CSC Holdings CIMB @ S$0.32 (24 Sep 2007)
- Initiate Coverage, netural
- Target Price: S$0.36 - Initiate Coverage
- Construction
- Lawrence LYE +65 6210-8994 – lawrence.lye@cimb.com
Largest ground engineering specialist
• Largest foundation specialist.
CSC is the region’s largest foundation and ground engineering specialist, following its integration of L&M Foundation Services, G-Pile and Soil Investigation. It can offer an extensive suite of services unmatched by any competitor. We believe it is a prime candidate to be involved in major infrastructure projects to be announced.
• Strong order book of S$387m.
CSC’s latest order book is S$387m, including S$294m from the Marina Bay Sands integrated resort project. This will be for piling and diaphragm walls. Work had only started in Aug 07 and is expected to be completed in Feb-Apr 08. Management is optimistic that its equipment will be fully deployed after the completion of its work at Marina Bay given the good visibility of
contract schedules.
• Robust FY07.
FY07 net profit of S$9.3m rose 112% yoy on the back of strong demand in the construction sector. Gross margins climbed to 16% from 14.4% in FY06, due mainly to improved equipment rental rates and internal rationalisation of operations for better efficiency. FY07 revenue expanded 18.1% yoy to S$126.7m on an increased number of contracts.
• Initiate with Neutral and target price of S$0.36,
set at 15x CY08 P/E, comparable to valuations for SGX-listed peers involved in the construction industry. CSC’s strong order book appears to have been priced in at 13.3x CY08 P/E, despite our 3-year core earnings CAGR forecast of 49.4%.
Background
CSC began in 1975 as Ching Soon Engineering to undertake excavation and Hsection steel piling work. In 1979, the company diversified into reinforced concrete piling and other general civil engineering work. CSC was incorporated in 1997 as the holding company for the group and was listed on the SGX in Apr 98.
In Nov 06, CSC acquired L&M Foundation Services Pte Ltd, a specialist contractor in heavy foundation piling, earth retaining systems and design-&-build services. In Apr 07, one of Singapore’s leading site investigation companies (Soil Investigation Pte Ltd) and Malaysia’s leading hydraulic jack-in pile company (G-Pile Sistem Sdn Bhd) became members of the CSC Group.
Through rapid organic expansion and a series of acquisitions, CSC is now the leading and largest specialist contractor in foundation and geotechnical work in Singapore. The group is recognised as a leading specialist contractor in foundation and geotechnical engineering with strong design-&-build capabilities. CSC is licensed by the Singapore Building & Control Authority (BCA) with a category L6 rating which allows it to tender for projects of unlimited value. In fact, it is a partner to many building and civil engineering contractors in precast construction products and steel
fabrication, including welded steel fabric. The sale and leasing of foundation engineering equipment is another new business the group expanded into in regional markets.
Some high-profile foundation engineering projects that were completed between FY03 and FY06 included bored piling for The Pinnacle @ Duxton and driven piling for oil storage tanks on Jurong Island.
Company outlook
CSC is optimistic of its outlook for FY08.
The construction cycle has just begun and the upswing is expected to provide strong demand for CSC’s specialised capabilities. Driven by increased private en-bloc redevelopment and public-sector initiatives to beef up infrastructure for its population target of 6.5m, the construction sector in Singapore is expected remain sustainable over the next few years. 2Q07 industry growth was 17.9%, the strongest in almost 10 years, after an 11.6% gain in 1Q07. BCA forecasts S$19bn-22bn worth of construction projects in Singapore. In addition, there is increasing acceptance of design and build in construction methods and this increasingly depends on contractors’ resources and expertise.
Construction industry momentum.
The industry is gaining momentum in light of major projects such as the integrated resorts at Marina Bay and Sentosa, Marina Bay Financial Centre, MRT extensions, Jurong Island underground cavern, Sports Hub, en-bloc redevelopment projects, several building and construction projects in the Orchard Road area and various developments in the petrochemical and pharmaceutical industries. With its enhanced size and capabilities following the acquisitions of L&M and Soil Investigation in Singapore and G-Pile Sistem in Malaysia, CSC is in a position to undertake major foundation engineering projects and increase its market share.
Order book
CSC’s order book has increased to S$387m, including the recently secured Marina Bay Sands integrated resort project. This contract worth S$240m was awarded to its subsidiary, L&M, for piling and diaphragm walls. Work had only started in Aug 07 and is expected to be completed in Feb-Apr 08. An additional S$54m was awarded to CSC in Jul 07. Meanwhile, the group should enjoy a steady flow of income from this and other projects in its pipeline.
Risks
Prolonged significant equipment downtime. Any prolonged significant equipment downtime may cause major disruptions to operations, and affect CSC’s financial performance. Equipment downtime occurs when machinery are sent for service or repair instead of being utilised for revenue-generating purposes. However, CSC mitigates this risk by maintaining a large fleet and a comprehensive and regular maintenance programme.
Reliance on skilled labour. The industry faces the perennial problem of a shortage of skilled labour at all levels, especially during the current construction boom. With a small local construction labour force, the industry is highly dependent on foreign workers and contractors are vulnerable to shortages and high employment costs of foreign workers, while competition for experienced workers is intense. Exposure to cyclical nature of construction industry. CSC is exposed to the cyclical fluctuations of the construction industry. A cyclical downturn, including delays or the cancellation of construction projects, will have a significant adverse financial impact.
Management
Mr See Yen Tern is Executive Director and Group Chief Executive Officer. Mr. See has over 20 years of experience at senior management levels in various industries and has held such positions as Chief Financial Officer, Executive Director and Deputy Group Managing Director in both listed and non-listed entities in Singapore, Indonesia, Hong Kong, China and Australia.
Mr Poh Chee Kuan is Executive Director and Chief Executive Officer (Foundation & Geotechnical Engineering). He joined the group as an Executive Director in Sep 99 and is currently the Chief Executive Officer of the group’s core business in foundation and geotechnical engineering. He has more than 30 years of professional and business experience in the fields of civil/foundation engineering.
Mr Teo Beng Teck is Executive Director. He joined the board as a Non-Executive Director in Nov 03 and was appointed an Executive Director on 15 Jan 07. He has more than 30 years of experience in engineering and construction in both the public and private sectors.
Financials
Rising gross margins. FY07 net profit of S$9.3m rose 112% yoy on the back of strong demand in the construction sector. Gross margins rose to 16% from 14.4% in FY06, due mainly to improved equipment rental rates. FY07 revenue expanded 18.1% yoy to S$126.7m on an increased number of contracts.
Net cash of S$0.3m. ROE improved from 8.4% in FY06 to 10.9% in FY07. Cash flow from operations deteriorated somewhat, possibly due to increased business volume, at over S$4m in FY07. The figure could be better in FY08 with the improved business outlook.
Valuation and recommendation
Initiate with Neutral and target price of S$0.36, set at 15x CY08 P/E, comparable to valuations for SGX-listed peers involved in the construction industry. CSC trades at 13.3x CY08 P/E against a 3-year core earnings CAGR forecast of 49.4%.
