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Alternative proposals for a better Singapore

Concerns about the TPP’s Investor-State Dispute Settlement provision


I asked the Minister for Trade and Industry this parliamentary question on 4 August 2014. There are concerns about the Investor-State Dispute Settlement (ISDS) provision in the Trans-Pacific Partnership (TPP) free trade agreement (FTA), which could grant foreign investors (usually MNCs) the right to sue national governments in an international tribunal if they believe TPP commitments have been breached.

Australia is currently engaged in legal battle with tobacco giant Philip Morris over the country’s plain packaging requirements on cigarette packs to reduce smoking rates. Philip Morris challenged this in Australian courts and lost. So they took the legal challenge to Hong Kong under the Hong Kong-Australia Bilateral Investment Treaty. While not part of the TPP, this is an example of how some multinationals may attempt to use international courts to overcome adverse rulings against themselves in domestic courts.

I would not want to see similar legal challenges against Singapore, especially against regulations that are meant to protect the public health of Singaporeans and our environment. Any FTAs that we sign should also not constrain us from enacting such regulations for fear of attracting legal challenges by MNCs at international tribunals.

The TPP is a proposed regional free trade agreement that is currently being negotiated by twelve countries throughout the Asia-Pacific region, including Singapore, Australia, Japan, the United States and Canada. While it is important that Singapore is included in the TPP, it is equally important that our trade negotiators ensure that the interests of SMEs and ordinary Singaporeans — and not just large MNCs — are promoted under the TPP.


Mr Gerald Giam Yean Song asked the Minister for Trade and Industry (a) what mechanisms and processes are in place to allow Singapore to implement legislation in areas such as public health and the environment given the Investor-State Dispute Settlement (ISDS) provision in the Trans-Pacific Partnership (TPP) which grants foreign investors the right to sue the Singapore Government in an international tribunal if they believe TPP commitments have been breached; and (b) how many ISDS challenges by multinational companies have been brought or have been threatened to be brought against Singapore in the past.

Mr Lim Hng Kiang (Minister for Trade and Industry): The TPP commits Singapore to ensuring a stable and fair regime for foreign investors. In return, Singaporean investors in TPP countries are also ensured the same stability and fairness. The ISDS mechanism gives foreign investors the right to initiate dispute settlement proceedings against host countries to enforce this commitment. At the same time, to prevent misuse of ISDS, there are also provisions within the TPP which discourage and allow the dismissal of frivolous suits, and allow TPP governments to direct the arbitral tribunals in certain situations.

Our FTAs, including the TPP, do not restrict Singapore from adopting measures for legitimate public policy reasons, including the protection of public health and the environment.

To date, no multinational company has challenged or threatened to challenge Singapore.


Source: Singapore Parliament Reports (Hansard)
Image: Canada Department of Foreign Affairs, Trade and Development

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Q&A on Govt’s net assets, GIC and CPF obligations

These were the questions I asked DPM Tharman Shanmugaratnam on 4 August 2014 in Parliament regarding the Government’s “net assets” and how the returns from the reserves managed by GIC make their way back to CPF members. The DPM’s answers and my supplementary questions are below.


Mr Gerald Giam Yean Song asked the Deputy Prime Minister and Minister for Finance (a) whether the buffer of “net assets” that are used by the Government to ensure that Special Singapore Government Securities (SSGS) interest rates are paid to the CPF Board even in years when GIC’s returns are weak refers to (i) past Government reserves requiring Presidential assent for drawdown (ii) current Government reserves or (iii) current or past reserves accumulated by GIC or MAS; and (b) what limitations apply to the use of these net assets.

The Deputy Prime Minister and Minister for Finance (Mr Tharman Shanmugaratnam): Mdm Speaker, I thank Mr Gerald Giam for his question.

Let me first reiterate the basic framework that enables the Government to ensure that SSGS obligations are met. The CPF Board invests CPF members’ savings in Special Singapore Government Securities (SSGS), which are guaranteed by the Government. This assures that CPF savings are safe, regardless of financial market conditions. The interest rates on SSGS also match those on CPF savings, so that CPF members will receive the annual interest rates that they are promised, including the minimum 4% to 5% interest on SMRA balances (Special Account, Medisave Account, Retirement Account balances) and the 2.5 % to 3.5% interest on the Ordinary Account balances, that they receive this even when market interest rates fall to low levels. So, the interest rates on SSGS match these interest rates on CPF savings regardless of financial market circumstances.

The Government pools the SSGS monies with the rest of its funds, such as proceeds from issuing Singapore Government Securities or SGS in the markets, i.e. the tradable securities in the markets, as well as unencumbered assets that reflect past Government surpluses and receipts from land sales. These co-mingled Government funds are first deposited with MAS as Government deposits. A major part of these funds, being of a longer-term nature, are then periodically transferred to the GIC to be managed over a long investment horizon.

Before GIC was formed in 1981, the Government’s monies including those derived from SSGS were managed by MAS. MAS continued to manage a good part of the monies especially during the first decade after GIC was formed, while GIC built up its capabilities for long-term global investment in diverse asset classes. Currently, GIC manages a major part of the Government’s funds, including those derived from long-term liabilities such as SSGS.

Importantly, GIC is not managing SSGS or CPF monies on their own, but a combined pool of Government funds including a significant sum of unencumbered assets. This is why the GIC’s mandate is to take calculated investment risks aimed at achieving good, long-term returns on the Government’s funds, without regard to the Government’s liabilities. It is precisely because the GIC is managing a combined pool, which includes a significant amount of unencumbered assets, that it is able to invest for the long term, take risk in expectation of long term returns, without regard to the government specific liabilities.

GIC has achieved good long-term returns to date. However, as investment markets are uncertain and volatile, GIC’s returns over shorter periods could be low or even negative. The Government is able to absorb these short-term market risks, because it has a strong balance sheet. It has a substantial buffer of net assets that enables it to meet the obligations on its liabilities, including its SSGS commitments.

The Government’s net assets, or its assets in excess of its liabilities, are the Government’s reserves as defined under the Constitution. The bulk of the Government’s reserves are those accumulated during previous terms of Government, also known as its Past Reserves. It is the Past Reserves that the Constitution seeks to safeguard, especially through the powers vested in the President.

In particular, the Constitution guards against profligate spending, which can draw down Past Reserves. The President can withhold his assent for the Supply Bill if the Government intends on its annual Budget to spend more than its Current Reserves, in other words, reserves accumulated during the current term of Government.

The Constitution also enables the President to state and gazette his opinion if he considers that the Government has entered into liabilities that will likely draw down Past Reserves. This scenario could for example arise if the Government were to set interest rates on SSGS at artificially high levels, without reference to market interest rates, and above what can reasonably be expected to be earned in investment returns on the Government’s funds over the long-term. This would run down the reserves systematically and deliberately. The President has not been put in a position where he has had to state such an opinion. CPF and SSGS interest rates are set with reference to returns on similar market instruments, and are both fair and sustainable.

