Investment of CPF Monies

Mr Gan Thiam Poh asked the Deputy Prime Minister and Minister for Finance (a) where and how has the Government invested the proceeds from the Special Singapore Government Securities, which the CPF Board invests in with the CPF monies; (b) whether it is possible to invest these proceeds such that they yield high returns with no risk even though high-risk investments typically yield high returns and vice versa; (c) what steps are put in place to ensure that these investments are sound, prudent and viable; and (d) whether independent internal and external audits are conducted regularly to ensure and safeguard the CPF investments and funds.

Mr Lim Biow Chuan asked the Deputy Prime Minister and Minister for Finance (a) what are the rates of interest paid by the CPF Board on CPF funds for the past 10 years; and (b) whether the CPF Board will consider paying a higher interest rate or pegging the interest rate paid on CPF funds to the rate paid on 10-year Singapore Government bonds.

Mr Gerald Giam Yean Song asked the Deputy Prime Minister and Minister for Finance (a) how many years, if any, in the last 20 years is GIC unable to pay the interest on the Special Singapore Government Securities (SSGS) owed to the CPF Board from its normal investment returns; (b) what are the returns from GIC's investment portfolio after accounting for the interest payable on the SSGS in each of the past 20 years; and (c) what extraordinary measures, if any, are taken in the last 20 years when normal GIC returns are insufficient to pay the SSGS interest rate.

Thank you, Mdm Speaker. Minister Tan Chuan-Jin has explained the basic features of the Central Provident Fund (CPF) system, the reasons for the Minimum Sum scheme and the areas which can be improved. Dr Lee Bee Wah, Mr Gan Thiam Poh, Mr Lim Biow Chuan, Ms Tin Pei Ling and Mr Gerald Giam have asked further questions on whether higher returns can be paid without changing the risk-free nature of CPF accounts and how CPF funds

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are invested and safeguarded. They have also asked about the GIC's investment returns.

Before I get into the details on these questions, it will be useful to provide some perspective on the challenges faced by retirement savings schemes around the world. There is a looming pensions crisis in most of the advanced countries and the challenges remain largely unresolved.

The first challenge is financial sustainability. In many advanced countries, the "pay-as-you-go" social security system has become unsustainable. As more of their citizens are retiring, the pensions they have been promised are becoming unaffordable to those who have to pay for the system, in other words, the younger citizens who are working and contributing through social security taxes.

Some of these countries have responded with politically difficult but necessary reforms, such as postponing the retirement age or cutting retirement benefits for younger workers. Most recently, the Australian government has proposed major reforms to its Age Pension scheme, which is the primary source of income for the majority of Australian pensioners today. These reforms include raising the age at which pensions can be withdrawn from 65 to 70 years old.

But in many cases, the severity of the problem has not been acknowledged and reforms have been postponed. In the US, for example, most public pension funds still over-estimate their future investment returns and understate their liabilities. With more realistic assumptions, it is estimated that about 85% of US public pensions will go bankrupt within the next 30 years. So, this is the first challenge – financial sustainability.

The second challenge is to give individuals a fair return on their retirement savings but avoid exposing them to more risk than they can bear.

As both governments and employers face increasing difficulty in funding "pay-as-you-go" pension schemes, more risk is being shifted to the individual in many countries. The shift is to pension plans where the worker's savings go into his own account and he eventually draws on his own account in retirement. The 401(K) schemes in the US are an example. These schemes which are called "defined contribution schemes", are like the CPF, in that the eventual payouts are funded by the contributions by the worker and employer into his account, not payouts funded by future workers. But in many such schemes, unlike the CPF, the worker has to choose his own investment plan and bears the risk on his investments.

In theory, individuals can expect to earn higher returns over the long term by taking more risk on investments, such as investing more in equities or equity-heavy funds. In

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practice, there are three problems. First, the evidence from the advanced economies shows that most individuals underperform the market, even when they invest in funds rather than do their own stock-picking. Some individuals do well, but most face daunting and unfamiliar investment choices, and are swayed by sentiment. They tend to buy into the funds after gains have been made, and sell after losses. As a result, in the US, for example, individual investors in equity funds earned only one-third of what the market index earned over the last 30 years; one-third of what the S&P Index earned over the last 30 years. Fees charged by private pension funds eat into the returns earned by individuals. In Europe, this is another reason why returns on private pension funds have been low in the last decade.

A second risk is that you may retire when the financial markets are down. A recent article in The Economist magazine described the typical retirement scheme as a lottery, because the individuals' pot of money at the time they retire will depend on the state of the markets at the time. For example, an individual who retired just before the Global Financial Crisis will have much more income in retirement compared to an individual who retired during the crisis. One year can make a big difference.

A third risk is that you retire when interest rates are low. The current prolonged low-interest rate environment is in fact a major challenge in many countries, because the pot of money that you have upon retiring now gives you a smaller stream of annuity income for the rest of your years. This is the consequence of low interest rates, either the annuity becomes more expensive to buy or for the same pot of money, you get a smaller stream of income for the rest of your years.

Many retirement schemes require or encourage members to convert their capital into an annuity or monthly payout. However, interest rates matter greatly when buying an annuity, and unlike CPF LIFE, these schemes do not provide a floor on interest rates. So, when market interest rates go down, the member has to buy an annuity that is either more expensive or he gets a smaller stream of income in retirement for the same pot of money that he has.

