Consultants bid to reshape CPF

The board of Singapore's Central Provident Fund has this week closed a tender from invited consultants to turn the vision of a 'low-cost private pension plan' into concrete proposals. The winning consultant is expected to be announced in the next few weeks. Although the specifics of the tender's scope and nature remain confidential, interviews with knowledgeable sources both in government and in the private sector can draw an image of what changes can be expected.

This activity stems from a high-level Economic Review Committee report released this summer that sets a path across many economic and financial fronts to boost Singapore's competitiveness. One important plank was reforming the CPF, which is responsible for citizens' housing, medical and old-age needs.

The CPF is itself just an implementer of policy set by the government via the Ministry of Manpower, while the assets are managed behind closed doors by the Government Investment Corporation. The CPF has been a social policy tool since its inception in 1955 and discussions today make clear that this role will continue.

In other countries, a 'private pension plan' suggests corporate provision of retirement plans, as you might find in the United States, Hong Kong or Australia. One source says in this case, however, what the government wants is the outcome, without reducing the existing choices (or control) CPF offers. The government is ultimately looking to make CPF more efficient.

Beyond that, however, it doesn't really know what the final arrangement would look like. Although Ministry of Manpower officials have been studying the Hong Kong model, they are more likely to rely on the recommendations of the consultant they select.

CPF contribution rates are high - they are rising to be 20% each from the worker and the employer of monthly salary for people below 50 years - but many participants lack enough in their account to live off of in retirement, because they can use CPF money for medical care and housing. Returns are announced and guaranteed by the government, but do not reflect the true value of the investments, which remains secret.

In addition to using CPF money for buying an apartment, the government has also created a huge amount of investment choices. Members can invest in authorized unit trusts and insurance policies, commodities, all sorts of things. The government would like to encourage this more, to provide choice as well as to boost the Lion City's fund management industry.

But the problem is cost. Members using CPF money invest in the cash market themselves, and are exposed to market-rate fees, loads and commissions by the insurance companies and banks that dominate funds distribution in Singapore. The central question for the Ministry of Manpower is to what extent these choices should be amalgamated, and what kind of basic options the CPF board should provide. The consultant will have to answer these questions, as well as matters related to the selection of investment service providers, recordkeepers and custodians. The consultant will also have to consider education and boosting awareness of whatever decisions the CPF makes.

The end result is likely to be one or a handful of private pension providers that will offer a broad 401(k)-like defined contribution service. The CPF needs to give members options that provide good returns but at affordable costs. The reason CPF charges are so high - up to 6% for mutual funds and 8% for unit-linked funds - is the huge amount of choice that CPF offers, 290 investment options by one person's count.

It is intuitive that more competition should reduce costs, but in this game, that's not the case. Competition to provide investment funds means each player needs to build separate infrastructure for marketing, distribution and administration. "Choice layers on costs," says one expert.

What consultants are likely to suggest is that the CPF tender a bid for a single, or a small group, of private-sector pension providers, the type used to administering 401(k) plans on a large scale. In the United States, such players with enough scale can offer investment funds as low as 100 basis points for actively managed products and 20bp for passive ones.

And the rub? Scale. No provider is going to get into this business at cutthroat rates without some kind of guarantee of a minimum amount of business. Prestige alone won't cut the mustard. The consultant with the most appealing solution is likely to win the mandate.

Then other factors will have to be sorted out. What will happen to the existing investment options, which government officials would like to keep? How will the new private pension provider's funds be meshed with investment restrictions on various CPF accounts (for example the special account's assets can't go into equities)? Is one private provider - which consultants may consider optimal - politically acceptable; if not, how do you widen the circle, with sufficient guarantees that all players will get enough business to lower their costs? What kind of educational effort is needed to highlight the benefits of putting your money with the provider rather than sticking with the (low) CPF guarantee?

What does seem likely, however, is that a space is being created for one or a handful of experienced defined contribution players from America, Australia or other jurisdictions - and that existing fund providers are likely to face stiff competition in the future.