The scenario of entering into liabilities that will lead to a systematic and deliberate drawdown of reserves should not be confused with the fluctuations in the value of the reserves due to market volatility and cycles that happen all the time. Volatility and cycles are part and parcel of the investment world. Indeed, the GIC’s mandate is to take risks aimed at achieving long term returns, in full knowledge that the Government’s portfolio will be exposed to market risks that could mean weak returns or even declines in value on a mark-to-market basis for a time, before cycles reverse and values rebound.

Hence, although GIC’s returns over the last 20 years – ending March 2014 – have averaged 6.5% in USD terms, or 5.3% in SGD terms, it has experienced several years where its returns were low or negative – several years during that 20 year period. To take the most recent episode, the Global Financial Crisis led to a significant reduction in GIC’s annualised five-year return ending March 2013 – i.e. as of a year ago – to just 0.5% in nominal SGD terms. But moving just a year forward to March 2014, its five-year annualised return rebounded strongly. This volatility is part of the market. It was also seen in comparable market portfolios.

The President and the Council of Presidential Advisers (CPA) have full information about the size of the reserves and all of the Government’s financial assets and liabilities. What matters in determining if there will be a likely draw on Past Reserves is whether Government has entered into liabilities that are sustainable and will not result in a systematic erosion in the reserves. It is not the short-term fluctuations in investment returns due to market risks that matter here – even if these ups and downs in investment returns, taken together with the Government’s SSGS and SGS obligations, imply fluctuations in the value of net assets.

A decline in investment returns or a drop in the market value of assets in the course of market cycles is not considered a draw on Past Reserves that the Constitution seeks to guard against, because any strategy of investing the reserves for long-term returns must mean taking investment risk and will involve ups and downs in market value of the portfolio, not just from one year to another but very frequently within the year.

The only way to avoid fluctuations in the value of our reserves is to avoid taking investment risk, for example by investing all of our assets in cash-like instruments. However, this will mean accepting low returns over the long term, and indeed returns that would likely fall below the interest rates on SSGS and even SGS over the long term.
To summarise the point, what the Constitution guards against are actions that lead to a systematic erosion of reserves, not the investment of reserves in order to gain long-term returns, which must involve investment risk and fluctuations in market value.

Let me return to the basic features of the system. The Government’s strong balance sheet enables it to take investment risks and ride out the market cycles that are inherent in investing for the long-term. It has a significant buffer of net assets, with important benefits for Singapore. These net assets enable the Government to guarantee CPF savings, and pay fair interest rates on CPF savings despite financial market cycles. The Government’s significant net assets, on which we expect to earn long-term returns, are also why we have a significant stream of investment income in the form of NIRC (Net Investment Returns Contribution) on our Budget each year, which can be used to meet important spending priorities.

Mr Gerald Giam Yean Song (Non-Constituency Member): Thank you, Madam. I thank the Deputy Prime Minister for the answers. I have three supplementary questions. GIC has reported that over the 20-year period ended 31 March 2014, the GIC portfolio has generated an average annual real return of 4.1%. Does this figure take into account the interest payable to CPF for the SSGS?

Second question: can the Deputy Prime Minister explain what is the mechanism by which the investment returns from GIC are transferred back to the Government and then to CPF? Does the GIC only return the NIRC to the budget and then leave it to the Government to disperse the SSGS principle plus interest to CPF using net assets?

And third question: specifically on the eight years in the past 20 years where GIC’s investment returns were below what the Government pays on SSGS, were these shortfalls funded from the Government’s net assets or from the GIC’s assets?

Mr Tharman Shanmugaratnam: First, let me explain that GIC is managing Government assets. It is not GIC’s assets. GIC is a fund manager, so the assets are assets on the Government’s balance sheet, rather than on the GIC’s balance sheet. When the GIC reported that it has earned a real return over 20 years of 4.1% on an annualised basis, it is referring to the return on the total assets that it is managing for the Government.

The NIRC which enters the Government’s budget is computed after netting off what is payable on the Government’s liabilities, SSGS and SGS. That is already netted off. So, what enters the Government’s budget, which is up to 50% of the expected investment returns, is after Government has paid what is necessary on the liabilities.

And as for the eight years within the last 20 years, which was what I had stated in response to Mr Gerald Giam’s question at the previous Sitting – just to reiterate, that is eight years in the previous 20 years ending 2013 – that is when in fact the GIC’s returns on the total assets that it is managing fell below the SSGS rates. That by definition would have meant that net assets would have been lower than otherwise because the Government has fixed obligations on its liabilities, and because of the fluctuations in returns on its assets.


Source: Singapore Parliament Reports (Hansard)

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Thoughts on National Day Rally 2014

I attended the National Day Rally on 17 August 2014 at ITE. After the speech, reporters from various media outlets asked for my views on the Prime Minister’s CPF announcements. These are some of my brief thoughts. My parliamentary colleague Yee Jenn Jong (NCMP) responded to the media’s questions about education.

1. While I understand the PM’s explanation that sufficient CPF balances are needed for people to have a decent monthly pay out after retirement, many low-income (or no-income) Singaporeans simply cannot save up enough to meet the Minimum Sum of $155,000 or $161,000, even with the property pledge included. They are caught in a Catch-22 situation. We need to do more to help those who cannot meet the Minimum Sum. I am glad to hear about the new Silver Support scheme. It is an acknowledgement that some poor elderly Singaporeans need more Government support, and that self-reliance or family-reliance has its limits.

2. I would like the Government to focus more on ways to improve retirement income without asking the elderly to sell their homes and downgrade. It is good that the Lease Buyback Scheme (LBS) has been extended to 4-room flats. The LBS has not seen a very good take up rate so far, in large part because it was restricted to only 3-room or smaller flats. But as I had stated in my 2012 Budget debate speech, I would prefer for LBS to be extended to all flat sizes. This will help more elderly folks monetise their flats without having to sell and move out of their flats, which many of them attach a lot of sentimental value to. This is what I said in 2012:

“…most elderly folks prefer to remain in their current homes, rather than get displaced to unfamiliar surroundings in their old age.

To give the elderly more choice, the Lease Buyback Scheme should be extended to owners of 4-room or larger flats, just like the Silver Housing Bonus. Currently only owners of 3-room or smaller flats are eligible. This could be a reason for the low take up rate.

An enhanced Lease Buyback Scheme will enable more of our elderly to age in place, and to live their golden years in familiar surroundings, without having to worry too much about finances.”

3. It is good to give CPF members more flexibility to withdraw part of their CPF upon retirement. My colleague Png Eng Huat (MP for Hougang) had spoken on this in Parliament in May this year. Different people have different needs. Some might have more pressing needs for their CPF, like healthcare expenses, immediately after retirement. The Government should not seek to dictate every aspect of how retirees spend their own CPF monies.

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Parliamentary Questions for 4 August sitting

These are the questions I will be asking the Ministers during today’s Parliament sitting:


*9. Mr Gerald Giam Yean Song: To ask the Deputy Prime Minister and Minister for Finance (a) whether the buffer of “net assets” that are used by the Government to ensure that Special Singapore Government Securities (SSGS) interest rates are paid to the CPF Board even in years when GIC’s returns are weak refers to (i) past Government reserves requiring Presidential assent for drawdown (ii) current Government reserves or (iii) current or past reserves accumulated by GIC or MAS; and (b) what limitations apply to the use of these net assets.