Even if individuals are relieved of the requirement to buy an annuity that pays out for life, which some governments have been tempted to do, it does not solve the problem. Low market interest rates mean that retirees will receive less income even if they invest on their own in suitable retirement portfolios.

I have provided this background, Mdm Speaker, to explain why our CPF system has worked well and provides a strong foundation for the future. It has protected members from risk. The scheme is aimed at meeting basic retirement needs. As many members have had relatively small balances, it has been right to shield them from risk. The CPF has also avoided imposing risk on taxpayers, unlike many countries where ordinary citizens face a much larger

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tax burden in future, on account of under-funded social security schemes.

The CPF is not a perfect retirement savings scheme, but it is amongst the better regarded internationally. As the Prime Minister has stated, we want to improve the CPF to provide greater security in retirement, especially for those with lower wages and to help retirees cope with inflation. We also want to give those who are "asset-rich and cash-poor" more convenient options to get cash from their homes.

But as we seek to improve the CPF or to add any flexibility, we must retain its basic strengths and avoid the huge problems seen elsewhere.

First, our CPF system is sustainable. There are no unfunded or sudden liabilities that will burden our children's generation.

Second, the CPF offers some flexibility for members to withdraw savings, indeed more so than many other social security systems. In particular, by tapping on their Ordinary Account (OA) savings, the vast majority of Singaporeans have been able to own their homes and service their mortgages with little or no out-of-pocket cash, which Minister Tan has just emphasised.

Third, while the CPF scheme does not provide the highest returns, it gives fair returns and certainly one of the safest in the world. Whilst the CPF does not provide the highest returns, it provides one of the safest in the world. These are fair returns. Few systems offer the guaranteed floors on interest rates – 3.5% of the OA and currently 5% on the SMRA (Special, Medisave and Retirement Accounts) for those with smaller balances, who comprise the majority of members. And for those with larger balances, it is 1% less. The interest rates are guaranteed by one of the few remaining triple-A rated governments in the world.

The CPF also offers the option to members who wish to place more money in their Special Account (SA) account, so that they can earn a higher interest rate than on their OA Account and it allows them the option of taking higher risks through the CPF Investment Scheme (CPFIS) in the hope of higher returns. So, that is the third strength – fair returns and safe returns.

Fourth, on top of the guaranteed interest rates, the Government subsidises CPF members through the Budget in a targeted and sustainable manner. We provide significant help to lower-income members to build up retirement assets, by giving them housing grants in their OA and CPF contributions through the Workfare Income Supplement (WIS). Members of the Pioneer Generation also now get top-ups for life in their Medisave accounts.

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Taken as a whole, our CPF system prepares Singaporeans well for the future. Based on current policies, a new entrant into the workforce today can expect to draw a retirement income of about two thirds of his last-drawn pay if he is a median income earner. This is around the OECD average. He gets a much higher ratio of his previous pay if he is a lower-income earner, chiefly because of Government subsidies. As Minister Tan has said, our key concern is to help the current generation of older Singaporeans who have lower balances, often very low balances, due to their much lower wages in the past and the more liberal withdrawal rules then.

Let me now address the specific questions on how CPF interest rates are determined. The current CPF interest rate structure was implemented in 2008. It was an enhancement, especially for members with smaller balances. We debated the changes in Parliament in 2007, as part of the broader package of reforms to strengthen retirement security.

The fundamental principle is to peg CPF interest rates to returns on investments of comparable risk and duration in the market. We also structured the interest rates to provide greater benefit to members with small and medium-sized balances, by paying Extra Interest (EI) on the first $60,000 of balances.

Let me start with the OA rate. In determining the interest rates, we have to recognise the fundamental difference in the purpose of the OA compared to the longer term SA, MA and RA, or SMRA. OA savings can be withdrawn at any time for home purchases, servicing mortgage loans, or education. It is a liquid account. The interest rate on OA has therefore been pegged to the 12-month fixed deposit and month-end savings rates of the major local banks. However, unlike market interest rates, it pays a guaranteed floor rate of 2.5%, or 3.5% for OA balances of up to $20,000. More than half of all members enjoy the full 3.5% on their OA.

Members also have options to earn more than these OA interest rates. They can transfer OA savings to the SA so that these become long-term savings, earning higher returns. That is an option that members have. It is a useful option for those who have paid up their housing loans. Those who want to take on market risks in the hope of earning better returns can also invest part of their OA balances through the CPFIS.

Furthermore, the CPF interest rates are not the only help that members get to build up their savings. As I had just mentioned, the Government also provides subsidies through the Budget to CPF members, targeted especially at lower- and middle-income members. These subsidies, in effect, amount to a significant boost to what a typical lower-income member earns on his balances.

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If we look at his OA, in particular, on top of the 3.5% interest rate on his OA, he gets Workfare payments and housing grants. When he sells his home to upgrade or downgrade later, the housing grant is returned to his OA as part of his savings for retirement. Based on current policies, these grants, amortised over his working life, will, in effect, grow his savings by at least 2.5% per year over a 30-40 years of working life. So, in effect, his savings "earn" 6% per annum through the combination of CPF interest rates and Government subsidies.

This does not include the OA savings used to purchase the housing asset, which benefits separately from appreciation in housing value. As Minister Tan explained, his home is an important retirement asset and, based on its value, he can withdraw monies from his CPF balances at age 55.

The OECD highlighted this critical role of homeownership in its recent analysis of pension systems in the advanced countries. Homeownership "can make a big difference for many pensioners, both reducing the need for cash and providing a way to generate income later in life."

