarin): [Please refer to Vernacular Speech.] With the amendment of this Bill, what is called Singapore Savings Bonds will be launched in the second half of this year.

The Savings Bonds have three benefits. First, it is a low-risk investment instrument. Second, it is also a low-cost instrument which you can invest in with as little as $500, and this will benefit many middle-income PMEs. Third, it is a flexible investment option which allows you to redeem at any time and you will not suffer any losses from early redemption.

The Savings Bonds is aimed at encouraging Singaporeans to make long-term investment and prepare for the rainy days by having another source of fund after retirement. The longer you hold, the higher the return. I would like to urge the Government to let Singaporeans know as soon as possible how to purchase the Bonds and what the caps will be and

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encourage Singaporeans to use this instrument as a long-term savings option.

(In English): I look forward to more details about the Singapore Savings Bond which should be issued in the coming months. I believe the Singapore Savings Bond will combine the flexibility of a short-term investment, the affordability of a low-cost product, and the stability of a long-term Government Bond and help Singaporeans build their nest egg.

Mdm Speaker, I thank Mr Liang Eng Hwa, Mr Yee Jenn Jong and Mr Patrick Tay for their comments on the Bill. Let me address the points raised by the Members, together with some of the feedback that we have received from the public, on the Savings Bonds programme.

First, I would like to assure Members of the House and the public that the programme will not adversely impact the Government's finances. All proceeds from bond issuances cannot be spent but are instead invested. As a result, the Government's assets will increase by the same amount as its liabilities, leaving the Reserves unchanged. Overall, as a government, we continue to maintain our strong net asset position and expect the returns from investments to cover the interest cost of the bonds.

Additionally, the liquidity risk from the programme will be manageable as the total issuance is not expected to add significantly to the size of total Government borrowings. In any case, total Government borrowings will be kept within the limit authorised by Parliament under the Government Securities Act.

Mr Liang has asked if Statutory Boards will consider issuing Savings Bonds. The proceeds from bonds issued by Statutory Boards are used primarily to meet payments of development projects on a continuing basis. It may, therefore, be difficult for them to manage the liquidity required by the flexible early redemption feature of the Savings Bonds.

Mr Liang has pointed out that the cap on individuals' holdings of Savings Bonds will mitigate the programme's impact on the banking system. In addition, we expect the programme size to be small relative to total bank deposits and the impact on the banking system is, therefore, likely to be limited.

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I will now move on to address the questions raised on the features of the Savings Bonds.

Mr Tay has asked how the Savings Bonds will reflect market sentiments and remain flexible, safe and protected when there are market interest rate movements and changes in inflation.

Like the conventional SGS, the interest rates on Savings Bonds are set to compensate for expected future inflation. But interest rates on such bonds may not offer full protection against unexpected inflation. However, the key difference from conventional bonds is that holders of Savings Bonds enjoy full protection from price depreciation or capital losses. In the case of conventional bonds, which are tradable, prices fluctuate with interest rate changes. During a period of rising inflation expectations, interest rates may adjust upwards and cause the prices of conventional bonds to fall. Savings Bonds, however, can always be redeemed at the initial purchase price. This full-redemption feature of Savings Bonds prevents such rising inflation expectations from eroding the value of the savings.

I should add that the redemption and interest on Savings Bonds are guaranteed by the Government, which has received "AAA" credit ratings from international credit rating agencies, such as Standard & Poor's, Fitch, and Moody's, consistently since 2003. It is, therefore, a very safe investment option.

Mr Patrick Tay has noted that Savings Bonds have a fixed interest rate schedule, which provides greater certainty to individuals as the interest income will not fluctuate with market movements. It is fixed, it is locked in at the point of issue, the schedule is known to the person buying the Savings Bonds. And even if there are market changes in interest rates, that schedule will be honoured. When market interest rates fall, existing bond-holders will, therefore, benefit from receiving higher-than-market interest rates. On the other hand, when interest rates rise, bond-holders can make use of the flexibility of the early redemption feature to redeem their bonds, if they wish to do so. They can then re-invest the proceeds in the new issues of the Savings Bonds.

We have also received some feedback from the public on whether the Savings Bonds can be floating-rate bonds, where the interest rates move with the market. Some have also asked if new Savings Bonds can be issued to existing bond-holders automatically when interest rates rise.

The Government has carefully considered and decided against including these two features in the design of the Savings Bonds. Let me explain why.

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First, issuing floating-rate bonds creates more uncertainty for the individuals, as there would be both upward and downward movements over time. And, as I explained earlier, in a rising interest rate environment, the bond-holder can redeem his existing Savings Bonds at the initial purchase price and re-invest the proceeds by applying for new issues of the Savings Bonds. In this way, he can potentially enjoy higher interest rates without having to face the downside risks of floating interest rates.