*37. Mr Gerald Giam Yean Song: To ask the Minister for Trade and Industry (a) what mechanisms and processes are in place to allow Singapore to implement legislation in areas such as public health and the environment given the Investor-State Dispute Settlement (ISDS) provision in the Trans-Pacific Partnership (TPP) which grants foreign investors the right to sue the Singapore Government in an international tribunal if they believe TPP commitments have been breached; and (b) how many ISDS challenges by multinational companies have been brought or have been threatened to be brought against Singapore in the past.

*46. Mr Gerald Giam Yean Song: To ask the Minister for Transport (a) what are the reasons for having SMRT and SBS Transit continue running 9 out of 12 bus contract packages without a competitive tender in the initial period of the new bus contracting model even after their Bus Service Operating Licences (BSOL) expire on 31 December 2016; (b) whether during this initial period SMRT and SBS Transit will benefit from being paid the service fee with no fare revenue risk while not being subject to competition for their nine negotiated packages; and (c) when does LTA expect to put out a competitive tender for all 12 bus packages.


16. Mr Gerald Giam Yean Song: To ask the Minister for Health (a) what is the size of the MediShield Fund’s reserves as at 31 December 2013; and (b) what is the percentage of the reserves that support (i) claims incurred but not yet submitted or paid; (ii) claims not yet incurred but expected to be paid in the future; (iii) continuing claims which have a long tail; and (iv) future premium rebates.

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Investment of CPF monies by GIC

This is the question I asked the DPM and Finance Minister on 8 July 2014 in Parliament, regarding GIC’s investment of CPF monies. His reply is below.


11. Er Dr Lee Bee Wah asked the Deputy Prime Minister and Minister for Finance a) how CPF monies are invested; b) what are the returns from the CPF Board’s investments; c) how does the CPF Board determine the interest to be paid to CPF account holders and whether it will review the current interest rate to pay a higher rate; and d) whether CPF account holders can be given a risk-free option to invest their funds directly in Temasek Holdings to earn better returns.

12. Mr Gan Thiam Poh asked the Deputy Prime Minister and Minister for Finance (a) where and how has the Government invested the proceeds from the Special Singapore Government Securities, which the CPF Board invests in with the CPF monies; (b) whether it is possible to invest these proceeds such that they yield high returns with no risk even though high-risk investments typically yield high returns and vice versa; (c) what steps are put in place to ensure that these investments are sound, prudent and viable; and (d) whether independent internal and external audits are conducted regularly to ensure and safeguard the CPF investments and funds.

13. Mr Lim Biow Chuan asked the Deputy Prime Minister and Minister for Finance (a) what are the rates of interest paid by the CPF Board on CPF funds for the past 10 years; and (b) whether the CPF Board will consider paying a higher interest rate or pegging the interest rate paid on CPF funds to the rate paid on 10-year Singapore Government bonds.

14. Mr Gerald Giam Yean Song asked the Deputy Prime Minister and Minister for Finance (a) how many years, if any, in the last 20 years is GIC unable to pay the interest on the Special Singapore Government Securities (SSGS) owed to the CPF Board from its normal investment returns; (b) what are the returns from GIC’s investment portfolio after accounting for the interest payable on the SSGS in each of the past 20 years; and (c) what extraordinary measures, if any, are taken in the last 20 years when normal GIC returns are insufficient to pay the SSGS interest rate.

The Deputy Prime Minister and Minister for Finance (Mr Tharman Shanmugaratnam): Mdm Speaker, may I take Question Nos 11 to 14 together?

Mdm Speaker: Yes, please.

Mr Tharman Shanmugaratnam: Thank you, Mdm Speaker. Minister Tan Chuan Jin has explained the basic features of the CPF system, the reasons for the Minimum Sum scheme, and the areas which can be improved. Dr Lee Bee Wah, Mr Gan Thiam Poh, Mr Lim Biow Chuan, Ms Tin Pei Ling and Mr Gerald Giam have asked further questions on whether higher returns can be paid without changing the risk-free nature of CPF accounts, and how CPF funds are invested and safeguarded. They have also asked about the GIC’s investment returns.

Before I get into the details on these questions, it will be useful to provide some perspective on the challenges faced by retirement savings schemes around the world. There is a looming pensions crisis in most of the advanced countries, and the challenges remain largely unresolved.

The first challenge is financial sustainability. In many advanced countries, the “pay-as-you-go” social security system has become unsustainable. As more of their citizens are retiring, the pensions they have been promised are becoming unaffordable to those who have to pay for the system, in other words, the younger citizens who are working and contributing through social security taxes.

Some of these countries have responded with politically difficult but necessary reforms, such as postponing the retirement age or cutting retirement benefits for younger workers. Most recently, the Australian government has proposed major reforms to its Age Pension scheme, which is the primary source of income for the majority of Australian pensioners today. These reforms include raising the age at which pensions can be withdrawn from 65 to 70 years old.

But in many cases, the severity of the problem has not been acknowledged and reforms have been postponed. In the US for example, most public pension funds still over-estimate their future investment returns, and understate their liabilities. With more realistic assumptions, it is estimated that about 85% of US public pensions will go bankrupt within the next 30 years. So this is the first challenge – financial sustainability.

The second challenge is to give individuals a fair return on their retirement savings but avoid exposing them to more risk than they can bear.

As both governments and employers face increasing difficulty in funding “pay-as-you-go” pension schemes, more risk is being shifted to the individual in many countries. The shift is to pension plans where the worker’s savings go into his own account, and he eventually draws on his own account in retirement. The 401(K) schemes in the US are an example. These schemes which are called “defined contribution schemes”, are like the CPF in that the eventual payouts are funded by the contributions by the worker and employer into his account, not payouts funded by future workers. But in many such schemes, unlike the CPF, the worker has to choose his own investment plan, and bears the risk on his investments.

In theory, individuals can expect to earn higher returns over the long term by taking more risk on investments, such as investing more in equities or equity-heavy funds. In practice, there are three problems. First, the evidence from the advanced economies shows that most individuals underperform the market, even when they invest in funds rather than do their own stock-picking. Some individuals do well, but most face daunting and unfamiliar investment choices, and are swayed by sentiment. They tend to buy into the funds after gains have been made, and sell after losses. As a result, in the US, for example, individual investors in equity funds earned only one-third of what the market index earned over the last 30 years; one-third of what the S&P Index earned over the last 30 years. Fees charged by private pension funds eat into the returns earned by individuals. In Europe this is another reason why returns on private pension funds have been low in the last decade.

A second risk is that you may retire when the financial markets are down. A recent article in the TheEconomist magazine described the typical retirement scheme as a lottery, because the individuals’ pot of money at the time they retire will depend on the state of the markets at the time. For example, an individual who retired just before the Global Financial Crisis will have much more income in retirement compared to an individual who retired during the crisis. One year can make a big difference.

A third risk is that you retire when interest rates are low. The current prolonged low-interest rate environment is in fact a major challenge in many countries, because the pot of money that you have upon retiring now gives you a smaller stream of annuity income for the rest of your years. This is the consequence of low interest rates, either the annuity becomes more expensive to buy or for the same pot of money you get a smaller stream of income for the rest of your years.

