TR EMERITUS

People With Pre-Existing Conditions People with pre-existing medical conditions will be happy just to be covered under MediShield Life. The loading — up to 30 per cent for ten years only — barely covers the significant cost of insuring them. Existing MediShield policyholders will be forced to subsidise them, with the remaining cost being borne by the Government. People With Undisclosed Pre-Existing Conditions It is not clear how the MediShield Life administrator will determine whether anyone who is not a MediShield policyholder has any pre-existing conditions. There are likely to be quite a few people who will deny having any pre-existing conditions. Unlike private life insurance or hospitalisation insurance, there are no penalties (e.g., withdrawal of coverage) for lying about pre-existing conditions under MediShield Life. Self-Employed People Who Cheat On Their True Employment Income The Government will provide permanent subsidies based on household per capita income and annual home value. There are probably quite a number of self-employed people who do not declare their true income to the Inland Revenue Authority of Singapore, to avoid paying all the income tax that they should otherwise be paying. Such people will soon have another reason to be dishonest — they will receive higher permanent subsidies. People Who Live Past Age 90 MediShield coverage stops at age 90. MediShield Life will cover all policyholders for life. The question that we should ask is this: why does MediShield coverage stop at 90, or any other age for that matter? As the likelihood of a policyholder needing hospitalisation insurance increases with age, MediShield takes away hospitalisation insurance just when he needs it most. People Who Live Past Premium Rebate Starting Age MediShield Life requires policyholders to pre-fund their premiums. The premiums of policyholders who live past the premium rebate starting age are subsidised by the pre-funded premiums of others in their age cohort who die before they reach the premium rebate starting age. People Who Don't Pay Since MediShield Life will be compulsory, there must be a mechanism to collect premiums. People who have sufficient Medisave moneys can't avoid having the premium deducted from their Medisave accounts. What about people who don't have sufficient Medisave moneys? If they don't pay, MediShield Life Fund will end up with bad debt, which will eventually mean higher premiums for those who pay. MediShield Life Fund must be empowered by law to appoint banks to transfer to it the amount of premiums owed, drawn from funds held for or on behalf of the errant policyholders (including their household members). New Residents The MediShield Life Review Committee Report makes no mention of any loading to be paid by new residents upon their admission to MediShield Life. MediShield Life policyholders will be required to pre-fund their premiums. By 2030, for example, younger Singapore-born residents who have been on MediShield Life since inception will have pre-funded their premiums for 15 years. If a new resident joins MediShield Life in 2030 without being required to pay any loading for the pre-funding that Singapore-born residents of his age will have paid, he will be tapping into, and diluting, their pre-funding pool. Insurance Companies MediShield is a subset of the integrated shield plans and MediShield Life will be a subset of the integrated shield plans. MediShield Life's benefits will significantly encroach into the most basic integrated shield plans to the extent that some policyholders may consider terminating them. However, such plans still offer better (though perhaps not significantly) benefits, together with riders, to policyholders. When transitioning from MediShield to MediShield Life, the premiums will increase due to the enhanced benefits. The Ministry of Health says that the increase in premiums for the integrated shield plans resulting from the introduction of MediShield Life is expected to be the same as, if not lower than, the increase in MediShield Life premiums. This is incorrect and confusing. With the exception of pre-existing condition coverage, most integrated shield plans already provide much better coverage than MediShield Life, so transitioning from MediShield to MediShield Life only adds pre-existing coverage (under MediShield Life) to most integrated shield plans, and their premiums should not increase by more than the premium for pre-existing conditions (together with changes to pre-funding). Any increase more than that is unfair to the integrated shield plan policyholders. SPECIAL CASE — THE GOVERNMENT The Government will bear significant costs under MediShield Life, including but not limited to transitional and permanent subsidies. However, some of all the costs are already incurred or provided for elsewhere. For example: ■ Pioneer Generation subsidies. ■ Financial assistance via Medifund (Medical Endowment Fund). It is not clear whether or to what extent the almost $4 billion in subsidies and financial support by the Government over the next four years include, for example, the Pioneer Generation subsidies, for which $8 billion has already been provided for in the last Budget. The Government cannot be considered to be either a winner or loser with MediShield Life because it is something that the Government needs to do for its citizens and the Government itself set out the broad parameters for the Committee. However, the Government will avoid bearing some costs, as follows: ■ Part of the cost of insuring people with pre-existing conditions, which is being forced onto MediShield policyholders. ■ Part of the cost of premiums to be paid by the elderly poor, which is being funded by those who die before them through pre-funding. RainMaker * The author blogs at refocusing.blogspot.com  Read More →