Tuesday, September 25, 2007
Friday, September 21, 2007
How To Make Your Money Grow
How To Make Your Money Grow
As the saying goes, "one never plans to fail but fail to plan". In order to achieve the above the first step is to develop a better understanding of your finances. That could be achieved by generating two statements, namely; Cash Flow Statement (monthly) and Balance Sheet.
The Cash Flow statement will provide us with a picture of our monetary inflows and outflows, by analyzing the statement we would arrive at a better picture of the state of health of our finances.
The Balance Sheet will provide us with an overview of our asset and liabilities. The resultant net worth will provide us with a clearer picture of our overall state of financial health.
By analyzing the Cash Flow Statement, we could identify the income and expenses. Expenses could be broken down into variable and fixed expenses. Fixed expenses could be for basic necessities such as housing, food, transport etc. Variable expenses could include leisure expenses, holiday expenses etc.
One essential component of making your money grow is a discipline savings habit. For many people, savings are more accidental rather than with purpose. This should not be the way, savings should be a planned item within your monthly cash flow. By planning ahead towards saving regularly the resultant growth in asset would prove to be more efficient.
To build up your savings, first build up your emergency cash fund. A common ratio is three to six times of your monthly income. Next you should ensure that you are adequately covered for catastrophic event in life (such as medical treatment cost etc.) Beyond that you should strive to save a minimum of 10 % of your monthly income (after CPF).
Saving for savings sake is insufficient. You should plan ahead for your savings. Identify your objective for your savings and by doing so you would arrive at the time horizon. With a suitable time horizon you could then decide on the form of savings that you should undertake. To illustrate, interest for savings account is only averaging a miserly 0.25 % p.a. to 0.5 % p.a., having excessive liquidity implies an opportunity cost of lower returns. For example, with a time horizon of 10 years or so, one could reap returns ranging from 3 % p.a. to 4 % p.a. with a regular premium endowment plan. This shows that with proper planning, by identifying objective and establishing time horizon, a person could grow his money more efficiently.
Historically cash has returned the lowest return over the years where as stocks has generally generated the highest return. High return entails high risk. One way to ride out the volatility of investment is to do so through a regular savings plan using unit trust.
Unit trust is an investment instrument where as investors we purchase units in the fund. A fund manager who should possess greater skill and tools in managing our funds will manage the fund. Through unit trust we could achieve diversification as well as professional management.
A regular investment plan entail that we invest a regular sum through a certain time period, this is known as Dollar Cost Averaging. In a volatile market, dollar cost averaging should lead to a lower average cost per unit. Savings through a regular investment plan would thus lead to us building an asset that is higher yielding in returns as well as reducing our average cost. Having said that there exist many parameters that we should consider before investing, you should approach a Financial Planner to develop a greater understanding of your objective as well as risk profile before engaging in investment.
Concluding, to "Make your money grow", you should:
1. Have a clear understanding of your own financial situation
2. Establish your objective for savings
3. Be self discipline in your savings habit
4. Be prudent in your expenditure
5. Embark on a suitable investment plan to enhance your return.
6. Review your finances and investment regularly
Contributed by:Mr Andrew AngCERTIFIED FINANCIAL PLANNERTMMember of Financial Planning Association of Singapore
As the saying goes, "one never plans to fail but fail to plan". In order to achieve the above the first step is to develop a better understanding of your finances. That could be achieved by generating two statements, namely; Cash Flow Statement (monthly) and Balance Sheet.
The Cash Flow statement will provide us with a picture of our monetary inflows and outflows, by analyzing the statement we would arrive at a better picture of the state of health of our finances.
The Balance Sheet will provide us with an overview of our asset and liabilities. The resultant net worth will provide us with a clearer picture of our overall state of financial health.
By analyzing the Cash Flow Statement, we could identify the income and expenses. Expenses could be broken down into variable and fixed expenses. Fixed expenses could be for basic necessities such as housing, food, transport etc. Variable expenses could include leisure expenses, holiday expenses etc.
One essential component of making your money grow is a discipline savings habit. For many people, savings are more accidental rather than with purpose. This should not be the way, savings should be a planned item within your monthly cash flow. By planning ahead towards saving regularly the resultant growth in asset would prove to be more efficient.
To build up your savings, first build up your emergency cash fund. A common ratio is three to six times of your monthly income. Next you should ensure that you are adequately covered for catastrophic event in life (such as medical treatment cost etc.) Beyond that you should strive to save a minimum of 10 % of your monthly income (after CPF).
Saving for savings sake is insufficient. You should plan ahead for your savings. Identify your objective for your savings and by doing so you would arrive at the time horizon. With a suitable time horizon you could then decide on the form of savings that you should undertake. To illustrate, interest for savings account is only averaging a miserly 0.25 % p.a. to 0.5 % p.a., having excessive liquidity implies an opportunity cost of lower returns. For example, with a time horizon of 10 years or so, one could reap returns ranging from 3 % p.a. to 4 % p.a. with a regular premium endowment plan. This shows that with proper planning, by identifying objective and establishing time horizon, a person could grow his money more efficiently.
Historically cash has returned the lowest return over the years where as stocks has generally generated the highest return. High return entails high risk. One way to ride out the volatility of investment is to do so through a regular savings plan using unit trust.
Unit trust is an investment instrument where as investors we purchase units in the fund. A fund manager who should possess greater skill and tools in managing our funds will manage the fund. Through unit trust we could achieve diversification as well as professional management.
A regular investment plan entail that we invest a regular sum through a certain time period, this is known as Dollar Cost Averaging. In a volatile market, dollar cost averaging should lead to a lower average cost per unit. Savings through a regular investment plan would thus lead to us building an asset that is higher yielding in returns as well as reducing our average cost. Having said that there exist many parameters that we should consider before investing, you should approach a Financial Planner to develop a greater understanding of your objective as well as risk profile before engaging in investment.
Concluding, to "Make your money grow", you should:
1. Have a clear understanding of your own financial situation
2. Establish your objective for savings
3. Be self discipline in your savings habit
4. Be prudent in your expenditure
5. Embark on a suitable investment plan to enhance your return.
6. Review your finances and investment regularly
Contributed by:Mr Andrew AngCERTIFIED FINANCIAL PLANNERTMMember of Financial Planning Association of Singapore
How To Retire Well
How To Retire Well
Investment is an integrated part of any retirement plan. The success of the retirement plan is very much dependent on the ability to achieve the projected rate of return on the investment.
In a dynamic market environment, the projected rate of return on investment may not be achievable. Therefore all investors should approach their investments with extreme care.
Investment is an art not a science. There is no one single strategy or formulae that will produce superior return consistently over a period of time.
Having said that, however a well-defined investment plan will help to minimize the mistakes that most investors make and enhance the chance of a positive outcome of the investment portfolio. The main advantages of this are that it imposes discipline on one's investment plan and prevent random rebalancing of portfolio based on panic or overconfidence.