Many retirement schemes require or encourage members to convert their capital into an annuity or monthly payout. However, interest rates matter greatly when buying an annuity, and unlike CPF LIFE, these schemes do not provide a floor on interest rates. So when market interest rates go down, the member experiences has to buy an annuity that is either more expensive or he gets a smaller stream of income in retirement for the same pot of money that he has.
Even if individuals are relieved of the requirement to buy an annuity that pays out for life, which some governments have been tempted to do, it does not solve the problem. Low market interest rates mean that retirees will receive less income even if they invest on their own in suitable retirement portfolios.

I have provided this background, Mdm Speaker, to explain why our CPF system has worked well and provides a strong foundation for the future. It has protected members from risk. The scheme is aimed at meeting basic retirement needs. As many members have had relatively small balances, it has been right to shield them from risk. The CPF has also avoided imposing risk on taxpayers, unlike many countries where ordinary citizens face a much larger tax burden in future, on account of under-funded social security schemes.

The CPF is not a perfect retirement savings scheme, but it is amongst the better regarded internationally. As the Prime Minister has stated, we want to improve the CPF to provide greater security in retirement, especially for those with lower wages and to help retirees cope with inflation. We also want to give those who are “asset-rich and cash-poor” more convenient options to get cash from their homes.

But as we seek to improve the CPF or to add any flexibility, we must retain its basic strengths and avoid the huge problems seen elsewhere:

First, our CPF system is sustainable. There are no unfunded or sudden liabilities that will burden our children’s generation.

Second, the CPF offers some flexibility for members to withdraw savings, indeed more so than many other social security systems. In particular, by tapping on their Ordinary Account (OA) savings, the vast majority of Singaporeans have been able to own their homes and service their mortgages with little or no out-of-pocket cash, which Minister Tan has just emphasised.

Third, while the CPF scheme does not provide the highest returns, it gives fair returns and certainly one of the safest in the world. Whilst the CPF does not provide the highest returns, it provides one of the safest in the world. These are fair returns. Few systems offer the guaranteed floors on interest rates – 3.5% of the OA and currently 5% on the SMRA (Special, Medisave and Retirement Accounts) for those with smaller balances, who comprise the majority of members. And for those with larger balances, it is 1% less. The interest rates are guaranteed by one of the few remaining triple-A rated governments in the world.

The CPF also offers the option to members who wish to place more money in their Special Account (SA) account, so that they can earn a higher interest rate than on their OA Account, and it allows them the option of taking higher risks through the CPF Investment Scheme (CPFIS) in the hope of higher returns. So that is the third strength – fair returns and safe returns.

Fourth, on top of the guaranteed interest rates, the Government subsidises CPF members through the Budget in a targeted and sustainable manner. We provide significant help to lower income members to build up retirement assets, by giving them housing grants in their OA and CPF contributions through the Workfare Income Supplement (WIS). Members of the Pioneer Generation also now get top-ups for life in their Medisave accounts.

Taken as a whole, our CPF system prepares Singaporeans well for the future. Based on current policies, a new entrant into the workforce today can expect to draw a retirement income of about two thirds of his last-drawn pay if he is a median income earner. This is around the OECD average. He gets a much higher ratio of his previous pay if he is a lower income earner, chiefly because of Government subsidies. As Minister Tan has said, our key concern is to help the current generation of older Singaporeans who have lower balances, often very low balances, due to their much lower wages in the past and the more liberal withdrawal rules then.

Let me now address the specific questions on how CPF interest rates are determined. The current CPF interest rate structure was implemented in 2008. It was an enhancement, especially for members with smaller balances. We debated the changes in Parliament in 2007, as part of the broader package of reforms to strengthen retirement security.
The fundamental principle is to peg CPF interest rates to returns on investments of comparable risk and duration in the market. We also structured the interest rates to provide greater benefit to members with small and medium-sized balances, by paying Extra Interest (EI) on the first $60,000 of balances.

Let me start with the OA rate. In determining the interest rates, we have to recognise the fundamental difference in the purpose of the OA compared to the longer term SA, MA and RA (or SMRA). OA savings can be withdrawn at any time for home purchases, servicing mortgage loans, or education. It is a liquid account. The interest rate on OA has therefore been pegged to the 12-month fixed deposit and month-end savings rates of the major local banks. However, unlike market interest rates, it pays a guaranteed floor rate of 2.5%, or 3.5% for OA balances of up to $20,000. More than half of all members enjoy the full 3.5% on their OA.

Tu Members also have options to earn more than these OA interest rates. They can transfer OA savings to the SA so that these become long-term savings, earning higher returns. That is an option that members have. It is a useful option for those who have paid up their housing loans. Those who want to take on market risks in the hope of earning better returns can also invest part of their OA balances through the CPFIS.

Furthermore, the CPF interest rates are not the only help that members get to build up their savings. As I had just mentioned, the Government also provides subsidies through the Budget to CPF members, targeted especially at lower and middle-income members. These subsidies in effect amount to a significant boost to what a typical lower income member earns on his balances.

If we look at his OA, in particular, on top of the 3.5% interest rate on his OA, he gets Workfare payments and housing grants. When he sells his home to upgrade or downgrade later, the housing grant is returned to his OA as part of his savings for retirement. Based on current policies, these grants (amortised over his working life) will in effect grow his savings by at least 2.5% per year over a 30-40 years of working life. So, in effect, his savings ‘earn’ 6% per annum through the combination of CPF interest rates and Government subsidies.

This does not include the OA savings used to purchase the housing asset, which benefits separately from appreciation in housing value. As Minister Tan explained, his home is an important retirement asset, and based on its value, he can withdraw monies from his CPF balances at age 55.

The OECD highlighted this critical role of homeownership in its recent analysis of pension systems in the advanced countries. Homeownership “can make a big difference for many pensioners, both reducing the need for cash and providing a way to generate income later in life.”

Mr Lim Biow Chuan asked if CPF interest rates could be pegged to those on 10-year Singapore Government Securities (10Y SGS). The OA interest rate, pegged to market deposits that can be withdrawn at any time, is fair. However, for several years now, the OA has earned the floor rate of 2.5% to 3.5%, well above the market rates. It also means that the OA has in fact been earning more than what 10Y SGS earns. The average yield on 10Y SGS over the past 10 years has been 2.4% and it is currently about 2.3%. So the floor rate of the OA at 2.5% to 3.5%, depending on the size of your balances, has in fact been higher than even the 10Y SGS.

The SMRA, on the other hand, is pegged at 1% above the 10Y SGS, which I will now explain. The Special Account and Retirement Account are as we all know held for retirement. It is long-term savings. As Medisave (MA) balances are also mainly used as Singaporeans get older, we have treated them like the SA for purpose of determining interest rates.

The returns on the SMRA have been enhanced over the years. When we set the new basis for SMRA rates in 2007, our aim was to peg it to the rates for similar long-term, risk-free investment. This was what the Economic Review Committee (ERC) had recommended in 2002.

The best peg would have been a 30-year government bond, because 30 years is the typical duration for which SMRA monies are held. However, as we had not started issuing 30-year SGS in 2007, SMRA rates were pegged to the yield on 10Y SGS plus 1%, to approximate the 30-year rate. 10Y SGS plus 1% was an approximation of what a 30-year government bond would have paid.

