LIBERALISATION OF USE OF CPF FOR INVESTMENT AND HOUSING

Dr Lee Boon Yang: Mr Speaker, Sir, my Ministry has completed a review of the use of CPF for investment. The aim is to give CPF members a wider choice of ways to invest their savings while maintaining the longer term objective of ensuring their financial security in old age.

Sir, the CPF Investment Scheme was introduced in 1986. It allows members to use up to 40% of the gross savings in excess of the Minimum Sum for investments. Allowed investments include trustee stocks, convertible loan stocks, approved unit trusts and gold. Gross savings include amount previously withdrawn for housing, investments and educational loans. The actual amount which can be used for investment is restricted to the member's ordinary account balance.

Sir, the requirement of a Minimum Sum is to ensure that members keep part of their portfolio in cash or property instead of investing their entire CPF savings in stocks and gold. Home owners may include their investment in properties as part of their Minimum Sum requirement, so that in practice many of them can participate in the Investment Scheme.

Sir, as at the end of February 1993, 104,000 CPF members have withdrawn savings for investment. This represented only 14% of the 740,000 members who qualified for the Investment Scheme. The amount invested was $2.1 billion or only 15% of the $14 billion available to be invested.

We have had seven years of experience with the Investment Scheme. CPF members have generally managed their savings prudently. It is timely to widen the 2options open to members to invest their CPF savings. Wider options will encourage more Singaporeans to make business assessments and investment choices for themselves. They will then learn to trade off risks and returns, and live with the consequences of their decisions.

Sir, the Government will liberalise the rules of the CPF Investment Scheme. The current scheme will become the CPF Basic Investment Scheme. We will introduce a second tier CPF Enhanced Investment Scheme for members who have accumulated more savings.

I will now briefly outline the CPF Basic Investment Scheme. Under the CPF Basic Investment Scheme, members may invest 80% of their gross savings in excess of the Minimum Sum instead of the present 40% limit. Members may now also invest in non-trustee stocks of Singapore incorporated companies listed on the Stock Exchange of Singapore. However, investments in non-trustee stocks and gold cannot exceed the existing 10% sub-limit.

Next, on the CPF Enhanced Investment Scheme. To qualify for the Enhanced Investment Scheme, members must set aside $50,000 in cash savings, not including amounts withdrawn for homes, previous investments and educational loans. They can then withdraw 80% of their savings above $50,000 for investment in the following eight approved instruments:

(1) Shares of all Singapore incorporated companies listed on the Stock Exchange of Singapore (SES) and Sesdaq;

(2) Unsecured loan stock of listed Singapore incorporated companies on SES and Sesdaq;

(3) Gold (up to the 10% limit);

(4) Unit trusts, including those investing in non-trustee stocks of Singapore incorporated companies;

(5) Government bonds;

(6) Bank deposits;

(7) Fund management accounts; and

(8) Endowment insurance policies.

Sir, to encourage CPF members to make use of the investment schemes, the Government will allow members to retain the capital gains and dividends from investments beyond what the sum would have earned in the CPF under both the Basic Investment Scheme and the Enhanced Investment Scheme. However, should there be any losses from previous investments, members will have to make good the principal amount plus interest at the CPF rate on these losses before they can withdraw the surplus capital gains and dividends.

Sir, the Government will also liberalise the use of CPF for housing. Presently, under the CPF Residential Properties Scheme, CPF members may use CPF savings to finance up to 100% of the property's purchase price or its value at the time of purchase, whichever is lower. Beyond this limit, members will have to repay their housing loan with their own funds.

The Government will now allow CPF members to use their CPF savings to fund property purchases beyond the 100% limit on the same terms as the Basic Investment Scheme. Members may use up to 80% of their gross CPF savings in excess of the Minimum Sum to pay their outstanding housing loan. It is thus up to members to choose whether to invest their savings in houses or in other assets.

Sir, the Minister of State for National Development recently announced new limits for HDB mortgage loans for purchases of resale HDB flats. The new withdrawal rules under the Residential Properties Scheme will also apply to HDB resale flats. In other words, purchasers of HDB resale flats will also be able to use their CPF savings to continue paying mortgage loans beyond the 100% limit.

Sir, the CPF Board will work out the implementation procedures and amend various Regulations over the next six months or so. The Basic Investment Scheme, the Enhanced Investment Scheme and the new rules for withdrawals for housing will be implemented once the procedures and regulations are finalised.

Mr Low Thia Khiang (Hougang): Can I clarify with the Minister, please? The first clarification is: Is the CPF Top-up Scheme announced by the Government recently to encourage Singaporeans to buy shares also subject to the restriction which the Minister has just mentioned? If the answer is yes, would the Minister tell this House how many Singaporeans, after their CPF has been topped up with $200 by the Government, will still not be able to use their CPF savings to buy shares?

Mr Goh Chee Wee (Boon Lay): Sir, I welcome the Minister's statement to liberalise the use of CPF savings. I have two questions to ask the Minister and would appreciate the Minister's clarification. My first question is: now that the Government has decided to allow the use of CPF to purchase non-trustee stocks, presumably the Government is prepared to allow CPF members to take greater risks in the investment of their CPF money. That being the case, would the Government consider allowing CPF savings to be used for investment in business or to start a new business?