An Investment Plan should cover the following basic areas.
Risk
The amount of risk that the investor can tolerate, how much the individual can afford to lose? Can he sleep soundly when his portfolio value declines significantly?
Return Objective
The investor must establish his investment goal and be committed to the goal. For example achieving a quantifiable dollar amount at retirement to finance his retirement plan.
Constraints
The investor will also need to take note of possible constraints. The liquidity needs of the family in the near future must be addressed in the plan. The investment time horizon is another important factor, as it will have an impact on the asset allocation decision.
Asset Allocation
Asset allocation is a process of allocating the investor's financial resources across different asset classes based on his risk, return objectives and constraints. The future market expectations are brought into consideration too. Typically the asset classes will consist of equity, fixed income, property or REIT and others.
Asset Classes
Investor can gain exposure in the equity market through direct investment in shares, equity funds and exchange-traded funds (ETF).
The rate of return for fixed income instrument is lower than equity in a long-term horizon. Fixed income instruments are poor hedge against inflation. However, it is included in the portfolio to reduce risk and volatility of the portfolio. Investment in fixed income instruments can be achieved by direct purchase of government or corporate bonds and fixed income funds.
Property and REIT are another asset class, which has generated high rate of return in the past. However, there is a liquidity and marketability problem of physical property in a bear market. REIT is more liquid as it is traded in stock exchanges.
Hedge fund is getting popular in recent days due to the fact that investor is seeking alternative asset classes to reduce portfolio risk and enhancing return. Based on the Hennessee Hedge Fund Index, hedge fund has posted annualized returns of 18% from 1987 to 2001.
Despite all the good publicity about hedge funds, investor should not to jump into hedge funds in a big way. Hedge funds tend to lack transparency in the portfolio holdings and these funds use complex investment strategy. In addition, hedge funds come in all types and varieties such as fundamental long-short, quantitative long-short, merger arbitrage, relative value funds, macro funds and funds of funds. All this, make the risk assessment and understanding of hedge funds a tough job. The near collapse of LTCM in 1998 will serve as a remainder to the risk associated in hedge funds investment.
Portfolio Construction
Once the asset allocation decision (composite of asset mix) is made the investor can proceed to construct his investment portfolio. He can build up his portfolio through direct investment in securities, funds and exchange-traded funds. Ideally the investor should construct a well diversify portfolio to reduce risk. The key reason for diversification is uncertainty of the investment outcome. If one can be certain about the outcome there is no need for diversification. Investor should also take note of unwarranted portfolio concentration due to the overlapping of portfolio holding in the funds when funds are used as investment vehicles in portfolio construction.
Review And Portfolio Rebalancing
Over time as asset prices change, the asset mixes drift away from the optimal level. Investor's risk, return objective and constraints will change as time passes. This creates a need to rebalance the portfolio. Generally there are 2 approaches to rebalancing of portfolio. Ad hoc rebalancing, - whereby the portfolio is rebalance when the investor thinks it is appropriate. And, discipline rebalancing - where it requires the portfolio to be rebalance in a systematic way. For example rebalancing is done on a semi-annual basis or whenever any asset mix drifts more than 15%(said) from it optimal level. Studies have shown that discipline rebalancing works best as compared to ad hoc rebalancing (market timing).
Lastly the investor needs to evaluate and review his plan as time passes and make the necessary adjustments along the way to ensure the success of the plan.
The actual development of investment is much more complex and therefore professional advice is usually required. In addition investors are advised to set aside enough emergency fund (6 months of monthly expenses) and have sufficient insurance coverage before embarking in investment planning.
Contributed by:Mr Poh Koon KiatCERTIFIED FINANCIAL PLANNERTMMember of Financial Planning Association of Singapore
Investment is an integrated part of any retirement plan. The success of the retirement plan is very much dependent on the ability to achieve the projected rate of return on the investment.
In a dynamic market environment, the projected rate of return on investment may not be achievable. Therefore all investors should approach their investments with extreme care.
Investment is an art not a science. There is no one single strategy or formulae that will produce superior return consistently over a period of time.
Having said that, however a well-defined investment plan will help to minimize the mistakes that most investors make and enhance the chance of a positive outcome of the investment portfolio. The main advantages of this are that it imposes discipline on one's investment plan and prevent random rebalancing of portfolio based on panic or overconfidence.
An Investment Plan should cover the following basic areas.
Risk
The amount of risk that the investor can tolerate, how much the individual can afford to lose? Can he sleep soundly when his portfolio value declines significantly?
Return Objective
The investor must establish his investment goal and be committed to the goal. For example achieving a quantifiable dollar amount at retirement to finance his retirement plan.
Constraints
The investor will also need to take note of possible constraints. The liquidity needs of the family in the near future must be addressed in the plan. The investment time horizon is another important factor, as it will have an impact on the asset allocation decision.
Asset Allocation
Asset allocation is a process of allocating the investor's financial resources across different asset classes based on his risk, return objectives and constraints. The future market expectations are brought into consideration too. Typically the asset classes will consist of equity, fixed income, property or REIT and others.
Asset Classes
Investor can gain exposure in the equity market through direct investment in shares, equity funds and exchange-traded funds (ETF).
The rate of return for fixed income instrument is lower than equity in a long-term horizon. Fixed income instruments are poor hedge against inflation. However, it is included in the portfolio to reduce risk and volatility of the portfolio. Investment in fixed income instruments can be achieved by direct purchase of government or corporate bonds and fixed income funds.
Property and REIT are another asset class, which has generated high rate of return in the past. However, there is a liquidity and marketability problem of physical property in a bear market. REIT is more liquid as it is traded in stock exchanges.
Hedge fund is getting popular in recent days due to the fact that investor is seeking alternative asset classes to reduce portfolio risk and enhancing return. Based on the Hennessee Hedge Fund Index, hedge fund has posted annualized returns of 18% from 1987 to 2001.
Despite all the good publicity about hedge funds, investor should not to jump into hedge funds in a big way. Hedge funds tend to lack transparency in the portfolio holdings and these funds use complex investment strategy. In addition, hedge funds come in all types and varieties such as fundamental long-short, quantitative long-short, merger arbitrage, relative value funds, macro funds and funds of funds. All this, make the risk assessment and understanding of hedge funds a tough job. The near collapse of LTCM in 1998 will serve as a remainder to the risk associated in hedge funds investment.
Portfolio Construction
Once the asset allocation decision (composite of asset mix) is made the investor can proceed to construct his investment portfolio. He can build up his portfolio through direct investment in securities, funds and exchange-traded funds. Ideally the investor should construct a well diversify portfolio to reduce risk. The key reason for diversification is uncertainty of the investment outcome. If one can be certain about the outcome there is no need for diversification. Investor should also take note of unwarranted portfolio concentration due to the overlapping of portfolio holding in the funds when funds are used as investment vehicles in portfolio construction.