DPM Tharman Shanmugaratnam The writer has often maintained that CPF interest rates are likely to increase ahead of the next election. So he was not surprised to read on 22 July 2014 Manpower Minister Tan Chuan-Jin had indicated the Government is reviewing CPF interest rates and concerns about inflation impacting retirement adequacy are valid. Interesting that he mentioned inflation as if it is now a concern when the macro-economic policies enacted more than 10 years ago were both inflationary and financially repressive (read the writer’s previous articles on the subject), a double whammy on the average citizen’s retirement funding. How Much CPF Members had been denied Let us look into the inflationary impact on savings. As a baseline, a $100,000 sum in 2004 will require $127,611 in 2014 to achieve the same purchasing power in 2014 as in 2004 according to the CPI. Next, let us look at what $100,000 in a median age CPF account in 2004 will be in 2014, through the compound effect of CPF rates and the extra 1% on first $60,000. This study excludes subsequent contributions in order to make a like for like comparison to the inflationary impact. Further comparisons to what that $100,000 will be under 3 separate scenarios. Scenarios Principal + Interest After 10 years Notes Inflation Effect $127,611 CPF rates $134,320 2.5% OA, extra 1% 1st 60,000 2% indexed to Inflation $151,794 CPI + 2% all accounts GIC 10 year return 5.8% $166,101 Estimated S$ rate of return Average GIC / TH 10 year return 8.2% $203,257 Weighted by estimated size of GIC to TH. Observe that at current CPF interest rates, such a member’s 2004 account balance hardly kept above the inflationary impact on purchasing power. This is astounding considering the length of time CPF monies are kept.  Of course, given such poor inflation-adjusted returns, all 3 scenarios provide much better returns and as such larger balances at retirement providing citizens with greater options. The one stone that kills many birds That CPF interest rates remained so low for so long in face of strong inflation and excessive GDP growth essentially illustrate how politically addictive the framework of the Net Investment Return Contribution and Past Reserves is.  The NIRC provided the government with extra funds for spending, derived from the net assets of GIC and net income of Temasek.  Unspent  excess returns from GIC and Temasek increased Past Reserves which compounded the total amount of NIRC made available in future years and so it goes around in an incestuous ménage a trois between the agencies, the policy framework and the budget. It should be clear that this edifice provides the government with the means to apportion the excess returns to itself to be dispensed such as politically motivated spending to shore up voter support; the Pioneer Generation Package is a prime example. Citizens should be aware that the government has an inherent bias to keep CPF interest rates low because low rates meant higher NIRC for targeted spending since less of GIC returns are used to pay interest. Besides what better way to fuel the showcase Asset Enhancement strategy than with low CPF rates which drives up property values but also likely to cause many citizens to over-estimate affordability. Of course, high property values meant greater government revenues from taxes and land sales. Implicit Tax The retention of excess returns to the degree achieved by the government should be viewed as nothing less than an implicit tax on citizens, and a highly regressive one that hit hardest those on median wages and below. Viewed in this context, the government’s international reputation for being “tax-friendly” is nothing more than a fig leaf except these taxes are unseen and born exclusively by CPF members. Battle is not over if CPF rates increased. The battle is not over if indeed the government increase the CPF rates. They need to be hardwired to a real economic data such as inflation or linked directly to the returns generated by GIC and Temasek.  The decision on CPF rates must be taken out of the hands of this and any future government to prevent extractive policies against retirement savings. Further, the government must abandon the indolent one-size-fits-all approach to CPF. Members must be given a choice of comparatively safe inflation-indexed government bonds, higher risk private pension plans, the government often asserted “good risk adjusted returns” of GIC and Temasek or any combination in between. This will far better reflect demographic preferences and differing levels of financial literacy and risk tolerance. Interestingly, Minister of Finance Tharman Shanmugaratnam, in the same forum, spoke about the government studying ways to provide better options to citizens without mentioning an increase in CPF interest rates. Perhaps, Mr Tharman finds such a change difficult to swallow as it will reduce his ability to dip his fingers into the honey pot. But dipping his or any future Finance Minister’s finger in the CPF honey pot must be drastically curtailed. For the moment in the historic past when the government fell into the temptation to treat CPF as such a honey pot, is the moment the long road to the present troubles began.   Chris K * Chris K holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.   Related: Govt reviewing how CPF Minimum Sum is calculated    Read More →

At a forum organised by the Institute of Policy Studies yesterday (22 Jul), prominent blogger Roy Ngerng, who was at the forum, asked DPM Tharman several questions, including whether Temasek Holdings had managed CPF monies prior to the establishment of GIC and why GIC did not know if it was investing CPF funds. Roy asked: Now that we know that the CPF is invested in the GIC, is it also possible to know what is the interest earned in SG terms since inception? Secondly, Temasek Holdings has said that they do not invest our CPF, is it possible to know if in the past Temasek Holdings had invested our CPF? Because the GIC was only set up in 1981, so prior to 1981, how was the CPF used and otherwise was it invested in Temasek Holdings? Thirdly, how much has the Government earned in absolute monetary terms from the excess returns of the CPF and will the Government consider returning some of them to Singaporeans? Finally, the GIC has said before June this year that they do not know if they invest our CPF because it is not made explicit to them – they said this on the GIC FAQ. But the Government made an about-turn in June this year and admitted that they do. So in the interest of public interest, is it possibly to know why the Government made an about-turn? It might also be intriguing because the Government is also on the board of the GIC, so it would be insightful to know why. Thank you. DPM Tharman replied: Temasek has never managed CPF funds I’ll start with Roy Ngerng’s points. First, a few factual matters; you asked some factual questions. Did Temasek manage the CPF funds in the past? No. It has never managed CPF funds. Temasek started off with a set of assets which were transferred by the Government at time of inception. I don’t have the exact figure in my head – but about $400 million dollars worth of assets in the form of a set of companies. It has never received CPF monies to invest. CPF funds were used by Govt to finance infrastructure in the past What was the case in the early days, before we amended the constitution in 1992, is that CPF monies, which were invested in Special Singapore Government Securities (SSGS), could be used by the Government to finance infrastructure - such as road infrastructure, Singapore’s economic infrastructure and social infrastructure. Just like (other) Singapore Government Securities (SGS), the Government was allowed to use borrowings in addition to the revenues it got in its budget, to finance infrastructural investments. That was the old system. After 1992, Govt not allowed to use borrowings for spending That changed in 1992. Together with Constitutional amendments, we introduced the new Government Securities Act, which disallowed the Government from using borrowings for spending. From then onwards, all borrowings - the SGS, SSGS - have had to be invested. Before GIC set up in early 80s, it was MAS which handled CPF assets How are they invested? Prior to the formation of the GIC, it was the MAS (Monetary Authority of Singapore). It was an old-fashioned, central bank investment system. Dr Goh (Keng Swee) changed that, explained why, explained that these are basically longer-term assets, and we should invest them for the longer term. And a significant chunk of reserves that were managed by the MAS were passed back to the Government, which then had the GIC manage them. So that was the system in the old days; the MAS manages the CPF assets, but after the GIC was set up in the early 1980s, it was essentially the GIC that manages CPF assets - but not as CPF assets. It is managing Government assets: managing all Government assets put together. GIC pays no regard to the source of funds Which brings me to the next question about whether GIC knows it is managing CPF assets. GIC knows it is managing Government assets. That is the Government’s mandate for the GIC. The mandate is irrespective of the sources of funds it manages, which comprise the SSGS, the SGS, Government surpluses, the proceeds from land sales - all Government funds. And the GIC (hence) pays no regard to what the source of funds is. It just has to meet its mandate: to invest for the long term, take risks, in the hope of achieving good long-term returns, significantly about global inflation. And that is a real strength of our system. The real strength of our system is that besides the CPF, we have unencumbered Government assets – Government assets that don’t have liabilities like the CPF. And the GIC is therefore able to invest, blind to where the funds come from. It’s able to invest the whole pool of funds for the long term. If the GIC was just managing CPF funds as a CPF fund manager, it would be managed quite differently. To provide a guaranteed interest rate of four to five per cent of the Special Account, or 2.5 to 3.5 per cent of the Ordinary Account, capital guaranteed and interest rate guaranteed, it would be a very different fund that it would be managing. It would be invested largely in bond securities, and earning returns that are very different from what it is able to earn by investing for the long term in higher-risk assets. Plus, it would mean the interest rates that the Government has committed to would be unsustainable, because it is no longer possible to earn these interest rates on a guaranteed basis, using a bond portfolio. It’s very difficult. Govt that takes risk to provide CPF members fair return on a guaranteed basis So the GIC manages a pool of Government assets, irrespective of sources of the funds. It is the Government that then takes the risk. The Government takes the risk that the performance of the GIC from year to year, sometimes even over five-year periods, may not be adequate for it to meet commitments to the CPF. But the Government balance sheet takes the risk to ensure that we can meet those commitments. And that’s the strength of the system. The strength of the system is we have assets that exceed our liabilities, that enable us to meet our commitments. And that’s why we’re not just triple-A-rated, but we’re able to provide CPF members with a very fair return on a guaranteed basis. That’s the system. For the GIC as the manager, it is blind to the sources of funds, because of our strength of having assets significantly in excess of liabilities. GIC managers do not need to know exactly where the funds come from because that’s not part of their mandate. There’s no mystery to that. Why Govt not giving excess GIC returns back to CPF members Next question had to do with excess returns. The GIC publishes five-year, 10-year, 20-year returns. You can look at the returns, and they are easily computed into Singapore dollars. Over the last five years it earned 0.5 per cent in Singapore dollar terms, over the last 10 years it earned five per cent in Singapore dollar terms, over the last 20 years it earned five per cent in Singapore dollar terms. So those are the facts, but that’s not returns gained from investing CPF monies. That’s returns gained from investing all Government assets including the unencumbered assets; it’s returns gained from investing in higher-risk portfolios for the long term. If it was just CPF monies, it will be a different portfolio and a different set of returns. Every serious financial professional knows that. But Mr Tharman, the question is, aren't those "unencumbered assets" managed by GIC also belong to the people?  Read More →