Second, an automatic rollover into new Savings Bonds may not be beneficial for all bond-holders. To illustrate, take a 10-year Savings Bond issued in January 2016 that will earn 2.5% interest per annum if held to the full 10 years. Let us say that in the first year, this bond earns 0.9% and the interest rate will step up to 1.9% by the fifth year. Suppose in the fifth year, the bond-holder could also purchase a new 10-year Savings Bond issued at 3% interest which pays a first year interest of 1%. This is clearly not an attractive option, compared to the 1.9% he is already getting on his existing bond by then. Even if the first-year interest rate of a new issue was attractive in comparison, the bond-holder may prefer to hold on to the existing bond because the interest payment is due shortly and he would like to be able to use the money, or wait for even higher interest rates before switching. Therefore, the choice of whether to redeem existing Savings Bonds and apply for new issues with higher interest rates will be better left to the individual bond-holders than to have the Government automatically roll it over.

To reiterate, the design of the Savings Bonds is expected to offer a safe savings option for individuals while also allowing them the flexibility to redeem their bonds in any given month. It may not be an inflation-linked bond, as Mr Liang and Mr Tay have asked the Government to consider, but, in effect, the full-redemption features allow bond-holders to mitigate against risks of soaring inflation and higher interest rates.

On a related note, some people have also asked if Savings Bonds offer good returns, compared to existing savings and investment options.

Mr Tay will be pleased to know that the interest received on Savings Bonds will be tax-exempt.

The returns on Savings Bonds are pegged to the market yields of conventional Singapore Government Securities, commonly known as SGS. The full interest rate schedule for each bond will be announced by MAS when the application period opens each month. Over the past 10 years, the 10-year SGS yield has, generally, been between 2% and 3%. Compared to SGS, the Savings Bonds offer attractive returns, considering the additional benefits of capital-guarantee and flexible redemption. Mr Liang has characterised this as a

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"free lunch". There are very few "free lunches".

We expect that the interest rates paid by the Savings Bonds would be higher than that of shorter-term fixed deposits but lower than the longer-term CPF monies. Savings Bonds are thus meant to complement, and not replace, existing instruments, like fixed deposits, bonds and equities. Mr Yee also talked about corporate bonds. But I should add that the other investment options carry varying levels of risk which investors ought to familiarise themselves with before plunging in.

Mr Tay has also asked that investors be allowed to use their SRS monies to buy Savings Bonds. Others have pointed out that CPF monies cannot be used. The Government will consider the suggestion of allowing SRS or CPF monies to be used to buy Savings Bonds. It makes sense to start the Savings Bonds with cash purchases as it complements the CPF scheme. There are also ongoing reviews to provide CPF members more investment options. We will consider all these in totality.

To address Mr Liang and Mr Yee's query, the Government will allow Savings Bonds to be transferable to beneficiaries in the event of death of a bond-holder. Such transfers can be effected in full, without being constrained by the cap on individual holdings. However, a beneficiary will not be able to apply for new Savings Bonds if his total holdings exceed the cap, until maturity or redemption of the existing bonds brings him below the cap.

Mr Tay and Mr Yee have also noted the importance of communicating the details of the Savings Bonds programme to the public. To ensure that Singaporeans are aware of the features and application process of Savings Bonds, MAS will be conducting a public education campaign through the media and its industry partners. A dedicated website will also be set up for the public to obtain information on Savings Bonds and a public hotline to answer enquiries.

The Government intends to make Savings Bonds accessible to all Singaporeans and have linked up with the three local banks to widen the outreach. But I assure Mr Yee we are not only depending on the banks for the outreach. As you heard earlier, we will have our own website and our own public education campaign.

As to why there is a cap on individual holdings, it is precisely to allow as many individuals as possible to gain access to the Savings Bonds. Otherwise, they could be concentrated in the hands of a small number of savvy investors. Nonetheless, the Government can review the caps after a period of time when patterns of demand have had the opportunity to stabilise.

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In conclusion, the Savings Bonds are a new type of Singapore Government Securities designed to offer individuals a long-term, flexible savings option with safe returns. They will provide individuals with more options to save and invest to meet their long-term financial needs. The proposed Government Securities (Amendment) Bill will allow Savings Bonds to be issued as non-tradable securities to protect individuals from capital losses.

I thank Members once again for their support of the Bill. Mdm Speaker, I beg to move.

*Question put, and agreed to.*

*Bill accordingly read a Second time and committed to a Committee of the whole House.*