As I told the House then, when we debated the changes to the CPF, the 1% spread on top of the 10-year government bonds was in fact a little generous, as it was higher than what had been observed for 30-year bonds in international markets. However, it was fair and reasonable, giving allowance for future economic and market uncertainties, such as if inflation picks up sharply over the long term.

Going by the formula for SMRA rates, we would be paying about 3.4% today on SMRA. This is higher than the actual yield of 3% on the 30Y SGS, which we now have but is not widely traded. So 3.4% is what the formula would dictate for SMRA. However, we have maintained a floor of 4% on SMRA, or 5% on balances of up to $60,000. We have renewed this floor each year since 2008. Two-thirds of CPF members in fact earn the full 5% on SMRA.

This is a fair system of returns for the SMRA. The CPF in essence pegs SMRA returns to long-term SGS, but it has also been paying a floor of 4% to 5% that is well above market rates in the current environment. As I explained earlier, we have shielded members from the risk of low market interest rates.

I will next explain how CPF monies are invested, as asked by Er Dr Lee Bee Wah and Mr Gan Thiam Poh. The CPF Board invests CPF members’ monies in Special Singapore Government Securities (SSGS). These are issued specially by the Government to CPF Board. They are not traded instruments. The payout from the SSGS is pegged to the interest rates that the CPF Board is committed to pay its members.

The Government guarantees these SSGS bonds, so that CPF Board faces no risk of being unable to meet its obligations to its members. This is a solid guarantee, from a triple-A credit-rated government. The triple-A credit rating reflects Singapore’s very strong financial position, with the Government’s assets comfortably exceeding its liabilities. Both Standard and Poor’s and Moody’s recently reaffirmed our triple-A credit rating, noting that our strong net asset position provides ample cushion against shocks.

What does the Government do with the proceeds from SSGS issuance? It pools them with the rest of the Government’s funds, such as the proceeds from the tradable Singapore Government Securities (SGS), any government surpluses as well as the proceeds from land sales which under our Constitutional rules have to be accounted for as past reserves. So, the Government pools the SSGS proceeds with the rest of the Government’s funds.

The comingled funds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. A major portion of these assets are however of a longer term nature, and are hence transferred over to be managed by the GIC.

The SSGS proceeds are not passed to Temasek for management. Temasek manages its own assets, and does not manage any CPF monies.

What these investment arrangements mean is that CPF members bear no investment risk at all in their CPF balances. Their monies are safe, and the returns they have been promised are guaranteed. Neither does the CPF Board bear any risk, regardless of whether the GIC’s investments earn or lose money in any particular year. The risk is wholly borne by the Government, on its own balance sheet.

The Government pools the proceeds from SSGS with its other assets, and invests long-term funds through the GIC. The GIC does not, in fact, manage SSGS monies on their own, separate from the Government’s other assets. This is an important distinction, which I will come to later. GIC is fund manager for the Government, not owner of the assets and liabilities. It seeks to achieve the Government’s mandate of achieving good long-term returns, without regard to the sources of the funds that the Government places with it – for example, whether they are proceeds from SGS, SSGS or government surpluses.

Over the long term, our investments in GIC have earned a creditable return. For example, over the last 20 years, GIC earned 6.5% per annum in US dollar terms, which translates to 5.0% per annum when expressed in Singapore dollar terms.

But that is not the whole story. The average long-term return masks wide fluctuations in returns from year to year. You can have good average, long-term returns but what it disguises is variations which can be very significant from year to year. To answer Mr Gerald Giam’s question, over the last 20 years, there were eight years where GIC’s investment returns were below what the Government pays on SSGS.

A good example was the Global Financial Crisis. As I stated in Parliament at the time, GIC’s portfolio value in US dollar terms declined by about 25% during the 14 months from October 2007. October 2007 was a peak and from then to December 2008, GIC’s portfolio value declined by 25%. GIC’s performance was similar to that of other funds with a similar mix of asset classes, but it illustrated the market volatilities faced by every long-term investor.
Even over the five years following the crisis, ending 31 March 2013, GIC earned an annualised return of just 2.6% in US dollar terms, which translates into a mere 0.5% in Singapore dollar terms. GIC’s Annual Report explains the reasons for this weak recovery from the crisis, especially in illiquid asset classes that it was holding, like real estate. Its five-year annualised returns are expected to improve significantly going forward.

Hence, while the Government expects to earn returns through the GIC over the long term that exceed what it pays on SSGS, and has done so in the past, there is no assurance of GIC’s returns exceeding SSGS interest rates over shorter periods, much less every year. This is also because of the guaranteed floor on CPF interest rates, which do not follow declines in market interest rates.

How then is the Government able to meet its SSGS obligations in the years when the markets are weak and GIC’s returns fall below what the Government has to pay SSGS? The reason is that the Government has a substantial buffer of net assets – net assets meaning assets in excess of liabilities – which ensures that it can meet its obligations. In years when investment returns are poor, the net assets have helped to absorb any losses and ensure that the Government can meet its obligations on the SSGS as well as its market-traded SGS. Correspondingly, when investment returns are strong, the net assets grow.

To address Mr Gerald Giam’s further question, therefore, no extraordinary measures have been necessary to enable the Government to meet its SSGS obligations in the years when GIC’s returns fall short.

It is this role of the Government, with its significant net assets, that ultimately allows the CPF Board and CPF members to be shielded from risk. The Government, through GIC, expects to earn good returns over the long term, but the volatility can be substantial from year to year. The Government has been absorbing that volatility, and protecting CPF members.

This is also the reason why no market player, other than the Government, is able to take on the CPF obligations. The guarantor is not merely playing the role of a long-term investor. It also must have significant capital that provides a buffer when the markets are down.

Our CPF system is hence sustainable, so long as the Government continues to run prudent budgets, and invest the reserves wisely. Then the Government’s balance sheet will remain strong and investment returns over the long term can continue to meet our debt costs.

However, the GIC’s good long-term returns also reflect the fact that it is managing the Government’s assets as a pool, which includes the Government’s unencumbered assets – in other words, assets that are not matched by liabilities. This is a critical feature of our system. The GIC is managing Government assets as a pool, and the pool comprises not just assets that are backing the SGS and SSGS but also the Government’s unencumbered assets – past Government surpluses, proceeds from land sales, which under our Constitutional rules have to be accounted for in, past reserves, these are unencumbered assets – and the GIC manages the whole pool of assets as one pool. This allows the GIC to invest for the long term, including investing in riskier assets such as equities, real estate and private equity.

It would be quite different if the GIC, instead of managing the Government’s pooled assets, were to manage a separate, standalone fund to provide backing for CPF liabilities. A standalone fund would have to be managed much more conservatively, to avoid the risk of failing to meet CPF obligations. It would not be aimed at accepting risks that enable good long-term returns, but at avoiding any short-term shortfalls. Consequently, the returns it would earn over time will be lower than what the GIC can achieve in its current role.