Review And Portfolio Rebalancing
Over time as asset prices change, the asset mixes drift away from the optimal level. Investor's risk, return objective and constraints will change as time passes. This creates a need to rebalance the portfolio. Generally there are 2 approaches to rebalancing of portfolio. Ad hoc rebalancing, - whereby the portfolio is rebalance when the investor thinks it is appropriate. And, discipline rebalancing - where it requires the portfolio to be rebalance in a systematic way. For example rebalancing is done on a semi-annual basis or whenever any asset mix drifts more than 15%(said) from it optimal level. Studies have shown that discipline rebalancing works best as compared to ad hoc rebalancing (market timing).
Lastly the investor needs to evaluate and review his plan as time passes and make the necessary adjustments along the way to ensure the success of the plan.
The actual development of investment is much more complex and therefore professional advice is usually required. In addition investors are advised to set aside enough emergency fund (6 months of monthly expenses) and have sufficient insurance coverage before embarking in investment planning.
Contributed by:Mr Poh Koon KiatCERTIFIED FINANCIAL PLANNERTMMember of Financial Planning Association of Singapore
Unit trust or insurance product? - www.dollarDEX.com
(This article appeared on www.dollarDEX.com on 23 September 2003)
Unit trust or insurance product?
Investors are often presented with a bewildering range of product choices. One critical choice is whether an investment should be done using specialised investment products, such as unit trusts, or insurance products, such as life assurance. Here’s an overview of the key decision criteria.
Investment objectives
The first principle of all investment decisions is to see that investments match investors’ needs. Generally, products should match an investor’s objectives, risk profile, timeframe and help diversify their overall portfolio.
• Investors whose critical needs are short term should not invest in risky products designed for long horizons (unless their short term needs have already been handled)
• Those with an unsure job situation, unclear future earnings or general financial uncertainty should defer long-term involvement in any investments
• Those with an overriding wealth accumulation need should not consider protection (insurance) products unless they really need the benefits of protection
• Where individuals have both protection and investment needs, they must consider whether a
single product or separate products meet these needs. If this comparison is difficult or complex, they should seek advisers who are familiar with both types of products.
Investors looking for income should only rarely buy products for capital growth or vice versa.
• At the extreme, some products, such as annuities, are usually designed for income, and could provide no capital preservation at all
• Receiving regular income or dividends, as opposed to capital gains, may have tax disadvantages
• At the other extreme, some products are designed only for capital growth and never pay out an income stream, although parts of the investment may be sold to simulate "income"
Surrender value
Often overlooked, surrender value is an important consideration, and early surrender of some products can have a heavy negative impact on investment returns
• Investments in shares or unit trusts, have surrender costs even if it’s only the realisation of upfront commission or sales charge. These could be anything from 1-5%. Some unit trusts, especially those with fixed tenures, have explicit redemption charges.
• Fixed deposits have a surrender cost, possibly as high as 90 days' interest.
The products with heaviest surrender losses are life assurance policies. In almost all cases they do not provide good value for money as short-term investments:
• Many life assurance products offer nil or very low surrender values for the first year or two
• Even after this initial period, surrender values are much lower than maturity benefits for much of the term of the investment
• Long-term endowments have lower early surrender values than short-term endowments
• Investment-linked insurance products have better encashment values than life policies with
bonuses (profits)
Early surrender values are of little concern to investors committed to fixed savings goals but they should bear in mind that any "forced sale" could be costly. It's a real problem: UK statistics show that up to 50% of endowment (insurance) policyholders surrender within the first six years. It is this aspect of long-term policies that often prompts financial advisers to recommend separating life assurance protection from investment needs.
Charging and commission structure
Charging and commission structures vary tremendously from product to product. Generally, investors should be aware of the following guidelines:
• Direct investment in stocks or bonds is usually cheaper than through packaged products, such as unit trusts and insurance
• The costs of fixed deposits or other "zero charge" products are concealed in the interest rates advertised, or the charges may be levied on an annual basis under a higher management fee
• Unit trust sales charges are as high as 5.5% at banks, but the same product can be had for as low as 1% at online portals.
• Initial commission on life insurance policies could be 30-40% of the annual premium, with payment spread over 16-38 months. Initial commission could be as high as 70-80% for 25-year endowments.
• Commission on annuity contracts is typical 2% of purchase price
Historically, ongoing annual management charges are roughly:
• Life assurance: 1.5-2%
• Actively managed unit trusts: 1.25-2%
• Tracker unit trusts: 0.5-1%
• Pension policies (in the UK): 2.5%
Charging and commission structures are subject to frequent change, and initial fees may be negotiable in some cases. Investors should try to compare on a like-for-like basis and remember that the net return to the investor is ultimately the key concern – a low charging product that makes losses is always less desirable than an "expensive" product that returns consistent gains.
Risk and accessibility
Different products have different levels of risk, and clearly any product purchase should be consistent with an investor’s risk tolerance.
Some products impose significant delays before redemption money can be accessed, so it’s important that potential investors understand these terms. For example, fixed tenure products may only trade once a month after the launch period. Likewise, 90-day savings accounts may require a three-month notice period. And as discussed above, easy access may come at the price of high surrender costs. Hence, it’s important that individuals have an easily accessible emergency fund before they enter into any investment with a substantial lock-in period.
Tax treatment
Different products have different tax treatments, both in terms of how the product itself is taxed, and how the end investor is taxed on the proceeds. Usually capital gains avoid any tax liability, which is an advantage for any product delivering the returns as a price gain.
In Singapore, income tax is chargeable on dividend income. Because of tax offsetting, in some situations the total returns to investors can actually be higher than the headline total returns.
This is because investors can claim some of the withheld tax. For example, Schroder Singapore Trust, a unit trust investing in local stocks, does not pay tax on dividends. Instead it receives dividends net of withholding tax (as any other investor would) and pays out the same net amount to its unit holders (in effect, the fund is transparent for tax purposes).
So investors with personal marginal tax rates lower than the current corporate tax rate can get a refund on the tax difference for the dividend. This allows them to enjoy a higher effective dividend (a new tax system eventually will remove this benefit as shareholders will not be able to claim tax refunds on dividends received).
Other products may do things quite differently. For example, Franklin US Government Fund, a unit trust investing in US mortgage-backed bonds, declares dividends on a quarterly basis at the fund level. This income is from the "passthroughs" of the underlying securities, which have a constant monthly cash flow from mortgage repayments. Holders of this fund receive the full dividend because there is no withholding tax on the fund’s foreign securities. But the individual investors must declare the dividends for taxation, which would probably lower their overall return.
Some insurance plans allow you to receive all proceeds tax-free. For example, those bought under the CPF Minimum Sum Scheme. Similarly, investors should also look at whether a product is available for purchase using Supplementary Retirement Scheme (SRS) money. If it is, it could have significant tax advantages over a similar product that is not under SRS.
