berthahenson

CPF – Completely Perplexing Fund

In Money, News Reports on July 9, 2014 at 4:54 am

So two ministers have spoken on the CPF system, probably the most extensive elaboration we’ve heard in recent years. Funny how the CPF system has been in place for so long and it is only now that we’re told the ins and outs of its operation. I don’t suppose we have to thank blogger Roy Ngerng for this? Or would the explanation have come in any case because people no longer take increases in the CPF minimum sum as something that just sorta happens every year?

The pity is that the G’s explanation is not going to reach many people. Its feedback arm says that while eight in 10 have heard of the CPF system, too many do not know how it works. Half of the 1,000 plus people polled don’t even know that CPF Life will give them a monthly sum from age 65. But why would anyone really bother so long as the money goes to them, in full and in time? No one has received a bounced cheque from the CPF have they? In fact, the fund is ticking away just fine compared to other retirement funds elsewhere where benefits have to be cut or where there’s a risk of the funds going bankrupt. Why the kerfuffle now?

At the risk of over-simplifying, people simply want more/all of their own money back earlier. They think they know how to deal with their own money to plan for their retirement and can the G please butt out, thank you. Also, there’s this desire to want all their own savings to themselves before they die. In fact, what I would really like to know is, how much do people leave behind in their CPF when they die? Nothing? Very little? A lot?

I suppose the trigger was the increase in the Minimum Sum to $155,000. You know, this really affects those who turn 55 this year but many other people are hopping around thinking it applies to them too. Hmm. Well, the bad news is that it will get higher given rising cost of living. It has to, to be able to provide between $1,000 and $1,200 pay out every month after age 65.

Then the G makes it plain that people shouldn’t be panicking at the $155K figure. It’s really just half that because you can use the property to pledge the other half. The figure I would really like to see is whether this current cohort of 55ers do have the Minimum Sum, in cash and kind. I don’t see the figure anywhere although it must exist. But last year, just 15 per cent of the 55ers put up property pledge. That sounds not too bad; most still can handle the cash portion.

There’s a point that I am confused about regarding this property pledge. So we have CPF Life which is like an insurance scheme pooling everybody’s retirement accounts (which I gather will include the property pledges) So what happens to our “property’’ if something untoward happens to CPF Life? Is this so as to provide room for us to finally sell our homes if need be? Or forced into doing some kind of reverse mortgage? (Okay, my questions might be seem silly, but I really don’t mind an education)

BTW, I thought Finance Minister Tharman did an excellent job explaining the workings of the CPF system. There will of course be queries, like why set the CPF interest rate to a formula involving G bond yields anyway – and not closer to projections of how much GIC can make, which might be higher than the 2.5 per cent for Ordinary Account and 4 per cent for Special? After all, the G is confident of guaranteeing rates of return and has a buffer of “net assets’’ if GIC underperforms. Too volatile to do so? Too much dependence on market vagaries?

But what IS this thing about net assets? So the G sells stuff and uses the money to subsidise the CPF in the GIC’s bad years? It seems to have done so for eight years – and no one noticed or recorded it?

What I also found interesting is his explanation of why the CPF fund can’t be managed as a standalone fund but needs to be co-mingled with other assets to be invested. It’s to give GIC a much bigger base to play with so that it won’t be TOO conservative about investing simply to meet CPF interest rates.

Manpower Minister Tan Chuan-Jin also gave some interesting statistics.

a. 20 per cent of last year’s cohort of 55ers – about 12,000 people_- didn’t withdraw their excess OA even though they could. So I guess this was pushed into the Retirement Account which gives higher interest. I wonder who these people are. Probably those with enough money to spare and can’t be bothered to take it out to invest elsewhere. So they leave it to the G to make money for them. It would be good to hear from some of them

b. 10 per cent of those 55 years and older are still using their CPF to service their mortgages. I guess this is from the Ordinary Account. Half of them have to put out cash as well. How many exactly? Don’t know but Mr Tan said it was a “small group of people’’. I wonder why they still haven’t owned their homes by then. Because they have been upgrading homes through the years and been enjoying the asset enhancements without figuring that their CPF might run out?

c. Every year, about 500 of the post 55ers ask to be able to use their Retirement Account to service mortgages, that is, they’ve already exhausted their Ordinary accounts. About two-thirds are approved. The other one-third will be given other “financing’’ or “housing’’ options. I wonder what they are. Will they be asked to take a reverse mortgage or a lease buy back scheme? It would be good to know if people have had to do so.

I hope the above isn’t too hard-going. Oh. I didn’t give the mechanics of how CPF works because I did so in an earlier post. Read The Old Lady and her CPF Part 2.

Advertisements
%d bloggers like this: