CPF Amendment Bill – 14th October 2024 – Speech By Jamus Lim

How to Plug a Loophole as Fairly as Possible

Mr Speaker, the amendments proposed to the Central Provident Fund Act have several objectives, which the Minister has already explained. I will focus my comments on the clauses relating to prioritizing the recovery of subsidies following the sale of flats, and those pertaining to the closure of Special Accounts. While I support the Bill, I have concerns over two aspects.

We should repay HDB subsidies, but recognize that subsidies introduce distortions

Clauses 28 and 29, taken together, require that owners of HDB flats that have enjoyed additional subsidies to prioritize the repayment of said subsidies from proceeds, following the sale of the flat. I believe this is to accommodate the larger subsidies that are likely to be extended for Plus and Prime flats.

The notion of repaying what one owes is, on its face, unobjectionable. That said, I believe many of us in this House have had residents appeal for consideration of higher mortgage loans, because they cannot afford the cash outlay.

This could lead to a disconnect: those selling a flat would now be required to fork out a cash amount, so as to pay off the subsidies, thereby exhausting much of any cash gains made from the sale of the flat. Yet they could well face a gap between the market price of their next resale flat, versus its official valuation, which would have to be made up by cash on hand. I have had residents in Sengkang face such a dilemma when they seek not even to upgrade, but to downgrade, and I certain that they are not alone.

More generally, this is one of the unintended consequences of the current HDB pricing model, where a higher sticker price is deemphasized simply because subsidies mean that the de facto price faced by buyers would be lower. But if valuations and, perhaps more importantly, mortgage loans are still based on the nominal price, and we insist on subsidies being fully repaid in cash, then we inadvertently impose a liquidity crunch on those who wish to sell, since we strip these sellers of a significant part of the cash amounts they would otherwise need as downpayments on their next flat.

At present, HDB appears to be dealing with this issue on a case-by-case basis, accepting appeals that occasionally enfold additional amounts into the HFE mortgage loan. But the basis for HDB decisions are opaque, and more importantly, I believe what I have raised amounts to a systemic issue that should merit more careful study by HDB.

Removing the shield from “shielding”

Another key thrust of this Bill, addressed by Clauses 2 through 16, is to impose institutional reforms that would put an end to CPF “shielding.” This practice—which allows the hiving off of special account (SA) funds from being transferred into the retirement account (RA), thereby accruing higher returns while also enjoying high liquidity—had become so widespread that websites and financial institutions were openly advising on how to pursue the practice. It got to a stage where one could legitimately wonder if the government was at least tacitly endorsing this CPF hack.

Perhaps more troubling, it appeared to have been a loophole exploited by that those who were better-off and financially more sophisticated. After all, ensuring that there would be sufficient excess funds in the ordinary account (OA) to make up for any basic retirement sum shortfall during the transfer window would only be possible if one had larger CPF balances to begin with. The strategy would also typically be known to those who ran in more financially-informed circles, or (at least) had access to a savvy financial advisor.

The Workers Party is not opposed, in principle, to the closure of this loophole, given how it tended to benefit this relatively select group. However, I believe it is worthwhile making a few additional points.

First, we should understand why, beyond the notion of fairness mentioned earlier, this loophole was unsustainable from a financial perspective. Sustaining an interest-bearing SA after the age of 55 would have meant savings that combined both higher interest rates (relative to the OA), with comparable liquidity. Yet there is almost always an inherent tradeoff between higher returns and the being locked into an investment for a longer duration. This is fairly standard stuff in financial economics.

Pension managers, such as CPF, are not exempt from this tradeoff, and their allocations to more illiquid investments is what, in part, allows them to harness the higher returns necessary to meet SA obligations. But when we promise higher returns but still allow account holders to withdraw their funds at will, we short-circuit the process, which threatens to unravel the otherwise sound long-term investments that CPF will have taken exposure in. Hence, given its inherent unsustainability, the loophole had to be closed.

That said, there is at least some degree to which we need to acknowledge that closing the loophole amounts to an upending of both accountholders’ expectations, as well as legacy rights of those who invested in the SA prior to this Bill. This is, of course, yet another reprise of the theme of retrospective lawmaking, which is something that both my honorable friend Louis Chua, as well as I, have raised in this House on prior occasions.

In this instance, it is the notion that those who will now experience disruptions to their retirement planning—since they had originally planned on having SA income as part of their retirement portfolio—need not be compensated. But as mentioned earlier, there was little indication that what they were doing was inappropriate or illegal.

To be clear, those who invested in the SA have, undeniably, enjoyed the higher rates associated with locking their balances in that account in the meantime. And in fairness, it was always known that there would be a transfer of SA funds into the RA at the age of 55. Still, there are at least some who would be hurt by this change in policy. Hence, while calling for compensation for this group may be a step to far, it seems at least fair to acknowledge that some have been, at the least, inadvertent victims in the government’s policy shift.

Perhaps more fundamentally, we should ask the question of what drove so many to seek to squeeze higher returns in the first place. Part of this, surely, is that, despite assurances by the government that the CPF rate is adequate for retirement, those that were taking advantage of the SA loophole clearly thought otherwise.

That is why the Workers’ Party had, in this House, previously suggested that CPF rates better reflect high inflation,[1] that it be computed with daily or monthly rates to better harvest returns,[2] and that it consider one-off adjustments to the OA rate consider not just deposit but lending rates (which tend to better reflect the global cost of capital),[3] among others.

I am hopeful that the CPF Board will continue to extend options for our account holders to continue building up sufficient savings for retirement. One useful reform—which admittedly goes beyond the pure scope of this Bill but is consistent with its spirit—is to offer more options for higher returns.

This goes beyond re-examining how we calculate the OA interest rate, as important as that may be. We should also look to expand the universe of CPF-approved investments. At the moment, there remains a dearth of low-cost index fund options, for a portfolio of either domestic and internationally-diversified companies. Decades of research has shown are among the most appealing ways to build retirement wealth.[4] Rather than continue to indirectly encourage overweighting real estate in our retirement portfolios, we should ensure that equities—which tend to offer even higher returns, on average, over the long run—feature prominently for future generations’ CPF savings. This could even have a secondary spillover effect, of bolstering our moribund stock exchange.

The goal is to make sure CPF returns keep up with retirement needs

Sir, the purpose of this speech is not to offer this House investment advice. Rather, I hope to highlight how many Singaporeans feel that their rate of accumulation of CPF savings is less and less able to keep up with their retirement needs.

Some of this has led to pathologies, such as a stretch for yield in exploiting the SA loophole. Others have tried to parlay the HDB housing ladder, but this effort runs up against the goal of keeping public housing affordable. This is further exacerbated by how extracting cash from a housing investment may be more challenging than sometimes believed. Further bolstering the returns available from CPF savings, through ways I’ve described, will strike at the heart of the problem that has led many to hunt for returns via shielding or housing.


[1] Hansard (2022) 95(64): Jul 5; Hansard (2022) 95(66): Aug 2.

[2] Hansard (2023) 95(79): Jan 9.

[3] Hansard (2022) 95(68): Sep 13.

[4] Malkiel, B. (2023), A Random Walk Down Wall Street, 13th ed., New York: W.W. Norton & Co.