Mr Lim Biow Chuan asked if CPF interest rates could be pegged to those on 10-year Singapore Government Securities (10Y SGS). The OA interest rate, pegged to market deposits that can be withdrawn at any time, is fair. However, for several years now, the OA has earned the floor rate of 2.5% to 3.5%, well above the market rates. It also means that the OA has in fact been earning more than what 10Y SGS earns. The average yield on 10Y SGS over the past 10 years has been 2.4% and it is currently about 2.3%. So, the floor rate of the OA at 2.5% to 3.5%, depending on the size of your balances, has in fact been higher than even the 10Y SGS.

The SMRA, on the other hand, is pegged at 1% above the 10Y SGS, which I will now explain. The Special Account and Retirement Account are as we all know held for retirement. It is long-term savings. As Medisave (MA) balances are also mainly used as Singaporeans get older, we have treated them like the SA for purpose of determining interest rates.

The returns on the SMRA have been enhanced over the years. When we set the new basis for SMRA rates in 2007, our aim was to peg it to the rates for similar long-term, risk-free investment. This was what the Economic Review Committee (ERC) had recommended in 2002.

The best peg would have been a 30-year Government bond, because 30 years is the typical duration for which SMRA monies are held. However, as we had not started issuing 30-year SGS in 2007, SMRA rates were pegged to the yield on 10Y SGS plus 1%, to approximate the 30-year rate. 10Y SGS plus 1% was an approximation of what a 30-year

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Government bond would have paid.

As I told the House then, when we debated the changes to the CPF, the 1% spread on top of the 10-year Government bonds was, in fact, a little generous, as it was higher than what had been observed for 30-year bonds in international markets. However, it was fair and reasonable, giving allowance for future economic and market uncertainties, such as if inflation picks up sharply over the long term.

Going by the formula for SMRA rates, we would be paying about 3.4% today on SMRA. This is higher than the actual yield of 3% on the 30Y SGS, which we now have but is not widely traded. So, 3.4% is what the formula would dictate for SMRA. However, we have maintained a floor of 4% on SMRA, or 5% on balances of up to $60,000. We have renewed this floor each year since 2008. Two-thirds of CPF members in fact earn the full 5% on SMRA.

This is a fair system of returns for the SMRA. The CPF in essence pegs SMRA returns to long-term SGS, but it has also been paying a floor of 4% to 5% that is well above market rates in the current environment. As I explained earlier, we have shielded members from the risk of low market interest rates.

I will next explain how CPF monies are invested, as asked by Er Dr Lee Bee Wah and Mr Gan Thiam Poh. The CPF Board invests CPF members' monies in Special Singapore Government Securities (SSGS). These are issued specially by the Government to CPF Board. They are not traded instruments. The payout from the SSGS is pegged to the interest rates that the CPF Board is committed to pay its members.

The Government guarantees these SSGS bonds, so that CPF Board faces no risk of being unable to meet its obligations to its members. This is a solid guarantee, from a triple-A credit-rated Government. The triple-A credit rating reflects Singapore's very strong financial position, with the Government's assets comfortably exceeding its liabilities. Both Standard and Poor's and Moody's recently reaffirmed our triple-A credit rating, noting that our strong net asset position provides ample cushion against shocks.

What does the Government do with the proceeds from SSGS issuance? It pools them with the rest of the Government's funds, such as the proceeds from the tradable Singapore Government Securities (SGS), any Government surpluses as well as the proceeds from land sales which under our constitutional rules have to be accounted for as past reserves. So, the Government pools the SSGS proceeds with the rest of the Government's funds.

The comingled funds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. A major

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portion of these assets are, however, of a longer-term nature and are, hence, transferred over to be managed by GIC.

The SSGS proceeds are not passed to Temasek for management. Temasek manages its own assets and does not manage any CPF monies.

What these investment arrangements mean is that CPF members bear no investment risk at all in their CPF balances. Their monies are safe and the returns they have been promised are guaranteed. Neither does the CPF Board bear any risk, regardless of whether the GIC's investments earn or lose money in any particular year. The risk is wholly borne by the Government, on its own balance sheet.

The Government pools the proceeds from SSGS with its other assets and invests long-term funds through the GIC. The GIC does not, in fact, manage SSGS monies on their own, separate from the Government's other assets. This is an important distinction, which I will come to later. GIC is the fund manager for the Government, not owner of the assets and liabilities. It seeks to achieve the Government's mandate of achieving good long-term returns, without regard to the sources of the funds that the Government places with it – for example, whether they are proceeds from SGS, SSGS or Government surpluses.

Over the long term, our investments in GIC have earned a creditable return. For example, over the last 20 years, GIC earned 6.5% per annum in US dollar terms, which translates to 5.0% per annum when expressed in Singapore dollar terms.

But that is not the whole story. The average long-term return masks wide fluctuations in returns from year to year. You can have good average, long-term returns but what it disguises is variations which can be very significant from year to year. To answer Mr Gerald Giam's question, over the last 20 years, there were eight years where GIC's investment returns were below what the Government pays on SSGS.

A good example was the Global Financial Crisis. As I stated in Parliament at the time, GIC's portfolio value in US dollar terms declined by about 25% during the 14 months from October 2007. October 2007 was a peak and from then to December 2008, GIC's portfolio value declined by 25%. GIC's performance was similar to that of other funds with a similar mix of asset classes, but it illustrated the market volatilities faced by every long-term investor.