Finally, I should emphasise that the investment returns in excess of the SSGS rates that the GIC expects to make as a long-term investor are not simply hoarded away in the reserves. Fifty per cent of the returns from our reserves flow back to our annual Budget through the Net Investment Returns Contribution (NIRC). This currently adds about $8 billion to our Budget annually. The NIRC has provided the Government valuable resources that have allowed us to embark on new priorities for Singapore, including enhancing our social safety nets.

Mr Gan Thiam Poh asked about independent audits and other measures to safeguard CPF investments and funds. As I have explained, CPF monies are invested in SSGS that are guaranteed by the Singapore Government. The Singapore Government’s guarantee is a key safeguard.

CPF Board, besides its own internal auditors, is externally audited by professional audit firms approved by the Auditor-General.

As for the Government’s investments, I can assure Members that GIC is audited on a regular basis. GIC’s financial statements are independently audited by the Auditor-General every year. Its audited financial statements are submitted to the President and the Council of Presidential advisors annually. The President also has full information about the size of the reserves and the performance of GIC’s investments. GIC’s investment performance over 5, 10 and 20 years is also made public through its Annual Reports.

To conclude briefly, let me just reiterate that our CPF system is sound, and provides a solid foundation for Singapore’s future. It is not a static system. Over the years, we have adjusted the system, such as to reduce the scope for housing withdrawals and focus increasingly on retirement and medical needs in old age.

As the Prime Minister has said, we intend to make important future improvements to the CPF to strengthen retirement security. Minister Tan has assured Members that we are open to different views and suggestions.

Whatever we do to improve the system, we must provide fair returns to the ordinary member who is unable to take on much risk, and ensure that the CPF remains sustainable over the long term. The Government should continue to subsidise CPF members, especially those with lower incomes, but these subsidies should be provided through the Budget, so as to ensure the CPF is sustainable.


Source: Singapore Parliament Reports (Hansard)

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Regulatory framework for commercial drones

There is a growing interest in commercial drones, where there are plans for them to be used for package deliveries, filming movies and commercials, and even pizza delivery. However in some countries, aviation regulations severely restrict the use of commercial drones, which could constrain the growth of the industry. I asked the Minister for Transport this parliamentary question on 9 July 2014, so that the public can better understand how Singapore’s regulatory framework will evolve to meet industry needs and technological advancements.


Mr Gerald Giam Yean Song asked the Minister for Transport in respect of current regulations governing unmanned aerial vehicles (also known as drones or unmanned airships) in Singapore’s airspace (a) whether there are any restrictions on the size or engine power of the drones; (b) whether there are any requirements for individuals to be certified before operating drones and, if so, what are these certifications for; (c) whether the Government sees potential in the commercial drone industry in Singapore; and (d) whether there are plans to provide a clearer regulatory framework so as to accommodate a possible growth in this industry.

Mr Lui Tuck Yew: The International Civil Aviation Organisation (ICAO) has embarked on the development of international standards to regulate unmanned aircraft operations, particularly in airspace used by manned aircraft. The work covers areas such as certification of the unmanned aircraft system (widely known as UAS), competency requirements of the UAS operator/pilot, and guidance on its operations. Singapore, represented by the Civil Aviation Authority of Singapore (CAAS), is a member of the ICAO Panel tasked with developing such standards.

In Singapore, there is growing public interest in civilian unmanned aircraft activities for recreation and commercial purposes such as aerial filming. There are also several companies in Singapore seeking to grow the commercial UAS industry here.

The Singapore Air Navigation Order (ANO) currently applies to the operation of unmanned aircraft that weighs not more than 7 kg without its fuel and that is capable of being flown without a pilot. To preserve the safety of manned aircraft operations, the ANO disallows the flying of such unmanned aircraft within 5 km of an aerodrome, or at an altitude higher than 200 ft above mean sea level when outside 5 km of an aerodrome, unless a permit has been obtained from CAAS.

The current regulations do not adequately address unmanned aircraft heavier than 7 kg, to which regulations for manned aircraft would apply. In parallel with the development of international standards by ICAO, CAAS is reviewing the regulatory framework for the various types of unmanned aircraft and their operations in Singapore. This review, which is being done in collaboration with other stakeholders, takes into account the safety and security risks posed by unmanned aircraft activities, particularly near aerodromes, built up areas and critical/sensitive installations. The review will provide the necessary regulatory oversight of UAS activities while allowing for the growth of the industry. Operating guidelines to advise operators on the safe conduct of UAS activities are also being developed. The proposed regulatory framework will be rolled out for public consultation in the coming months.


Source: Singapore Parliament Reports (Hansard)

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Questions on the new bus contracting model

I asked the Minister for Transport 3 parliamentary questions and another 4 supplementary questions regarding the new bus contracting model, during the sitting of Parliament on 7 July 2014. This is the relevant extract from the Hansard.


1. Mr R Dhinakaran asked the Minister for Transport what are the key considerations for the change in the public bus transport model and what will be the initial investment by the Government in this model.

2. Mr Christopher de Souza asked the Minister for Transport how his Ministry envisions the new bus contracting model in which operators will bid for a package of routes through competitive tendering as being able to achieve better service and affordable fares to commuters as well as the plying of buses on less lucrative but necessary routes.

3. Mr Teo Siong Seng asked the Minister for Transport whether the Government has made a provision in the budget for the new bus contracting model and, if so, whether the budget will be made transparent to the public.

4. Mr Gerald Giam Yean Song asked the Minister for Transport under the new Government contracting model for public buses (a) how does the Government plan to buy back the public bus infrastructure and operating assets currently owned by the two public transport operators (PTOs); (b) how will the value of these assets be assessed; (c) how will the Government ensure that the PTOs do not profit from the disposal of these assets; and (d) how will the Government fund these asset purchases.

5. Mr Gerald Giam Yean Song asked the Minister for Transport (a) whether the Government expects to make an operating loss over the long term under the new Government contracting model for public buses; and (b) approximately how much operating subsidies the Government expects to inject into the public bus system each year.

6. Mr Gerald Giam Yean Song asked the Minister for Transport (a) whether the Government has any plans to extend the new public bus contracting model to the MRT system; and (b) whether the Government is satisfied with the current MRT ownership and operating model.

The Minister for Transport (Mr Lui Tuck Yew): Mdm Speaker, with your permission, I would like to take Question Nos 1 to 6 together, please.

Mdm Speaker: Yes, please.

Mr Lui Tuck Yew: As announced in May, we are moving the public bus industry from the current privatised model to a Government Contracting Model.

We have been studying this move as early as the Land Transport Master Plan in 2008. Under the current model, the public bus operators rely on their fare and non-fare revenues to pay for their operations and buy operating assets, such as buses. When fare revenues are uncertain, as it has been in recent years, operators may be reluctant to expand capacity ahead of demand, or to improve service levels beyond regulatory standards on their own accord. This was why the Government had to step in with the Bus Service Enhancement Programme, or BSEP, in 2012 to quickly raise service standards and to add capacity, even as we worked towards a more sustainable bus industry model.

Under the proposed Government Contracting Model, LTA owns the buses, plans the routes and engages private bus operators through competitive tenders to run the services. This will enable us to respond more quickly and effectively to changes in ridership and commuter needs. The model also allows for more operators, potentially even overseas ones, to compete for the contracts. Bus operators will need to compete on the basis of costs and service quality. Over time, this will lead to the provision of better bus services in a cost-competitive manner, thereby benefitting commuters.