Conclusion
It's worth doing your homework or getting unbiased advice, as there is a lot more variability in products than many investors imagine. Often a product suitable for one person is unsuitable for someone else with almost identical needs, except for a key difference. For example, an endowment insurance policy could be ideal for someone with the intention and means to keep up regular contributions for 15 years or more. But the same plan could be the wrong choice for an investor who has a high chance of surrendering the policy after only a few years.
We believe that, generally, low-cost products designed to meet a specific need have advantages over combination products with an overabundance of features. And we think it's always a good idea to separate needs (investment, insurance) during your planning, although that doesn't rule out a single product choice when you implement.
So...unit trust or insurance product? Depends on your precise needs, but generally low cost unit trusts have the edge as pure investments, especially for short-term investing. For those who can stick with an investment for the long-term, whether an insurance product is best depends on whether you need the extra protection, and if that benefit is cost-effective bundled or separate.
Unit trust or insurance product?
Investors are often presented with a bewildering range of product choices. One critical choice is whether an investment should be done using specialised investment products, such as unit trusts, or insurance products, such as life assurance. Here’s an overview of the key decision criteria.
Investment objectives
The first principle of all investment decisions is to see that investments match investors’ needs. Generally, products should match an investor’s objectives, risk profile, timeframe and help diversify their overall portfolio.
• Investors whose critical needs are short term should not invest in risky products designed for long horizons (unless their short term needs have already been handled)
• Those with an unsure job situation, unclear future earnings or general financial uncertainty should defer long-term involvement in any investments
• Those with an overriding wealth accumulation need should not consider protection (insurance) products unless they really need the benefits of protection
• Where individuals have both protection and investment needs, they must consider whether a
single product or separate products meet these needs. If this comparison is difficult or complex, they should seek advisers who are familiar with both types of products.
Investors looking for income should only rarely buy products for capital growth or vice versa.
• At the extreme, some products, such as annuities, are usually designed for income, and could provide no capital preservation at all
• Receiving regular income or dividends, as opposed to capital gains, may have tax disadvantages
• At the other extreme, some products are designed only for capital growth and never pay out an income stream, although parts of the investment may be sold to simulate "income"
Surrender value
Often overlooked, surrender value is an important consideration, and early surrender of some products can have a heavy negative impact on investment returns
• Investments in shares or unit trusts, have surrender costs even if it’s only the realisation of upfront commission or sales charge. These could be anything from 1-5%. Some unit trusts, especially those with fixed tenures, have explicit redemption charges.
• Fixed deposits have a surrender cost, possibly as high as 90 days' interest.
The products with heaviest surrender losses are life assurance policies. In almost all cases they do not provide good value for money as short-term investments:
• Many life assurance products offer nil or very low surrender values for the first year or two
• Even after this initial period, surrender values are much lower than maturity benefits for much of the term of the investment
• Long-term endowments have lower early surrender values than short-term endowments
• Investment-linked insurance products have better encashment values than life policies with
bonuses (profits)
Early surrender values are of little concern to investors committed to fixed savings goals but they should bear in mind that any "forced sale" could be costly. It's a real problem: UK statistics show that up to 50% of endowment (insurance) policyholders surrender within the first six years. It is this aspect of long-term policies that often prompts financial advisers to recommend separating life assurance protection from investment needs.
Charging and commission structure
Charging and commission structures vary tremendously from product to product. Generally, investors should be aware of the following guidelines:
• Direct investment in stocks or bonds is usually cheaper than through packaged products, such as unit trusts and insurance
• The costs of fixed deposits or other "zero charge" products are concealed in the interest rates advertised, or the charges may be levied on an annual basis under a higher management fee
• Unit trust sales charges are as high as 5.5% at banks, but the same product can be had for as low as 1% at online portals.
• Initial commission on life insurance policies could be 30-40% of the annual premium, with payment spread over 16-38 months. Initial commission could be as high as 70-80% for 25-year endowments.
• Commission on annuity contracts is typical 2% of purchase price
Historically, ongoing annual management charges are roughly:
• Life assurance: 1.5-2%
• Actively managed unit trusts: 1.25-2%
• Tracker unit trusts: 0.5-1%
• Pension policies (in the UK): 2.5%
Charging and commission structures are subject to frequent change, and initial fees may be negotiable in some cases. Investors should try to compare on a like-for-like basis and remember that the net return to the investor is ultimately the key concern – a low charging product that makes losses is always less desirable than an "expensive" product that returns consistent gains.
Risk and accessibility
Different products have different levels of risk, and clearly any product purchase should be consistent with an investor’s risk tolerance.
Some products impose significant delays before redemption money can be accessed, so it’s important that potential investors understand these terms. For example, fixed tenure products may only trade once a month after the launch period. Likewise, 90-day savings accounts may require a three-month notice period. And as discussed above, easy access may come at the price of high surrender costs. Hence, it’s important that individuals have an easily accessible emergency fund before they enter into any investment with a substantial lock-in period.
Tax treatment
Different products have different tax treatments, both in terms of how the product itself is taxed, and how the end investor is taxed on the proceeds. Usually capital gains avoid any tax liability, which is an advantage for any product delivering the returns as a price gain.
In Singapore, income tax is chargeable on dividend income. Because of tax offsetting, in some situations the total returns to investors can actually be higher than the headline total returns.
This is because investors can claim some of the withheld tax. For example, Schroder Singapore Trust, a unit trust investing in local stocks, does not pay tax on dividends. Instead it receives dividends net of withholding tax (as any other investor would) and pays out the same net amount to its unit holders (in effect, the fund is transparent for tax purposes).
So investors with personal marginal tax rates lower than the current corporate tax rate can get a refund on the tax difference for the dividend. This allows them to enjoy a higher effective dividend (a new tax system eventually will remove this benefit as shareholders will not be able to claim tax refunds on dividends received).
Other products may do things quite differently. For example, Franklin US Government Fund, a unit trust investing in US mortgage-backed bonds, declares dividends on a quarterly basis at the fund level. This income is from the "passthroughs" of the underlying securities, which have a constant monthly cash flow from mortgage repayments. Holders of this fund receive the full dividend because there is no withholding tax on the fund’s foreign securities. But the individual investors must declare the dividends for taxation, which would probably lower their overall return.
Some insurance plans allow you to receive all proceeds tax-free. For example, those bought under the CPF Minimum Sum Scheme. Similarly, investors should also look at whether a product is available for purchase using Supplementary Retirement Scheme (SRS) money. If it is, it could have significant tax advantages over a similar product that is not under SRS.
Conclusion
It's worth doing your homework or getting unbiased advice, as there is a lot more variability in products than many investors imagine. Often a product suitable for one person is unsuitable for someone else with almost identical needs, except for a key difference. For example, an endowment insurance policy could be ideal for someone with the intention and means to keep up regular contributions for 15 years or more. But the same plan could be the wrong choice for an investor who has a high chance of surrendering the policy after only a few years.
We believe that, generally, low-cost products designed to meet a specific need have advantages over combination products with an overabundance of features. And we think it's always a good idea to separate needs (investment, insurance) during your planning, although that doesn't rule out a single product choice when you implement.