Even over the five years following the crisis, ending 31 March 2013, GIC earned an annualised return of just 2.6% in US dollar terms, which translates into a mere 0.5% in Singapore dollar terms. GIC's Annual Report explains the reasons for this weak recovery from the crisis, especially in illiquid asset classes that it was holding, like real estate. Its five-year

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annualised returns are expected to improve significantly going forward.

Hence, while the Government expects to earn returns through the GIC over the long term that exceed what it pays on SSGS and has done so in the past, there is no assurance of GIC's returns exceeding SSGS interest rates over shorter periods, much less every year. This is also because of the guaranteed floor on CPF interest rates, which do not follow declines in market interest rates.

How then is the Government able to meet its SSGS obligations in the years when the markets are weak and GIC's returns fall below what the Government has to pay SSGS? The reason is that the Government has a substantial buffer of net assets – net assets meaning assets in excess of liabilities – which ensures that it can meet its obligations. In years when investment returns are poor, the net assets have helped to absorb any losses and ensure that the Government can meet its obligations on the SSGS as well as its market-traded SGS. Correspondingly, when investment returns are strong, the net assets grow.

To address Mr Gerald Giam's further question, therefore, no extraordinary measures have been necessary to enable the Government to meet its SSGS obligations in the years when GIC's returns fall short.

It is this role of the Government, with its significant net assets, that ultimately allows the CPF Board and CPF members to be shielded from risk. The Government, through GIC, expects to earn good returns over the long term, but the volatility can be substantial from year to year. The Government has been absorbing that volatility and protecting CPF members.

This is also the reason why no market player, other than the Government, is able to take on the CPF obligations. The guarantor is not merely playing the role of a long-term investor. It also must have significant capital that provides a buffer when the markets are down.

Our CPF system is, hence, sustainable, so long as the Government continues to run prudent budgets and invest the reserves wisely. Then the Government's balance sheet will remain strong and investment returns over the long term can continue to meet our debt costs.

However, the GIC's good long-term returns also reflect the fact that it is managing the Government's assets as a pool, which includes the Government's unencumbered assets – in other words, assets that are not matched by liabilities. This is a critical feature of our system. The GIC is managing Government assets as a pool, and the pool comprises not just assets

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that are backing the SGS and SSGS but also the Government's unencumbered assets – past Government surpluses, proceeds from land sales, which under our constitutional rules have to be accounted for in, past reserves, these are unencumbered assets – and the GIC manages the whole pool of assets as one pool. This allows the GIC to invest for the long term, including investing in riskier assets such as equities, real estate and private equity.

It would be quite different if the GIC, instead of managing the Government's pooled assets, were to manage a separate, standalone fund to provide backing for CPF liabilities. A standalone fund would have to be managed much more conservatively, to avoid the risk of failing to meet CPF obligations. It would not be aimed at accepting risks that enable good long-term returns, but at avoiding any short-term shortfalls. Consequently, the returns it would earn over time will be lower than what the GIC can achieve in its current role.

Finally, I should emphasise that the investment returns in excess of the SSGS rates that the GIC expects to make as a long-term investor are not simply hoarded away in the reserves. Fifty percent of the returns from our reserves flow back to our annual Budget through the Net Investment Returns Contribution (NIRC). This currently adds about $8 billion to our Budget annually. The NIRC has provided the Government valuable resources that have allowed us to embark on new priorities for Singapore, including enhancing our social safety nets.

Mr Gan Thiam Poh asked about independent audits and other measures to safeguard CPF investments and funds. As I have explained, CPF monies are invested in SSGS that are guaranteed by the Singapore Government. The Singapore Government's guarantee is a key safeguard.

CPF Board, besides its own internal auditors, is externally audited by professional audit firms approved by the Auditor-General.

As for the Government's investments, I can assure Members that GIC is audited on a regular basis. GIC's financial statements are independently audited by the Auditor-General every year. Its audited financial statements are submitted to the President and the Council of Presidential advisors annually. The President also has full information about the size of the reserves and the performance of GIC's investments. GIC's investment performance over five, 10 and 20 years is also made public through its Annual Reports.

To conclude briefly, let me just reiterate that our CPF system is sound and provides a solid foundation for Singapore's future. It is not a static system. Over the years, we have adjusted the system, such as to reduce the scope for housing withdrawals and focus

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increasingly on retirement and medical needs in old age.

As the Prime Minister has said, we intend to make important future improvements to the CPF to strengthen retirement security. Minister Tan has assured Members that we are open to different views and suggestions.

Whatever we do to improve the system, we must provide fair returns to the ordinary member who is unable to take on much risk and ensure that the CPF remains sustainable over the long term. The Government should continue to subsidise CPF members, especially those with lower income, but these subsidies should be provided through the Budget, so as to ensure the CPF is sustainable.

Thank you, Mdm Speaker. I understand the need for the Minimum Sum. However, I would like to ask if Minister would consider giving Singaporeans more choices pertaining to CPF withdrawal. For example, would the Minister consider allowing Singaporeans at age 55 years to withdraw $10,000, $5,000 or zero amount? For those who choose not to withdraw any CPF money at age 55 as they know that they would not meet the Minimum Sum, would the Government reward them by way of Medisave top-up, to encourage prudence?

For those Singaporeans who can easily meet the Minimum Sum, they are already allowed to retain more money in the CPF as mentioned by the Minister. That being the case, would the Minister consider allowing them to choose a different CPF LIFE policy that provides them with a higher monthly payout of, say, $1,500 per month?