Mr Dhinakaran, Mr Gerald Giam, and Mr Teo Siong Seng asked whether the Government is setting aside a budget for the new bus contracting model, and how much the Government will subsidise bus operations. I think it is probably not in the Government’s interest to reveal any budget that we may have set aside and how much we are prepared to subsidise before the tenders are issued and the returns are seen, as this may well skew the bids against us.

The eventual amount of subsidy will crucially depend on whether fares and bus service standards are set realistically. Regardless of industry model, the cost of the overall bus system has to be paid for either by commuters in the form of fares, or taxpayers in the form of Government subsidies. There surely is no free lunch. Therefore, we have to strike the right balance. The Government is committed to ensure the affordability of public transport fares. However, regular fare adjustments are still necessary to ensure the overall financial sustainability of the public transport system.

Likewise new bus routes and higher service levels have to be assessed judiciously. Even today, we receive many requests to run bus routes that have low ridership. From the point of view of the select few who benefit, these bus routes are of course “necessary”. But if we run too many of these routes throughout the system, either higher fares, or more Government subsidies, will be required.

Mr Giam asked about how we intend to treat the current bus assets owned by the two incumbent public bus operators. We will discuss this issue as part of our negotiations with SBST and SMRT on the nine bus packages that they will continue to operate after 2016.

Finally, Mr Giam may perhaps not be aware that we have already implemented the New Rail Financing Framework (NRFF) starting with the Downtown Line last year, even before the announcement of the public bus contracting model. In fact, the Government Contracting Model for buses brings us closer to the NRFF, where the Government, instead of the operator, owns the operating assets and is responsible for major capital asset investments.

Mdm Speaker: Mr Gerald Giam.

Mr Gerald Giam Yean Song (Non-Constituency Member): Thank you, Madam. I have four supplementary questions, three of which are related to each other. First is how does the Government ensure that there is genuine contestability and competition among the operators so that they will be kept on their toes to constantly improve service quality and efficiency? How will it ensure that the new model will not see the same few players dominating the market?

Secondly, how will the Government ensure that it is easy for new players to enter the market, and also easy for non-performing operators to exit?

Thirdly, how many new players does the Government plan to allow into this market?

Fourthly, does the Government have plans to set up a corporatised, not-for-profit entity like a National Transport Corporation or Transport for London, that manages the assets in the day-to-day operations of the bus network, while leaving LTA to play the regulatory and planning role, as this could lead to greater efficiency and accountability, and minimise the risk of regulatory capture?

Mr Lui Tuck Yew: Mdm Speaker, I thank the Member for his supplementary questions. Perhaps, I will start with a reply to how we would encourage new players to enter the market, and then, I will go into the specifics of contestability and how many new players.

One important thing is to lower barriers to entry, which is why we decided that as we embarked into the Government Contracting Model that it would be best for LTA to purchase and own the buses. For each package, you may be looking at perhaps 400-500 buses. For 400 buses, you may be looking at $150 million and $200 million dollars – quite a significant capital investment if it has to be invested by a new player.

We do not want to preclude the possibility of operators that are already in the local market, running private buses quite efficiently, who may be prepared to make a bid for one of these packages, provided we lower the barriers to entry.

How do we ensure genuine contestability? Well, to have as many bidders as possible. To make the bidding as simple as it can be, so that your evaluation is as straightforward as possible.

There is another reason why we have decided to purchase and provide the buses. Because we intend to have a five plus two option – five years, with the option for an operator, if he is successful and performing well, to extend for another two years. So this is five plus two. After that, it is re-tendered.

Obviously, the lifespan of a bus extends well beyond the five or seven years. If an operator were to bring in their own buses, then the challenge is how do they cost this into their bid? Do they bring in second-hand buses, meaning the life span would run out by the time they finish; or do they bring in new buses knowing that this could disadvantage operators from certain countries, for example, the European countries because they are on the different side of the road. And so the buses that they use here may well not be so suitable if they were to use it some other place, like back in their home countries.

So, genuine contestability comes about from lowering the barriers to entry, making sure that you have got competitive bids, structuring the tender so that it is as clear and as simple as possible so that when you evaluate, you can evaluate across a common base line, so that the potential operators do not need to price in too many areas of uncertainty.

As to how many new players, we actually are open to this. The initial part is that three of the 12 packages will be put up for tenders and we will then negotiate with SBST and SMRT to run the remaining nine packages. Over the longer period, the intent is to put up all 12 packages for tender. Whether we continue to have two, three or more players will depend on the returns that come in.

On the not-for-profit entity and whether there should be a corporate player to own the buses, we do not see a necessity for that at this point in time. Basically, it is really the same model that we are trying to adopt as for rail. In rail, we provide the infrastructure, we provide the first set of rolling stock, and the operator then subsequently buys it over at the right point in time. The bus industry had been operating on quite a different model in the past because the operators used to have to pay for the depots, buses and everything. What we are trying to do here in the Government Contracting Model is to provide as much as possible the same kind of support to the bus industry as we did to the rail industry in the early years.


Source: Singapore Parliament Reports (Hansard)

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Debate on MediShield Life Committee Report

Delivered in Parliament on 8 July 2014

Madam Speaker,

Anxiety about healthcare affordability weighs heavily on the minds of Singaporeans – not only the elderly, but also their adult children and those who will become old and face the risk of falling seriously ill. It is therefore important for us to work together as a nation to find solutions to the challenging problems regarding healthcare affordability, quality and accessibility in Singapore.

I would like to thank the MediShield Life Review Committee for widely consulting Singaporeans on their concerns and taking many of these into account when crafting their recommendations to the Government. I also commend the Committee for taking the initiative to address some key issues that went beyond the terms of reference given to them by the Government.

I support the motion endorsing the Committee’s report as the basis for designing MediShield Life. However, I have a number of concerns about some details of the Scheme, which I will focus on in my speech today.

At the heart of the report lies the recommendation to provide Singaporeans with better lifetime protection against large medical bills and to strengthen our social safety net. Pulling these recommendations in both directions are the competing priorities of, on one hand, the need to make MediShield Life affordable to all Singaporeans, and on the other hand, the need to ensure that the scheme is financially sustainable. This is the key challenge before the House today.

Premium subsidies

On the issue of affordability, I am glad that the Government will be providing permanent premium subsidies for low and middle income earners.

The Committee has suggested that the process for applying for subsidies should be as simple and convenient as possible. I agree and I would like to reiterate my earlier calls for premium subsidies to be provided automatically to households that have already undergone means-testing for other government assistance schemes.

For example, all households with Community Health Assist Scheme (CHAS) Blue and Orange cards should receive MediShield Life premium subsidies without having to apply separately. The same should apply to recipients of Medifund, Public Assistance and ComCare assistance.

Polyclinics, hospitals and private clinics should step up efforts to assist all their patients to apply for CHAS, so that they can receive both outpatient subsidies under CHAS, and MediShield Life premium subsidies. The Government should reach out to all lower and middle income Singaporeans before the start of MediShield Life, so that they do not miss out on the premium subsidies they are entitled to.

