Before the Government contemplates locking up workers' CPF funds for a longer period, it has to assure Singaporeans that the money is being put to good use in the first place.

In other words, look at the rate of return. In this respect, CPF's record has been solidly mediocre.

It takes charge of S$128.8billion in funds, giving a guaranteed interest of 2.5 per cent on money in the Ordinary Account and 4 per cent in the longer-term Special Account which generally does not allow withdrawal till age 55.

To get these returns, the CPF Board is mandated to invest workers' savings in deposits and government bonds which yield a small, steady but nearly risk-free return.

Are these returns adequate?

It depends on how one defines 'enough'. It is often noted that CPF returns pale in comparison to stock market index performances, or to the performance of privately-held portfolios. But CPF funds are risk-free and tax-free. They are also regulated, with severely curtailed mandates to invest.

In some countries, public pension funds are a source of 'development' financing, meaning the government borrows from these funds at low interest rates to finance infrastructure or enterprises.

The injection of social objectives detracts from public pension funds' abilities to maximise financial returns for members.

One way to ascertain if returns are satisfactory is to compare with how other funds are doing.

An interesting 2000 World Bank study, Managing Public Pension Reserves, shows that Singapore has been a consistent middling-to-good performer in this respect.

Between 1961 and 1995, real compounded returns for Singapore's pension fund were 1.5 per cent a year, worse than South Korea's 5.4 per cent and Malaysia's 3.2 per cent, but far better than Peru (-44 per cent) and Uganda (-33.1 per cent)

Another benchmark used by the World Bank pegged pension fund returns to interest rates in bank deposits.

Singaporeans got marginally better returns with CPF (1.5 per cent) than they would have gotten with bank deposits, which paid interest from 1972 to 1995 of 1.1 per cent compounded a year in real terms.

The World Bank study is seven years old, and its data set is not complete. At best, it gives a snapshot of how public pension funds have performed.

After studying pension systems, it concluded that privately managed funds generated better returns than publicly managed funds, provided the countries had good governance (for example, are not corrupt).

The CPF system has served workers creditably. Few Singaporeans worry that their CPF savings will be wiped out by corruption or incompetence. But going forward, as retirement needs rise, the pressure is more intense for CPF to raise rates of return for members.

If you look at the current CPF policy, three questions beg answers.

First: The CPF interest paid to members is pegged to short-term bank deposits. But the CPF is a long-term fund, for retirement purposes.

Why is the interest rate pegged to short-term deposits for a fund that locks up money for 10, 20 years and more?

It is true that members can, and do, make withdrawals for property purchases or investments, but sizeable amounts are still held for the long term.

Second: Why can't CPF invest funds in a wider range of instruments to get higher returns?

Part of the problem is the CPF Board's mandate at the moment, which restricts its ability to manage members' funds actively. Instead, the bulk of CPF funds is put into safe deposits and government bonds.

Why can't the CPF Board be mandated to invest workers' old-age savings in higher-yielding, risk-adjusted instruments?

It cannot be an issue of lack of expertise. Agencies like the Government of Singapore Investment Corporation (GIC) chalk up healthy returns, investing state reserves, of 9.5 per cent a year over 25 years to 2006, or 5.3 per cent in real terms after factoring in inflation.

This is not to hark back to the old proposal that GIC manage CPF funds. Rather, the mandate of CPF should be broadened so it can offer low-

cost, long-term funds together with the private sector.

Third question: Why is the CPF inconsistent in deciding on the risk profile of CPF funds?

On the one hand, it adopts an ultra-conservative approach as a fund administrator, investing funds in risk-free instruments. This is the rationale it gives for not being able to put workers' money in higher-risk, higher-yield instruments.

On the other hand, the CPF investment schemes allow individual members to put their life savings into a bewildering array of financial instruments, many with high costs and high risks.

A 2005 report said that in the 12 years to 2004, nearly three out of every four people who invested their CPF funds in financial instruments under the CPF investment scheme were worse off than if they had just left CPF to manage the funds.

This isn't surprising, since retail investors lack the knowledge to have a diversified portfolio and the economies of scale to negotiate fees down. (To its credit, the CPF has been active in driving investment fees down and raising the quality of funds which can attract CPF funds.)

Is there a middle way between the constrained world of 2.5 per cent returns and the wild, wild West of caveat emptor? Yes. There is a middle ground of state-directed, private-sector-managed pension funds.

Indeed, the idea has been around for years. Back in November 1997, a Straits Times report quoted economists saying that 'the CPF Board should use its financial muscle to raise rates of return, by seeking good investment portfolios and bargaining for a low bulk rate from fund managers'.

In essence, the idea is for the CPF to play an 'aggregator' role and to negotiate with private fund managers to set up a pool of maybe four to six funds. With 3.12 million members and S$128.8 billion in funds, the CPF Board has the clout to drive down fees.

The World Bank suggested a public-private approach to managing pension funds. These funds remain public in that the state mandates contribution rates and sets rules for withdrawal. The funds are financially managed by the private sector, subject to investment policies spelt out by the government.

Such rules could include asset allocation (specifying no more than 40 per cent in equities, say) or structuring fees to create the right incentives (zero commissions for negative returns, for example).

The 2002 Economic Review Committee report proposed that the CPF facilitate the provision of low-cost pension funds. A consultant was engaged. In 2004, the Government said workers would have two to three low-cost private funds to choose from by year-end. It didn't happen and plans went back to the drawing board.

In March this year, Manpower Minister Ng Eng Hen said raising CPF rates of return remained 'very much on the radar screen' of the Government.

Raising CPF returns is manifestly the right thing to do.

It is true the Government faces political flak if funds under-perform, whereas the current guaranteed return is risk-free financially and politically. But a good government does not shirk from doing what it is right; instead it goes ahead and manages the risk.

Even as workers are urged to work longer, they should have the assurance that their old-age savings are also being made to work harder.

muihoong@sph.com.sg

FINDING THE MIDDLE GROUND

There is a middle way. Between the constrained world of 2.5 per cent returns and the wild, wild West of caveat emptor lies this huge middle ground of state-directed, private-sector-managed pension funds.