In short, Singaporeans like to make choices. Would the Minister consider providing Singaporeans with more CPF options?

Mdm Speaker, I would like to thank the Member for his suggestions. The issue of flexibility is really a question of choice – meeting present-day wants and addressing future needs. It is a trade-off. The more flexibility we allow, the more we deplete the CPF account. What it means is that the monthly stream-out for the individuals would be reduced. As it is, as Deputy Prime Minister Tharman has mentioned, the CPF system does afford certain level of flexibility. Many Singaporeans do draw on their CPF for housing needs. In fact, many of us draw on the CPF for our housing needs. If we did not have that flexibility to use that, we would otherwise have to rely on cash. It also allows us to address some of our medical needs and, in some limited form, our own investment schemes through the CPF Investment Scheme and some limited use for our children's education as well.

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The more flexibility we allow in terms of allowing individuals to withdraw more money at the age of 55, or at the drawdown age, it would mean that it would reduce correspondingly the amount that the individual would receive on a monthly basis when the stream-outs happen. But we take on board the various perspectives shared by the Member. This is not unique. Many Members have shared this request for more flexibility. We will take a look at this. Our view is that it is important to remember that the present Minimum Sum, as is computed, is meant to provide what we believe is a basic level of requirement for a couple at a slightly lower than middle-income level. I think when you reduce that further, your monthly payout would correspondingly be less.

I thank the Minister for Manpower for his assurance that flexibility will be exercised for low-income workers caught by the CPF policy to lock up their funds in their Retirement Account at the age of 55.

I want to echo Mr Ang's appeal for greater flexibility as we continue to see residents coming to see us at the Meet-the-People Sessions (MPS) with such problems and at their wits' end because their Housing and Development Board (HDB) arrears are accumulating on account of this policy.

I know the Minister cited that the CPF receives only 500 appeals a year from those affected, but can I ask the Minister to also look into the fact that entire households of these residents are also affected at the same time? If we multiply those affected, it would be more than 500 people.

Would the Minister agree that, sometimes, it takes quite a lot of "to-ing" and "fro-ing" among the relevant agencies before an appeal is approved? In the meantime, it can mean that the HDB arrears are accumulating with late payment charges. This might leave the residents in a state of uncertainty and turmoil. Can I ask the Minister, if it cannot be made automatic for their appeals to be approved, can he, at least, make it less of a hassle and ensure that meritorious appeals can be approved more speedily so that such problems do not occur and cause them greater hardship?

My third question is that while I appreciate the Minister's point that families should not over-extend their retirement savings with large HDB loans, can I ask the Minister whether he would agree that it may not be fruitful to preach this to the current generation of older workers with existing HDB loans to service as their ship has sailed?

Can I urge the Minister to carefully review the data of the HDB loan obligations of this lower-income group, of those aged 50 and above, and balance that with their retirement adequacy so that the CPF policy can be tweaked and fine-tuned further to take into account

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their concerns?

Mdm Speaker, I would like to thank the Member for the points raised. Many of us do face similar personal examples of families who come forward with various challenges. There are many reasons for some of these individuals and their families in facing difficulties. Perhaps, it would be useful for us to consider.

One of the points I would acknowledge is that we would endeavour – certainly between CPF and HDB – to make sure that the process is as streamlined as possible so that the help can be expeditiously provided. It is important for us to understand the ways that we can help individuals.

One, the numbers who are caught and having difficulties paying their mortgage loans as a result of turning 55 are small. On average, we have about 500 a year. Following the appeals, we approve about two-thirds of them. We do consider their cases in quite a detailed fashion. But there are other steps that we can put in place to assist members. For example, upstream, housing counsellors in HDB branches play a very important role in providing financial counselling and proactively helping owners with mortgage arrears to tailor solutions to their circumstances. They do look at the personal circumstances of each individual family and to structure programmes to help manage their transition.

For flat owners who are in temporary financial difficulties, HDB does work out measures, such as reducing or deferring their mortgage instalments for a period of time or working out instalment plans to repay their arrears. Many of us who are Members of Parliament in this House, we have made similar appeals to HDB as well, and we have found that that has worked out quite well.

HDB may also, in some circumstances, advise flat owners of other options. For example, if they do have a slightly bigger flat, there is the possibility of renting out spare bedrooms for additional income to supplement them in moments of need. Or, ultimately, they can refer them to the Community Development Council for employment, financial or social assistance. In those situations where the individuals find themselves in dire financial circumstances, that is where the social safety nets kick in.

For flat owners who can no longer afford to keep their flats, for one reason or another, HDB will help them explore longer term solutions. For example, in some instances, they can include their children as joint owners to help service their loan. They can also consider selling their flat, downgrading and moving to a smaller one. We have various schemes to allow individuals to monetise through the Silver Housing Bonus and Lease Buyback scheme, and,

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if necessary, HDB can offer them a loan to help them to do so as well.

There is a range of measures that we want to put in place. Ultimately, if all these things do not quite work out and families are in difficulties, that is where the social safety nets come in.

Supplementary questions, Madam. The first question is for the Deputy Prime Minister. CPF is a very complicated scheme and CPF is also a story that can be retold again and again. In fact, different persons read it from a different perspective. May I ask the Deputy Prime Minister for his assessment of the effectiveness of CPF's communications to its members and in what ways it can be further enhanced because not all Singaporeans have the luxury of listening to your very clear explanations here?