So...unit trust or insurance product? Depends on your precise needs, but generally low cost unit trusts have the edge as pure investments, especially for short-term investing. For those who can stick with an investment for the long-term, whether an insurance product is best depends on whether you need the extra protection, and if that benefit is cost-effective bundled or separate.
The Economist: Will the credit crisis trigger a downturn?
The world economy
Will the credit crisis trigger a downturn?
Sep 20th 2007
From The Economist print edition
Despite the Fed's big interest-rate cut, increasing risk-aversion is likely to depress growth
AT THE climax of "The Day the Earth Caught Fire", a science-fiction film made in 1961, the fate of the planet hangs in the balance. The world's great powers decide to detonate nuclear bombs, hoping to push the Earth off a collision course with the sun. Do they succeed? The final scene shows two versions of the next day's Daily Express: the headline on the first reads "World Saved"; the other, "World Doomed".
In the 2007 sequel, "The Day the Credit Markets Seized Up", Wall Street seemed this week almost to have made up its mind about the ending: World Saved, Probably. Financial markets had expected the Federal Reserve to cut interest rates by a quarter of a percentage point on September 18th, but prayed fervently for a half. When the half came, America's markets rejoiced: the S&P 500 index enjoyed its largest rise on a single day since January 2003; the next day share prices elsewhere jumped for joy and junk-bond markets sprang back to life.
But on sober appraisal, there is less cause for celebration. Global money markets are still bedevilled by banks' need for cash and mistrust of one another: witness the thousands of Britons who queued this week to take their money out of Northern Rock, a mortgage lender. The longer that money-market rates stay high, the greater the danger that expensive credit will start to hurt real economies. Central bankers still have work to do and reputations to make and lose—chief among them Ben Bernanke, the chairman of the Fed. Mr Bernanke may have been feted this week. But it will take more than one rate cut, with Wall Street and Congress screaming for it, to make his name. In the past the Fed has been too eager to cut rates repeatedly when markets gripe. Mr Bernanke has yet to show he is not making the same mistake.
Reasons to be fearful
The size of the Fed's cut and the statement that accompanied it signified fear more than hope (see article). The central bank hopes to "forestall some of the adverse effects" of the credit crunch on the economy. But trouble may be coming anyway. The housing market's malaise is deepening all the while. This week's symptoms were a 12-year low in housing starts and a doubling of foreclosures in a year. No wonder housebuilders are their gloomiest since the 1991 recession.
If America is set for a sharp slowdown, or even a recession, it is sure to import less from other countries. That, however, is not the main danger to the rest of the world. Both Europe and Asia are less dependent on American growth than they used to be. Europe is now on a par with America as a market for Chinese exports. Sales to America account for less than 3% of euro-zone GDP. And some rebalancing of the world economy—a smaller American current-account deficit, a weaker dollar—is no bad thing.
The real source of pain is the rise in borrowing costs in both America and Europe. Granted, things are a little better than they were. The gap between three-month interbank rates and Treasury bills, a measure of the risk of lending to other banks rather than Uncle Sam, has narrowed in recent days, helped by the Fed's cut. Sterling interbank rates also fell, notably after the Bank of England abandoned its refusal to intervene in the three-month money market. But the about-turn came only after the panic at Northern Rock—and has heightened criticism of the governor, Mervyn King. Central banks must hope that a turning point has been reached, but interbank rates are still high. There is a long way to go.
From celebration to calibration
A lot of this pain, alas, is necessary. Central banks have been saying for months that risk had become underpriced. Well, now the repricing is at hand, and it is not going to be fun. Banks have to work out the cost of the damage done by years of easy credit and gorging on complicated financial products (see article). It could take months to put prices on the complicated mix of assets for which they are ultimately liable. Meanwhile, they will want to keep cash to themselves rather than lend to others. And in future they may be choosier about who they lend to, directly or indirectly.
This is not to say that securitisation is about to be uninvented. It cannot be and should not be. In recent weeks the dangers of financial innovation—the divorce of originator from ultimate lender; the sheer complexity of some derivatives—have become plain. The benefits remain, not least the increased ability of households to smooth spending over their lifetimes and of markets to allocate risks to those most willing to bear them (see article). But there are cycles in all things: underpricing begets excess, which begets a reckoning. For a while at least, many people and businesses will have to pay more to borrow, or will not be able to borrow at all. The results will be felt in markets for housing—America's was far from the frothiest—as well as junk bonds and corporate buy-outs.
To some extent, easier monetary policy may soothe the transition. Already some central banks have held off interest-rate increases that looked certain a few weeks ago. But even if some of these eventually cut rates, they are unlikely wholly to reverse the tightening of conditions just yet. The markets are in effect raising rates on the central banks' behalf. These monetary policymakers are unlikely to forget inflation in a hurry.
But might the Fed? It says not. And given the recent run of economic data, inflation hardly seems an imminent threat. That ought to help to protect Mr Bernanke from the charge levelled at Alan Greenspan, his predecessor. Under Mr Greenspan, whose memoirs came out this week (see article), the Fed won a name for being quick to cut rates when markets squealed but slow to raise them when the economy picked up. The housing boom—and today's mess—are the result.
Having delivered a half-point cut rather than a quarter, Mr Bernanke is not yet free of the suspicion that he will follow Mr Greenspan's path. Nor is he surely guilty. His Fed has cut rates with the economy looking ropy—but also with bankers and politicians trying to bully him. The hope is that he acted because he saw a gloomy outlook. The fear is that he did so because it is hard for central bankers to say no.
Will the credit crisis trigger a downturn?
Sep 20th 2007
From The Economist print edition
Despite the Fed's big interest-rate cut, increasing risk-aversion is likely to depress growth
AT THE climax of "The Day the Earth Caught Fire", a science-fiction film made in 1961, the fate of the planet hangs in the balance. The world's great powers decide to detonate nuclear bombs, hoping to push the Earth off a collision course with the sun. Do they succeed? The final scene shows two versions of the next day's Daily Express: the headline on the first reads "World Saved"; the other, "World Doomed".
In the 2007 sequel, "The Day the Credit Markets Seized Up", Wall Street seemed this week almost to have made up its mind about the ending: World Saved, Probably. Financial markets had expected the Federal Reserve to cut interest rates by a quarter of a percentage point on September 18th, but prayed fervently for a half. When the half came, America's markets rejoiced: the S&P 500 index enjoyed its largest rise on a single day since January 2003; the next day share prices elsewhere jumped for joy and junk-bond markets sprang back to life.
But on sober appraisal, there is less cause for celebration. Global money markets are still bedevilled by banks' need for cash and mistrust of one another: witness the thousands of Britons who queued this week to take their money out of Northern Rock, a mortgage lender. The longer that money-market rates stay high, the greater the danger that expensive credit will start to hurt real economies. Central bankers still have work to do and reputations to make and lose—chief among them Ben Bernanke, the chairman of the Fed. Mr Bernanke may have been feted this week. But it will take more than one rate cut, with Wall Street and Congress screaming for it, to make his name. In the past the Fed has been too eager to cut rates repeatedly when markets gripe. Mr Bernanke has yet to show he is not making the same mistake.
