Reform Directions (Extracts) by Mukul Asher

The analysis in the previous section has strongly suggested that the current retirement
financing system of Singapore is unsustainable and is in urgent need of fundamental
reforms designed to address various dilemmas discussed earlier. The following
reforms are suggested in the current single-tier retirement financing system.

1. Reforms should result in much higher priority to fiduciary responsibility by the
CPF Board; greater transparency of the investment process and outcome; and
lower transactions costs.

2. The CPF Board should have independent and competent members regulated by
the newly constituted Provident Fund Authority (PFA).

3. Between 10 to 15 percentage points of the CPF contributions should be diverted
to the asset management company (with the rest for housing, health are, and
others) remaining with the current CPF Board.
4. Formation of a separate asset management company with statutory requirement
for fiduciary responsibilities and transparency should be considered
.
5. Over the medium term (2 to 4 years) current accumulated balances of $102 billion
should be transferred to the new asset management company.

6. The current CPFIS scheme should be restructured to restrict individual choice and
the funds should be also centrally managed.

7. The new asset management company can use its expertise and large pool of funds
to provide choice to members to allocate their balances among limited number of
portfolios of differing risk-return profile. A member may be given a choice to
reallocate the portfolio every three to four years. Since the behavioral finance
literature (Mitchell and Utkus 2003) suggests that many individuals do not rebalance
their portfolio towards more conservative investments as they get older,
some provision for default option incorporating this feature may be built into the
scheme.

8. The new asset management company can take advantage of its large pool of funds
to reduce transactions and investment management costs; and to provide effective
diversification of the portfolio while giving due weight to transparency. This is
likely to encourage the funds management industry in Singapore on a more
sustainable and financially viable basis.