My second question is to the Minister for Manpower. Of the 500 appeals annually to use the Minimum Sum for housing needs, what are the guiding principles of approval for the two-thirds and why was the one-third rejected?

Mdm Speaker, I had assumed that my response was also sufficiently clear, apart from the Deputy Prime Minister's response [Laughter]. But it is okay.

I do agree with Mr Seng that we can always do better with communications. We have come to realise that CPF has been an institution for a very long time. As with many things, there are many policies that the Government has, and one of the things that many of us realise in our dialogues is that even we ourselves, as Members of this House, do not always pay attention to these policies until perhaps when it impacts us. For many Singaporeans, it is upon turning 55 that we begin to think about what are the policies that confront us and about the decisions we have to make.

CPF Board continuously seeks to identify simpler and clearer ways of communicating CPF schemes to members through different channels. We have online magazines, thematic educational talks, including monthly talks to members turning 55. They are fairly well-attended but they obviously do not cater to everyone. Not everyone comes forward for that. We send out email blasts to members as well.

CPF Board works with partners, such as the Institute of Financial Literacy and the Financial Planning Association of Singapore, to ensure that the right information and explanation is being given on the CPF schemes through training courses and sharing of resources. This means that apart from the members themselves, it is also important to enhance the understanding amongst professionals who can in turn then advise members.

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Beyond this, more needs to be done to help members have a better appreciation of our CPF policies and improve knowledge on scheme details. CPF Board is, therefore, looking at improving the presentation of schemes' information on the CPF website and adding visual aids, such as infographics and videos. A dedicated website and Facebook page are also being developed to share CPF-related information and relevant tools to help members understand and make informed decisions about the use of their CPF monies at different life stages. We will also push out more information to the public through the mainstream media channels.

Online is one platform, but we also fully recognise that there are many Singaporeans who are not necessarily online or who are not comfortable with that medium. Traditional modes of pushing out information remain important. I would very much like to call on Members of the House to help us clarify any misconceptions of the CPF that your constituents might have and refer those who need more information assistance to the CPF Board. This is important.

We all recognise that the CPF is a very significant and important pillar. And it is important to have debates and discussions based on facts, based on what it is and what it is not, and not on speculation for whatever reason that individuals choose to distort this and create fear and anxiety.

As the Deputy Prime Minister and I have shared, while the CPF system is not perfect – it is not going to cater to every single person's individual specific needs – as a system, it has provided us well. Going forward, one of the things that we are particular about is that this system must be sustainable not because we want to shift the risk to the people or not having the Government bear the risk. By not being prudent and not keeping it sustainable, we are going to shift that risk and that burden to our children's generation. And this is what many countries are facing.

As to Mr Seng's second question, even though the numbers may be small, we do want to take a look at each individual specific case. It is very difficult to generalise because every individual has very unique circumstances – why they are in a particular situation. As I mentioned, about two-thirds of the appeals are approved. We will look at them earnestly and, if we are not able to provide a solution via the CPF route, we will endeavour to work with HDB to make sure that other options are provided.

In all circumstances, I will mention again, the social safety nets remain. The CPF will not solve all problems. There will be individuals who have financial challenges that are beyond CPF and HDB solutions. That is where the other arms of Government will step in to provide the assistance and support. And that is something we will endeavour to do. So, it is important for Members of this House, when you encounter these problems, do surface them to us and

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we will do what we can to solve these problems.

Thank you, Mdm Speaker. I have three supplementary questions. Earlier, the Minister mentioned that when CPF started 60 years ago, we were allowed to withdraw a lump sum upon turning 55 years old and it was because life expectancy then was five to seven years beyond 55. I would like to ask whether the Minister can consider giving options, that means, working backwards. Now it is 82 years' expectancy, so five to seven years from 82, can they be given the option to withdraw their money in a lump sum, because many Singaporeans would like to see lump sums and manage their own money?

My second question is: can the Ministry do more to educate, to talk more on property pledge, including how easy or how difficult it is to pledge their property and, after pledging, does that flat still belong to them because a lot of Singaporeans would like to own their own flat. So, if you ask them to pledge their flat, they have a fear.

The third question is: what would be the Minimum Sum for the year 2015, because I see on the CPF website, the Minimum Sum for 2015 is labelled as "To be announced". A lot of residents are having fears as to what the amount is in 2015. And, after 2015, will there be any more increase, because the table on the website does not show anything after 2015? Does it mean no more increase or is it "akan datang"?

Mdm Speaker, with regard to the Member's suggestion on the lump sum withdrawal, even the present system allows a lump sum withdrawal. Basically, monies above the Minimum Sum can be withdrawn. As I had mentioned earlier, with the property pledge, for those who are turning 55 this year, for example, you can withdraw half your Minimum Sum if you pledge your property. That remains available.

Independent of whatever quantum you have in the Minimum Sum, members upon turning 55 can also withdraw $5,000. Obviously, one of the suggestions is that whatever the life expectancy age may be, say, 82, 85, we should work backwards five to seven years like the example cited earlier. Back then when the retirement age was 55, you withdraw your lump sum at 55, life expectancy was about six to seven years. People live to about 60 to 62 years old.