Reasons to be fearful
The size of the Fed's cut and the statement that accompanied it signified fear more than hope (see article). The central bank hopes to "forestall some of the adverse effects" of the credit crunch on the economy. But trouble may be coming anyway. The housing market's malaise is deepening all the while. This week's symptoms were a 12-year low in housing starts and a doubling of foreclosures in a year. No wonder housebuilders are their gloomiest since the 1991 recession.
If America is set for a sharp slowdown, or even a recession, it is sure to import less from other countries. That, however, is not the main danger to the rest of the world. Both Europe and Asia are less dependent on American growth than they used to be. Europe is now on a par with America as a market for Chinese exports. Sales to America account for less than 3% of euro-zone GDP. And some rebalancing of the world economy—a smaller American current-account deficit, a weaker dollar—is no bad thing.
The real source of pain is the rise in borrowing costs in both America and Europe. Granted, things are a little better than they were. The gap between three-month interbank rates and Treasury bills, a measure of the risk of lending to other banks rather than Uncle Sam, has narrowed in recent days, helped by the Fed's cut. Sterling interbank rates also fell, notably after the Bank of England abandoned its refusal to intervene in the three-month money market. But the about-turn came only after the panic at Northern Rock—and has heightened criticism of the governor, Mervyn King. Central banks must hope that a turning point has been reached, but interbank rates are still high. There is a long way to go.
From celebration to calibration
A lot of this pain, alas, is necessary. Central banks have been saying for months that risk had become underpriced. Well, now the repricing is at hand, and it is not going to be fun. Banks have to work out the cost of the damage done by years of easy credit and gorging on complicated financial products (see article). It could take months to put prices on the complicated mix of assets for which they are ultimately liable. Meanwhile, they will want to keep cash to themselves rather than lend to others. And in future they may be choosier about who they lend to, directly or indirectly.
This is not to say that securitisation is about to be uninvented. It cannot be and should not be. In recent weeks the dangers of financial innovation—the divorce of originator from ultimate lender; the sheer complexity of some derivatives—have become plain. The benefits remain, not least the increased ability of households to smooth spending over their lifetimes and of markets to allocate risks to those most willing to bear them (see article). But there are cycles in all things: underpricing begets excess, which begets a reckoning. For a while at least, many people and businesses will have to pay more to borrow, or will not be able to borrow at all. The results will be felt in markets for housing—America's was far from the frothiest—as well as junk bonds and corporate buy-outs.
To some extent, easier monetary policy may soothe the transition. Already some central banks have held off interest-rate increases that looked certain a few weeks ago. But even if some of these eventually cut rates, they are unlikely wholly to reverse the tightening of conditions just yet. The markets are in effect raising rates on the central banks' behalf. These monetary policymakers are unlikely to forget inflation in a hurry.
But might the Fed? It says not. And given the recent run of economic data, inflation hardly seems an imminent threat. That ought to help to protect Mr Bernanke from the charge levelled at Alan Greenspan, his predecessor. Under Mr Greenspan, whose memoirs came out this week (see article), the Fed won a name for being quick to cut rates when markets squealed but slow to raise them when the economy picked up. The housing boom—and today's mess—are the result.
Having delivered a half-point cut rather than a quarter, Mr Bernanke is not yet free of the suspicion that he will follow Mr Greenspan's path. Nor is he surely guilty. His Fed has cut rates with the economy looking ropy—but also with bankers and politicians trying to bully him. The hope is that he acted because he saw a gloomy outlook. The fear is that he did so because it is hard for central bankers to say no.
Thursday, September 20, 2007
The Economist: The Fed's bold cut
Looking down
Sep 18th 2007 From Economist.com
Sep 18th 2007 From Economist.com
The Fed's bold cut
IS THE Federal Reserve running scared of the financial markets—or the housing market? On Tuesday September 18th America’s central bank cut its target for the federal funds rate by half a point, to 4.75%, the first reduction for more than four years. Financial markets had thought a quarter-point cut a shade more likely, but prayed fervently for a half. Rejoicing, the S&P 500 jumped by nearly 3% after the Fed’s announcement and the Dow Jones index closed more than 300 points up.
Once the cheering stops, it may be worth reflecting on what the Fed’s action—and words—say about the state of the economy, especially the housing market. The "tightening of credit conditions", said the Fed, "has the potential to intensify the housing correction and to restrain economic growth." The Fed seems to be trying to act before things get worse: the cut, it said, "is intended to help forestall some of the adverse effects on the broader economy".
This argument is close to that laid out by Frederic Mishkin, a Fed governor, at the Jackson Hole central bankers’ symposium a fortnight ago. If a central bank cuts rates swiftly, Mr Mishkin argued there, it can soften the effects of even a sharp drop in house prices—not least because falling house prices translate only slowly into lower spending. The arguments of Janet Yellen, head of the San Francisco Fed, also seem to have been persuasive, says Adam Posen of the Peterson Institute for International Economics in Washington, DC: "the San Francisco Fed is one of the only regional Feds to have independent full-scale forecasts". She gave warning this week that "financial market turmoil seems likely to intensify the downturn in housing".
The Fed will have been helped towards its half-point cut by benign data on both consumer and producer prices: the latter, released on the day of the Fed’s decision, showed a 1.4% fall in August. More bad news from the housing market, published the same day, will have added weight to the argument for a bigger cut. An index of homebuilders’ confidence fell to match the lowest level reached since its inception. And the rate of foreclosures has more than doubled in the past year.
To some, it will seem as if the Fed has caved in to Wall Street. The emphasis on the housing market may help to dispel that impression. So might the Fed’s insistence that "some inflation risks remain" and that it will "continue to monitor inflation developments carefully." So too, notes Mr Posen, will recent data on inflation, housing and jobs. Even so, the Fed will have to keep choosing its words carefully in the months ahead.
Tuesday, September 18, 2007
Higher CPF returns from next year
ALL CPF members will enjoy higher returns from next year.
Lydia Lim, Senior Political Correspondent
Tue, Sep 18, 2007The Straits Times
ALL CPF members will enjoy higher returns from next year.
And seven in 10 will enjoy an extra one percentage point in interest on all their balances. These are members with $60,000 or less in their Central Provident Fund (CPF) accounts.
The new interest rate is part of a suite of changes to help Singaporeans save more for old age.
These include bigger Workfare income top-ups for older low-wage workers, and new bonuses tied to postponing the draw down on members' CPF Minimum Sum.
Manpower Minister Ng Eng Hen yesterday fleshed out the details of several measures first announced by the Prime Minister in his National Day Rally speech last month.
Of these, a proposed compulsory annuities or longevity insurance scheme has proved the most unpopular.
Yesterday, Dr Ng promised a flexible scheme that will take into account people's different needs.