My second question is: The Ministry of National Development has recently announced that there is a plan to allow individuals to bid for land to build their own houses. Can CPF savings be used to purchase such land?

Assoc. Prof. Low Seow Chay (Chua Chu Kang): With the extended use of CPF savings for residential property, it was announced that members can use more than 100% for payment towards housing loan, inclusive of interest, beyond 100%. Does it mean that it would apply to previous applicants because some of them have actually been granted up to 90% and, in the more recent case, 100%? For these people, do they need to submit a fresh application?

Encik Othman bin Haron Eusofe (Marine Parade GRC): I have two questions for the Minister. For the Enhanced Investment Scheme, can the amount in the Special Account be used to meet the $50,000 cash requirement?

My second question is: in view of this liberalisation, do we need to make employees contribute further if they already have $50,000 in their accounts? Perhaps only the employers' contribution should be sufficient.

Dr Lee Boon Yang: Mr Speaker, Sir, first, let me thank the Members who supported the liberalisation of the CPF Investment Scheme. I will take up the point raised by Mr Low Thia Khiang. He asked whether the recently announced CPF Top-Up Scheme will be subjected to the same restrictions and conditions which I have announced shortly. The answer is no. In the case of the CPF Top-Up Scheme for the purchase of Telecom shares, we are exempting all CPF members from the requirement to set aside a minimum sum or the $50,000 reserve amount.

Mr Goh Chee Wee asked whether we will allow CPF savings to be used for starting business or for business ventures. We will not be allowing CPF savings to be withdrawn for business ventures. Business ventures are far more risky than all the new instruments for investments under the Enhanced Investment Scheme. Savings withdrawn for business ventures may be completely lost when the business fails. A CPF member who has invested his savings in a business venture may find that he is unable to liquidate his savings to pull out of the business venture, even if he feels that the business is not doing well. By the time he does so, he may not only have lost all his CPF savings but he could well end up in debt at the same time. In the case of the allowed investments under the Enhanced Investment Scheme, it is quite unlikely for such total losses to happen. There is also the problem of how to assess business ventures which can be financed out of CPF savings. Some business ventures could be genuine. Others could result in consumption of CPF savings with very little real gain. And it is very difficult for the CPF Board to monitor such business ventures.

Sir, I urge Members to bear in mind that the purpose of this liberalisation is to allow CPF members a wider scope to invest their savings, so that they can build up their retirement fund. This is in line with the Prime Minister's declared objective of helping Singaporeans to enlarge their assets. Both the Basic Investment Scheme and the Enhanced Investment Scheme will be able to achieve this objective better than releasing CPF savings for business ventures.

Sir, Mr Goh also asked whether we will allow CPF members to purchase land from the Government for the purpose of building their own residential unit. In principle, I have no objection to allowing CPF members to use CPF savings for financing the purchase of land to build their own homes. However, this will require an amendment to the CPF Act, because presently this is not allowed. I will ask the CPF Board to study how this can be done.

Sir, Prof. Low Seow Chay asked whether the new conditions for withdrawals for the payment of interest or to service mortgage loans beyond the 100% limit will apply to previous applicants, people who have already taken out mortgage loans and who have already been withdrawing from their CPF accounts. The answer is yes. It will apply to them provided they meet the conditions required. That means they can set aside the Minimum Sum and then they can use up to 80% to continue to service their mortgage loan repayments.

Sir, Mr Othman Haron Eusofe asked whether, under the Enhanced Investment Scheme, the $50,000 requirement will include the balance in the member's Special Account. The answer is yes. In computing the $50,000 net savings, the CPF Board will include the balance in the member's Special Account. However, savings in the Special Account cannot be withdrawn until the member reaches the age of 55. For investment purposes, whether under the Basic Investment Scheme or Enhanced Investment Scheme, members will be restricted to using their savings in the ordinary account.

Finally, Sir, Mr Othman also asked why we require CPF members to continue contributing to CPF if they have a saving of $50,000. The current CPF contribution rate of 40% is based on the objective of enabling workers to retire with sufficient savings to generate post-retirement income ranging from between 20% and 40% of their last take-home pay, after they have paid for their home and set aside money for Medisave. Any reduction of this contribution rate of 40% will affect a worker's ability to generate that level of post-retirement income and also affects his ability to purchase a home which is commensurate with his income level.

Hon Members in this House should bear in mind that a high income earner may be able to accumulate $50,000 in his CPF account in less than two years. Therefore, if we use that as a benchmark and say that above $50,000 no further contribution will be required, there is a danger that he may not receive all those CPF contributions which will now not be required in the form of take-home pay. He may well end up with a very severe pay cut. Even if we just reduce or just cut off the employer's contribution, then he may still end up with a severe pay cut of 18%. At the same time, we should bear in mind that all CPF contributions are tax exempt. Therefore, even if we reduce the employee's contribution to CPF, then his taxable income will go up. It is far better that the CPF contribution rate continues at our long-term target of 20% plus 20%. With the Basic Investment Scheme and the Enhanced Investment Scheme, CPF members will have many opportunities to invest their savings using tax exempt CPF contributions. Sir, I think this approach better serves the individual's interest as well as the national interest of ensuring that every worker retires with sufficient funds to meet his old age needs.