Assuming we work backwards from whatever the life expectancy would be at that prevailing age and, therefore, allowing members to take out lump sum, again, as I mentioned earlier, the more we allow flexibility at this stage would really deplete the amount that can be withdrawn. What we have provided in terms of the possibility of withdrawing lump sum via the property pledge and the $5,000 is something that is supported and that is provided

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for. We do not know how long each individual is going to live, but as a whole, individuals will live longer. The more you take out, the more you reduce that monthly payout that you will have available, and are you able to stretch that for a long period?

Secondly, I do agree with the Member that we do need to perhaps publicise more and to educate the public more on how exactly the property pledge will be made. The reason for the property pledge is that we recognise that when you come to retirement adequacy, it is not just solely dependent on the monies in your CPF account. Your Minimum Sum is one component. That is a calculation upon what we think a monthly payout reasonably would afford a couple. At the same time, the property remains an asset. As I had mentioned earlier, because of the stringent way in which we define it, half of that value, even though you may have a property worth several millions of dollars, only half of the Minimum Sum amount, which in today's terms is $77,500 will be computed as part of the Minimum Sum.

A recognition of the property pledge is an important part of that equation. It is part of your retirement adequacy. What I would assure is that when you pledge your property, that property belongs to you. If you do need to liquidate the property in order to provide for your retirement needs, that remains possible. It is an option. You are not compelled to do so. For those with HDB flats, the options we provide – and we will be strengthening these – there will be the Silver Housing Bonus as well as the Lease Buyback Scheme.

And lastly, with regard to the Minimum Sum for 2015 and beyond and whether the announcement of the amount will be "akan datang": it is a plan. As we mentioned in 2003, each year, we will have to look at what the prevailing inflation rate is. Once that is clearer, we will announce it. There is one more increment left to announce, basically for next year. We have no present plans to increase from that at the moment.

Madam, I would like to ask the Minister for Manpower how the Government assesses the adequacy of the Minimum Sum. I know the Minister said that it produces a stream of income of about $1,200 a month but is this sufficient for those it is targeted at? How is it working on the ground? A concern is that for those where the Minimum Sum is adequate, they do not accumulate enough to have the Minimum Sum at 55 years old. While for those who can meet the Minimum Sum, it is not adequate. So, how do you assess and consider as you move ahead and plan for future increases of the Minimum Sum?

Mdm Speaker, one of the concerns raised – which I think is a fair concern – is whether the Minimum Sum accumulated is sufficient, especially when we look at the data. For example, about 50% of active members turning 55 today and in 2030 meeting that Minimum Sum. Allow me to explain the context of this statistic and in that sense also to

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explain what Minimum Sum means and what it does not mean.

We adopt a fairly stringent definition of Minimum Sum attainment. We kept that portion of the Minimum Sum that can be met through the property pledge at 50% of the Minimum Sum or $77,500 for members turning 55 today. In reality, the value of the property owned by CPF members would usually far exceed $77,500 and the Minimum Sum attainment rate would be higher if the full value of members' properties is taken into account.

In addition, many Singaporeans should continue to work beyond 55. Fifty five was the retirement age when CPF first started. The retirement age today is 62. The Re-employment Age has gone up from 62 to 65 years. We are in the midst of discussing how to move up to the next milestone of 67. Singaporeans continue to work beyond 55.

With employment rate of residents aged 55 and 64 steadily increasing – in large part also due to the tight labour market and also in terms of the employers becoming more receptive to taking on older workers who do want to work – these members will continue to receive CPF contributions as they work which will further boost their retirement adequacy by the time they start receiving CPF payouts at 65. This means that even as we look at the Minimum Sum at age 55, they continue to accumulate monies in the CPF accounts after that. Some CPF members who do not meet the Minimum Sum also do have spouses who have either CPF balances or own property and can provide for them.

Taken together, the so-called 50% figure that we have today is a conservative number. It does not take into account the full value of the property which the member owns and can rely on for retirement or for future CPF contributions from employment. Certainly, it does not mean that 50% of the cohort will be inadequately prepared for their retirement. But what we have also noted is that the Minimum Sum attainment figure has been improving in the past few years and we expect this trend to continue.

In essence, what we are saying is – the Minimum Sum is something we have assessed that for the slightly below middle income family, the monthly payout basis would meet their basic needs. Now, does it mean that individuals survive solely on the Minimum Sum itself? No. For many of us, we do have other forms of savings. Many Singaporeans own their housing, which is why housing remains a very important part of retirement adequacy. In many other countries where public housing is not provided for in the way we have provided, it takes up a very large part of their retirement, in terms of the retirement funds going into funding their housing needs.

In Singapore's context, with the various housing grants, with the various subsidies and to provide public housing for the vast majority of Singaporeans, that is one way of

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contributing to providing their adequacy and on top of that, that is something that individuals can draw on, should the need arise. Many Singaporeans, even though they may not meet the Minimum Sum, for example, today, many of them actually own their own properties, and they also have other alternative sources as well. For those who do have challenges, meaning that they do not meet the Minimum Sum, they do not own their properties for whatever reason – perhaps because of the low wages earned or their personal circumstances and they do have challenges – that is where the other arms of the Government step into to provide for them.

The Minimum Sum is one construct. I think it is a useful construct to at least ensure that individuals do have a monthly stream out. Those who do not meet the Minimum Sum do not need to top it up. What it means is that their monthly payout will be lesser. But if they are able to manage on that payout, supplemented by other schemes that are available, then that is not a problem. But if they do have challenges, that is where the State would come in through the social safety net to augment and to provide for their other needs.

