Big opportunity in little Singapore for fund managers

Singapore's Central Provident Fund board is calling on participants in the asset management industry to comment on its just-released consultation paper on its intention to introduce a private pension plan (PPP) that may create big opportunities for a handful of fund managers and administrators - and eventually upend the retail funds market.

The government is keen to boost its role as a fund management hub and beef up citizens' savings by encouraging them to invest some of their CPF money into unit trusts. But CPF members must pay full retail prices, which are high in Singapore, given the lock that large banks have on the market; typically banks charge a 5% front-end load.

The high cost, plus retail losses in Asian country funds and tech funds over the past seven years, and the fact that CPF account guarantees have provided better returns recently, have hindered CPF investment into funds. So far, only S$3.2 billion of CPF money has gone into unit trusts, out of S$70 billion eligible ($41 billion).

The CPF wants to install a system that improves members' long-term investment returns, reduces their investment costs and keeps choices simple. Last year it signed up Mercer Investment Consulting to help it draft a plan, and now it is open to consultation until February 14. The CPF is expected to issue RPFs to fund managers and administrators within three months, if the feedback is generally positive, and announce winners within six months. The PPP should be active in early 2005, say industry executives.

Although the proposal requests suggestions about how many fund managers to use, insiders believe the government is looking at two or three fund managers, each of which would provide four to six funds catering to a range of risk appetites. This sort of work should appeal to providers with experience with defined contribution plans and a multi-asset class capacity.

The issue here is commercial viability, for the government is going to require fees below market rates. Typical expense ratios for unit trusts run at 250-400 basis points. The government has rejected front-end loads, and although it hasn't publicized the fee levels it would like, industry people believe it's 100-200bps in total, including a share for the master administrator.

Singapore is a small market, but with only two or three providers, analysts say there is enough there for a tidy business. One outstanding question is whether CPF money should still be allowed to invest in retail unit trusts at all, and if the CPF decides no, this would improve the attractiveness of PPPs. Moreover, providers would enjoy some economies of scale: the master administrator will handle the back office, while any global mandates will feed into existing offshore funds and achieve some efficiencies.

If the PPP role is potentially attractive, the master administrator role looks like a vital mandate for any regional player with fund administration ambitions. The government has already decided that there shall be only one master administrator, handling not just the back-office functions of settlement, compliance, valuations, registration and record keeping, but also customer support and service.

In addition, the CPF board is considering allowing the master administrator to handle these functions for the CPF's official and special accounts. And, says one analyst, the winner of this prize would be in pole position to win an expected RFP from the Monetary Authority of Singapore, which is keen to create a universal processing centre for the entire unit trust industry.

These bigger roles are not set in stone; their commercial viability must be determined, and the domestic banks may object (although they may also welcome relinquishing this drudge work, which some view as national service).

A big question, then, is whether a master administrator can also be a PPP provider, and how to set fees and so on - the CPF wants to hear from you.

Broader questions the market faces once this new scheme is operational is whether bank distributors will decide to sell PPPs, which risks exposing just how much banks now charge for unit trusts, and whether retail investors are savvy to the benefits of PPPs or remain inertly in the hands of consumer banks. Another question to be resolved is whether the master administrator should also distribute PPPs, and if this is commercially viable - or will customers still go through banks, insurance companies or financial planners.

Although uncertainties loom, however, the CPF proposals demonstrate the government remains firmly on track in introducing the private pension plans at a low cost. Over time this is certain to have an impact on the current, rather cosy arrangements for unit trusts in Singapore, and reshape the winners and losers in CPF's retail funds market.