Sir, I believe I have answered the points raised by Members.

Mr Chiam See Tong: Sir, may I take up one point that has just been mentioned by the Minister? He says that the Government wants CPF members to widen their scope of investments and enlarge their assets. At the moment, CPF members have invested 15% of the available funds, ie, $2.1 billion. The Minister says that $14 billion is available for investments. My question to the Minister is: when this Enhanced Investment Scheme is implemented, how much more of the $14 billion will go into the market for investments?

Mr Low Thia Khiang: Sir, the Minister says that the purchase of Telecom shares will be exempted. I would like to know the rationale of the Ministry in deciding to exempt the purchase of Telecom shares from the normal restrictions of CPF investment rules which are supposed to safeguard the CPF savings.

The second clarification is that when CPF members sell their Telecom shares in future, can they withdraw whatever they earn from the sale of their shares? If they make a loss, do they have to pay back to the CPF for the loss?

Dr Lee Boon Yang: Mr Speaker, Sir, Mr Chiam would like to know how much more funds will be invested. I am unable to tell because how much funds will actually be invested is entirely dependent on the CPF members themselves. What I can tell Mr Chiam is that with the liberalisation of the scheme, and with the introduction of the Basic Investment Scheme and the Enhanced Investment Scheme, a lot more funds will now be made available potentially, to be invested in the various instruments that I have outlined earlier on. In fact, under the Basic Investment Scheme, 740,000 CPF members will be eligible, as I mentioned earlier on. They will together have about $22 billion worth of investible savings. Exactly how much of the $22 billion will be invested, that is a decision only the CPF members themselves can make. In the case of the Enhanced Investment Scheme, 235,000 CPF members currently qualify. Together, they will have available $9 billion of investible savings.

Mr Low has asked on what grounds the CPF exempts the purchase of Telecom shares under the CPF Top-Up Scheme from the Minimum Sum requirement. The answer is that Telecom shares are a special category, in the sense that Telecom is a very established statutory board which has an excellent track record and the shares will be sold to the citizens at a discount, on top of which Government is going to give each citizen a $200 direct subsidy to purchase the shares. Therefore, there is very little risk of any citizen losing out in the course of purchasing Telecom shares. Therefore, we have thought it in order to exempt them from the requirement of the minimum sum.

He also asked whether later on when CPF members sell the Telecom shares, they will be able to withdraw the proceeds or should they sell it at a loss, will they have to top it up. All withdrawals from investment schemes will be according to the CPF rules. In other words, whatever you sell, the money goes back into your CPF account. If you made a profit, except under the Basic Investment Scheme and the Enhanced Investment Scheme, where your profits exceed the CPF amount withdrawn and also the interest which you have accumulated, then you are allowed to withdraw the balance. In the case of those who sell their shares at a loss, we do not require any member, whether under the Basic Investment Scheme or the Enhanced Investment Scheme, to top up with their own cash to make up for the losses.

Mr Chiam See Tong: I did not expect the Minister to give me up to the dollar how much CPF members would invest under the Enhanced Investment Scheme. I am sure the Government has worked out its sums and would have an estimate of how much money will be released into the market.

Dr Kanwaljit Soin (Nominated Member): Mr Speaker, Sir, I am just wondering whether it is very prudent to let our CPF members to have so much leeway in buying shares of Singapore Incorporated to increase their retirement nest-egg, because my fear is that some of them may get themselves burnt. I am wondering whether a better and more prudent way would be for the CPF to start some sort of unit trusts whereby fund managers could then advise them which unit trust to buy where the returns are more predictable so that we do not have many people losing their CPF money. I know they have $50,000 but beyond that they may get their fingers burnt, and that is my concern.

Dr Lee Boon Yang: Mr Speaker, Sir, I agree with Dr Soin that there is always an element of risk when you make an investment. I think the result of this liberalisation will contribute to the educational process of getting Singaporeans to better learn how to manage their savings, how to improve the rate of return from their savings, and they must learn. In the course of learning, yes, some people may inadvertently make the wrong decision and they may be hurt. But we have structured the Basic Investment Scheme and the Enhanced Investment Scheme to ensure that their minimum requirement on retirement will be met. That is why there is this, at the first tier, Minimum Sum and also we only allow up to 80% of the surplus savings to be invested, not 100%. Likewise, in the Enhanced Investment Scheme, there is a requirement to keep $50,000 cash savings in the member's account, and again an 80% limit, which means that at any one time there will still be a 20% over and above the requirement of $50,000. I think this helps to minimise the risk exposure of CPF members.

Dr Soin also asked: why not let the CPF itself start a unit trust? I think we have already allowed for it under the Enhanced Investment Scheme for people who are not experts in making such investment decision to go to the professionals. That is why we have allowed, as one of the eight investment instruments, a fund management account. CPF members can go and look out for the best fund managers available in town and they will certainly, for a fee, help them to wisely and prudently invest their savings for a good return.