Madam, I have two clarifications. First, will the Government consider allowing CPF members to withdraw from CPF Retirement Account to redeem housing loan with a small loan balance, say, about $20,000 at age 55, so that the member can save on paying interest?

I have a second clarification for the Deputy Prime Minister. He said that if the CPF monies were managed and invested as an independent pool, it would not be able to enjoy the same investment returns as GIC. I would like to know why it is so. I understand we currently have about $300 billion CPF balance. Is the pool not big enough to be able to secure the same returns and maybe better returns?

If I can handle Mr Low's second question first. It is a very important question and, in fact, many of my grassroots leaders and others have asked that question: why not just get GIC to manage the CPF money directly?

If the GIC had to manage the CPF money and ensure that we are able to meet our full obligations in CPF every year – that the capital is guaranteed, the interest rates are guaranteed and when market interest rates go down, we do not bring the CPF interest rate down but we keep it at the floor, a high floor, 3.5% on the Ordinary Account and 5% on SMRA for most accounts. If those were the obligations that were required, first, there is no private sector fund manager who will take on that task because it is very difficult to meet.

The GIC, because it has a large diversified portfolio, aims to invest for the long term and do better than the SSGS obligations imply. However, that is only possible because the GIC is

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not just managing SSGS obligations. It is not just managing CPF liabilities. If it is only managing CPF liabilities or SSGS obligations, where you must meet that obligation every year, it will need a very conservative portfolio. This means a portfolio that does not invest much in equities, certainly not in real estate and alternative assets. It will aim to just minimise the chance of failing to meet annual obligations, not maximise long-term returns. That is what would happen.

It would not be able to aim to invest over the long term and ride out the market cycles: take big losses when the markets go down, knowing that as a long-term investor, you are the one who ultimately stands to gain. It will instead have to be conservative, avoid losses and make sure that it can meet the obligations every year. That is what would happen and it does not matter whether it is GIC or anyone else. If you are managing this unique set of obligations – guaranteed capital with high minimum interest rates – you will need a very conservative portfolio. To begin with, it will be hard to achieve, and it will be a conservative portfolio.

That is the reason why our real strength is that the Government has net assets, including unencumbered assets – proceeds from land sales over many years, proceeds from Government surpluses, especially in the earlier years, and the investment returns on those funds. Those give us unencumbered assets. By pooling the SSGS proceeds together with those unencumbered assets, we are able to invest for the long term and aim for higher returns over the long term that will beat the SSGS.

But if we are only managing SSGS by itself, this would not be possible. So, basically our net assets and the strong Government balance sheet are the real strengths of the system. The Government balance sheet is taking the risk, and we can absorb that risk, protect CPF members from any risks, and retain our triple-A credit rating.

Mdm Speaker, in response to the first question raised, we have, on a case-by-case basis, allowed CPF members to use savings in their Retirement Account (RA) that originated from the Ordinary Account (OA) to meet their housing needs, should there be that need. However, this option means that their retirement savings will be depleted and should be used sparingly.

In assessing whether to allow CPF members concessionary use of more RA savings for housing, we do consider whether the member will continue, even after that assistance, to have difficulties in meeting his outstanding loan even after allowing the concession. In some of the instances when we meet residents who have those challenges, even if we make those concessions, they will continue to have problems servicing the loan thereafter.

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This is because we want to avoid a situation where a member has no CPF savings and no roof over his head in retirement. But I would also add that I think in those circumstances where there is a need, we have made those exceptions and we have assisted members accordingly.

We understand that members may wish to use their RA savings that have been committed, for housing purposes. As we had mentioned, we will look at each case, exercise flexibility on a case-by-case basis but, certainly, we do approve in certain instances for members to draw on their RA savings in order to pay their housing loan requirements.

Thank you, Mdm Speaker, I appreciate that I have two minutes. My supplementary question is: in light of some retirement surveys about potential financial adequacy or rather inadequacy in retirement in Singapore – for example, the Aviva and Manulife surveys – is it the Minister's view that CPF is all the more an important avenue for retirement savings in Singapore? And if so, how does the Minister intend to continue using the CPF tool to enhance the retirement savings of Singaporeans?

Mdm Speaker, what the Member has shared is indeed at the crux of the issue that many countries face. We all know that we do need to provide for our retirement and many of us are concerned about it, but are we taking active steps to provide for that?

The experience has been shown in many countries and surveys have shown quite clearly that there is inadequate preparation, which is why some form of a pension system or retirement system is required. It is why every country, probably most countries do have some systems or other. But as shared by the Deputy Prime Minister earlier, many of these systems are facing a lot of challenges because they are promising things which cannot be sustained.

For us, as we have mentioned, the CPF system is not a perfect system but it is a sustainable system. It is a sustainable system because it can provide for our retirement needs and it can provide for other needs as well, which are important for retirement, housing particularly, and also in terms of healthcare.

What we do intend is to continue to strengthen it. There have been many suggestions that have been provided by the public over the years and these have contributed to strengthening the CPF system. As you will realise on a yearly basis, each time I come to Parliament, we do and will make tweaks to the Bills accordingly because we look at

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improving the system in terms of the operational part of it.

From a structural standpoint, as the Prime Minister has highlighted, this is something that we have been working on for some time. Earlier this year, we have announced the Pioneer Generation Package. We have announced and talked about MediShield Life. But retirement adequacy is a big part of providing that sense of assurance for Singaporeans. We have been working on that for some time. The details are being ironed out. We would be able to make some announcements on some of the steps going forward in the next month or so.