The subcommittee on the Central Provident Fund (CPF), part of the Economic Review Committee (ERC), has made two pronouncements about investment returns and the way the assets of Singapore’s social-security savings scheme may be managed in the future. In October, Prime Minister Goh Chok Tong announced the formation of the ERC to review fundamentally the city-state’s development strategy and formulate a blueprint to restructure the economy.

The first pronouncement relates to the ‘high’ costs of investment products and their capacity to eat up a large part of the investment returns. To address the first issue, the subcommittee suggests that it may be propitious to consider allowing the creation of privately managed pension funds. The rationale is that such pension funds would operate on an institutional pricing basis (as opposed to the current retail pricing of CPF-approved funds), thereby keeping costs low, in addition to providing well-diversified investment strategies to investors.

By focusing on the cost of investment products, the ERC’s CPF subcommittee is dealing with an issue uppermost in the minds of most investors, who have been battered by market volatility for the better part of the past five years. How galling it must be for Singaporean investors in unit trusts to find that they are paying upwards of 3% in sales charges and annual management fees of as much as 2%.

Sales charges can be lowered, as they have over the past two years, coming down from a flat 5% to a more negotiated 2% to 4%. Given the overall (tiny) size of the Singapore mutual fund industry—S$10 billion (US$5.8 billion)—fees can only be lowered so much. Some costs will always be fixed irrespective of the volume of assets managed, making comparisons of total expense ratios between asset management markets in the United States (US$7 trillion under management) and in Singapore fatuous.

Forcing fees down below a rational economic cost leads to the worrying ‘cheap-equals- good’ argument. Taken to its logical conclusion, this will result in an industry where product and performance differentiation are sacrificed at the altar of cost. Yes, costs need to be hawkishly monitored but do not expect them to come down to levels of the more developed (and much larger) U.S. and European markets.

Setting up privately managed pension funds would be seemingly straightforward for the CPF Board. The CPF is, after all, the de facto pension fund for all Singaporeans. Currently, funds in the CPF account earn a tax-free rate of return pegged to the domestic bank rate.

The S$40 billion to S$60 billion currently sloshing around with the CPF Board can be effectively invested for the long term with the help of external (actuarial) consultants. (The latter can build asset allocation models and help farm out mandates to institutional investment managers.) Investors can move from one asset allocation model to the next as their age and financial circumstances change.

What of the retail investment fund market place that has been nurtured so carefully over the past decade? Given that almost every cent that is now invested into unit trusts is CPF money, the unit trust industry in Singapore potentially faces a very bleak future as the success of a pension fund structure would come at the cost of the existing, CPF-fuelled unit trust market place.

Source: Cerulli Edge Retirement Issue – August 2002