A new committee, helmed by National Wages Council chairman Lim Pin, will study how best to ensure those who live beyond age 85 - the age when people's CPF Minimum Sum runs out - have an income until their deaths.
Dr Ng even held out the possibility that CPF members could stretch out their Minimum Sum payouts to 30 years, up from the current 20, thereby reducing the need to buy the insurance.
The 14 MPs who joined the debate yesterday supported the changes, several describing them as bold. But they also took pains to reflect workers' worries, sprinkling their speeches with Hokkien phrases to convey ground sentiments that ranged from confusion to suspicion over the Government's motives.
They said unhappiness centred on the compulsory longevity insurance and the raising of the CPF Minimum Sum draw-down age.
Now set at age 62, it will be raised to 63 in 2012, 64 in 2015, and 65 in 2018.
Dr Amy Khor, chairman of government feedback unit Reach, said some were saying in Hokkien that they would end up with 'boh chi, boh kang' - that is, 'no money, no job'.
Setting the context for the changes, which he said were necessary even if unpopular, Dr Ng noted that Singaporeans were living much longer than before.
Of those who turned 62 last year, one in two will live beyond age 85. And more than half of those who stop work at the current retirement age of 62 will have to prepare for over 20 years of retirement.
Singapore's ageing population also means that there will be fewer younger folk to support the elderly.
The ratio is now eight people aged 15 to 64 for every senior aged 65 and over. But the ratio will fall to four to one in 2030.
According to a United Nations study, by 2050, Singapore's population will be the fourth oldest in the world.
Dr Ng said: 'We must therefore tackle this challenge now, as we have done with other national issues which can affect our nation's well-being and future.'
Many had asked about the Government's role in improving retirement security, he noted.
It will foot the bill for the changes, he said, to the tune of $1.1 billion a year for higher CPF returns and Workfare payouts, and a one-off outlay of $1.2 billion for the bonuses tied to draw-down age.
While the problem of retirement adequacy was a looming challenge for many countries, he said Singapore was one of the few 'tackling this problem head-on, with eyes wide open and the public engaged'.
The Government's three-pronged retirement support plan consists of ways to help people work longer, improve CPF returns, and make savings last for their whole lifespans.
There will be a new re-employment law by 2012 and higher Workfare income top-ups for low-wage earners aged over 55.
CPF returns will also go up from next year.
Savings in the CPF Special, Medisave and Retirement accounts will also be pegged to a new rate: that of 10-year Singapore Government Securities plus one percentage point.
Dr Ng said the Government will justify the new system to the President and explain that there will be no draw down on past reserves. Second Finance Minister Tharman Shanmugaratnam will speak in Parliament on the issue.
In tandem with the raising of the Minimum Sum draw-down age, the Government will pay special bonuses to those affected by the change, or who volunteer to delay the use of their CPF savings.
Dr Ng said that taken together, the changes would strengthen and make for a better and sustainable CPF system.
They would ensure all CPF members, especially the lower- and middle-income, will be better off and that 'as many as possible will have savings for as long as they live'.
The Parliament debate on the CPF changes continues today.
Lydia Lim, Senior Political Correspondent
Tue, Sep 18, 2007The Straits Times
ALL CPF members will enjoy higher returns from next year.
And seven in 10 will enjoy an extra one percentage point in interest on all their balances. These are members with $60,000 or less in their Central Provident Fund (CPF) accounts.
The new interest rate is part of a suite of changes to help Singaporeans save more for old age.
These include bigger Workfare income top-ups for older low-wage workers, and new bonuses tied to postponing the draw down on members' CPF Minimum Sum.
Manpower Minister Ng Eng Hen yesterday fleshed out the details of several measures first announced by the Prime Minister in his National Day Rally speech last month.
Of these, a proposed compulsory annuities or longevity insurance scheme has proved the most unpopular.
Yesterday, Dr Ng promised a flexible scheme that will take into account people's different needs.
A new committee, helmed by National Wages Council chairman Lim Pin, will study how best to ensure those who live beyond age 85 - the age when people's CPF Minimum Sum runs out - have an income until their deaths.
Dr Ng even held out the possibility that CPF members could stretch out their Minimum Sum payouts to 30 years, up from the current 20, thereby reducing the need to buy the insurance.
The 14 MPs who joined the debate yesterday supported the changes, several describing them as bold. But they also took pains to reflect workers' worries, sprinkling their speeches with Hokkien phrases to convey ground sentiments that ranged from confusion to suspicion over the Government's motives.
They said unhappiness centred on the compulsory longevity insurance and the raising of the CPF Minimum Sum draw-down age.
Now set at age 62, it will be raised to 63 in 2012, 64 in 2015, and 65 in 2018.
Dr Amy Khor, chairman of government feedback unit Reach, said some were saying in Hokkien that they would end up with 'boh chi, boh kang' - that is, 'no money, no job'.
Setting the context for the changes, which he said were necessary even if unpopular, Dr Ng noted that Singaporeans were living much longer than before.
Of those who turned 62 last year, one in two will live beyond age 85. And more than half of those who stop work at the current retirement age of 62 will have to prepare for over 20 years of retirement.
Singapore's ageing population also means that there will be fewer younger folk to support the elderly.
The ratio is now eight people aged 15 to 64 for every senior aged 65 and over. But the ratio will fall to four to one in 2030.
According to a United Nations study, by 2050, Singapore's population will be the fourth oldest in the world.
Dr Ng said: 'We must therefore tackle this challenge now, as we have done with other national issues which can affect our nation's well-being and future.'
Many had asked about the Government's role in improving retirement security, he noted.
It will foot the bill for the changes, he said, to the tune of $1.1 billion a year for higher CPF returns and Workfare payouts, and a one-off outlay of $1.2 billion for the bonuses tied to draw-down age.
While the problem of retirement adequacy was a looming challenge for many countries, he said Singapore was one of the few 'tackling this problem head-on, with eyes wide open and the public engaged'.
The Government's three-pronged retirement support plan consists of ways to help people work longer, improve CPF returns, and make savings last for their whole lifespans.
There will be a new re-employment law by 2012 and higher Workfare income top-ups for low-wage earners aged over 55.
CPF returns will also go up from next year.
Savings in the CPF Special, Medisave and Retirement accounts will also be pegged to a new rate: that of 10-year Singapore Government Securities plus one percentage point.
Dr Ng said the Government will justify the new system to the President and explain that there will be no draw down on past reserves. Second Finance Minister Tharman Shanmugaratnam will speak in Parliament on the issue.
In tandem with the raising of the Minimum Sum draw-down age, the Government will pay special bonuses to those affected by the change, or who volunteer to delay the use of their CPF savings.
Dr Ng said that taken together, the changes would strengthen and make for a better and sustainable CPF system.
They would ensure all CPF members, especially the lower- and middle-income, will be better off and that 'as many as possible will have savings for as long as they live'.
The Parliament debate on the CPF changes continues today.
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