I read with interest in today’s Straits Time on the debate in Parliament with regard to having a better interest in CPF. Some MP ask whether is the CPF a source of “cheap” money for the GIC usage. Apparently CPF Board buys government bonds from the government. In return, the CPF Board gets risk free coupons. The government that issues these bonds, borrows monies from the CPF Board and reinvest it. I am unsure the actual mechanics of how this is invested which somehow I guess goes to GIC and/or Temasek. As CPF members are not subjected to risk of the investments that the government does, it does make senses that CPF Members to have no part in any investment returns of the GIC or Temasek. But I like to propose another way for CPF Members to get better returns:

In my blog http://www.wilfredling.com/content/view/164/9/ I mentioned smoothing technique used by life insurance companies. Life funds of participating policies invests in traditional assets such as bonds, equities, properties. Policyholders cash value never go down but always goes up depending on the return of the underlying investment. To shield policyholders from market fluctuation, smoothing technique is used. Policyholders receive “bonuses” every year. Once bonuses are declared, it is guaranteed (“lock-in”). Particpating policies also have “guaranteed” cash value. This guaranteed cash value is equivalent to the risk-free return that policyholder can get.

I suggest the government consider doing this. Let the government setup a mega life fund managed by GIC or Temasek. Let the government hire actuaries to calculate the fair bonuses that can be given to CPF Members every year. Also, they can mimic like a participating policy with “guaranteed cash value” and “non-guaranteed cash value”. To ensure no anti-selection, CPF Members must remain “invested” in the life fund for long period. This is no issue since CPF Special Account money cannot be used for anything for very long period. As far as the CPF Members are concerned, there is no risk at all. There is only upside, no downside. Also there is no need for government to “commit” to a fixed interest rate. OK, maybe it can give a modest “guaranteed cash value” of interest rate say peg to 10 years SGS bonds. But there is no need to add 1% or 2% on top of it. In addition, in this way, the ENTIRE Special Account can be used  for investing in a life fund. Not merely just the first $60,000 ($20K in OA, remaining SMRA). What kind of return can a person gets? Based on NTUC Income published resuts, their policyholders enjoyed having a yield of about 6%pa for endowment and 4.7% to 5.4%pa for whole life. Considering that they gives out 98% of the profits of the life fund to its policyholder, the government can give 100% of the profits back to CPF Members. Thus, the return should be higher if CPF Board manages it. To add some “seed” money to the life fund so that the fund reaches a certain economical of scale initially, the government can contribute $600m to it. Then perhaps $100m annually to maintain the administration of the life fund. (In fact, the government is going to spend $700m in the first year for giving higher interest in the CPF Board.)

In the above, suggestion, CPF Members can truly enjoy the investment return of GIC and Temasek at NO risk by employing smoothing technique.

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