I would also like to suggest that the income criteria for premium subsidies be pegged to healthcare inflation so that the value of the subsidies is not eroded with rising healthcare costs and premiums.

Reserves and Capital Adequacy Requirements

On the issue of financial sustainability, the Committee has reiterated the Government’s conservative approach of setting aside substantial reserves in the MediShield Life Fund to meet current and future liabilities. It did not suggest any changes to the reserves framework.

This is an area that begs further examination. It is not just an academic exercise. The reserves framework impacts the premiums that people are required to pay.

Let me state for the record that I believe that MediShield Life should be financially sustainable in the long term, and that enough reserves must be set aside for temporary spikes in claims and long term liabilities.

However, there is a big difference between setting aside enough for reserves, and setting aside too much for reserves. Setting aside enough ensures that the MediShield Life Fund remains solvent even when claims in a particular year are higher than expected. Setting aside too much could mean collecting excessive premiums to cater to an extremely unlikely, but catastrophic event.

So how much is “enough” and how much is “too much”?

The Monetary Authority of Singapore (MAS) has in place a Risk Based Capital Framework which regualtes all insurance funds, including MediShield. The framework defines, among other things, how much the fund needs to set aside to ensure capital adequacy and solvency. This is measured using the capital adequacy ratio (CAR), which is the ratio of a fund’s net assets to its total risk requirements.

The MAS expects insurance funds to meet a CAR of 120%. According to an answer to my parliamentary question last October, the CAR of the MediShield Fund was 165% at the end of 2012, which is 45% higher than MAS requirements. At the end of 2013, the MediShield Fund had net assets of $613.3 million dollars, which is more than 1.8 times the total claims paid last year.

The Health Minister said in response to the same parliamentary question that the MediShield Fund has set a target CAR of 200%, which is 80% higher than MAS requirements.

Madam, is there really a need to set aside so much in reserves? While this manages the risk for the Fund, it could be placing an unnecessary premium burden on policyholders.

If the pace of reserves accumulation can be adjusted to be more in line with MAS requirements, premiums can be made more affordable. The Fund can still maintain a comfortable buffer above MAS requirements, but I do not see the justification for exceeding the requirements by 80% when the regulator’s requirements are already quite conservative.

Another result of parking aside too much in the reserves, is that the medical loss ratio of the MediShield scheme becomes very low. In 2013, the medical loss ratio of MediShield was 44%, which means that out of every dollar that was collected in premiums last year, only 44 cents was paid out in claims. This is the lowest loss ratio since 2001.

As I pointed out during the last Parliament sitting, under the Affordable Care Act in the United States, commercial insurance companies are required to issue premium rebates to policyholders if their loss ratio falls below 80-85%. Can MediShield Life, which is a not-for-profit scheme, do something similar, so as to reduce the premium burden on Singaporeans?

Transparency of actuarial data

Healthcare expert Dr Jeremy Lim has commented on the lack of actuarial data on MediShield Life being made available to the public. I agree that more detailed data will enable the public and independent experts to validate the conclusions put out by the Government, especially with respect to the premiums that need to be collected to keep the Fund solvent.

It would be helpful if the Government could make known its targets for the medical loss ratio, capital adequacy ratio and reserves for MediShield Life.

Since the Government says it needs to keep a large amount in reserves for “adverse scenarios”, it should explain what kind of adverse scenarios it is expecting and how much it expects them to cost.

Finally, as MediShield Life will be front-loading premiums, its annual reports should distinguish how much is being collected for pre-funding and how much is being collected to fund current claims.

Portal medical insurance

Next, I would like to discuss the issue of portable medical insurance. It is good that the Committee has brought this up in its report.

The report noted that less than 5% of employers offer portal medical benefits, and most companies that provide inpatient benefits do so through Group Hospitalisation and Surgery insurance plans (GHS) that are separate from MediShield. It acknowledged that GHS plans are “usually more attractive” than those provided by MediShield, MediShield Life and Integrated Shield Plans, and tend to offer “higher perceived value” to employees at relatively lower costs for employers.

This presents a steep challenge to adoption. We are essentially asking many employers and employees to shift to an inferior plan that may cost more.

Because of this, I think we need to approach the messaging from a different angle to encourage adoption. First, we need to explain to employees that there are clear benefits to portable insurance. When they move jobs, they can still retain their cover. Second, the universal mandate for MediShield Life means employees will already be paying premiums, whether or not their employers offer portable plans. So portable benefits provided by employers could help lower the premium burden on employees.

Third, having a single comprehensive insurance cover instead of a patchwork of duplicate covers means the employee should be able to claim a larger share of his hospital bill. And fourth, not all employers offer inpatient medical benefits to their employees. These employers could be encouraged to take the first steps by helping their employees pay their MediShield Life premiums, as this will make them more attractive organisations to work for.

To make portable benefits more attractive and comprehensive, employers could not only contribute towards their employees’ MediShield Life premiums, but also consider purchasing riders to cover some of the co-payments, so that the out-of-pocket payments by employees will be reduced.

The Government should take up the Committee’s suggestion for an adoption grant to be made available to companies to assist them in making a move to portable medical benefits that ride atop MediShield Life. MOH should also increase its efforts to better educate companies of the continuing tax incentives available, and the benefits of providing portable insurance to their employees.

Integrated Shield Plans

Next I would like to touch on Integrated Shield Plans. The Committee has suggested that the Government should work with the insurance industry to develop key features for a Standard Plan that will provide coverage at the B1 class level in public hospitals.

This Standard Plan appears to serve two main purposes: First, to provide a benchmark for consumers to compare against the plans offered by private insurers. Second, to set the Medisave Withdrawal Limit for Integrated Shield Plans.

On the first point, I share the frustration of many consumers in choosing the best Shield Plan. The Plans are currently offered by five insurance companies, with each trying to differentiate itself by offering a different set of benefits. Sometimes comparing them is like comparing apples with oranges.

Worse still, many consumers get their information about the Integrated Shield Plans from insurance agents representing individual insurers. Naturally, we cannot expect these insurance agents to give completely unbiased advice, since it is their job to market their own company’s products.

The net result is that consumers end up either choosing a plan that is not the best for them and their families, or they end up confused and unsure of which plan to choose.

I note that the MOH has a section on its website that provides a comparison of MediShield and different Integrated Shield Plans. This is a good initiative that should be better publicised, so as to reduce confusion and also encourage more consumer self-service. It could also spur more competition and lower prices, as the insurance companies will compete more on features and price, and less on their marketing ability.

I would like to seek more clarification on how the Standard B1 plan will be implemented:

First, will the Government tender out the Standard Plan to one insurance company or will all insurers be expected to offer this plan? If it is tendered to one insurer, how will it ensure sufficient competition such that the premiums and benefits are to the advantage of consumers’?

Second, if existing Integrated Shield Plan policyholders decide to switch to the Standard Plan, will they be subject to underwriting, where their pre-existing conditions will get excluded or risk-loaded? If so, then it probably would not make sense to switch, especially for older policyholders who are likely to have developed pre-existing conditions.

For many Singaporeans, the main issue they have with Integrated Shield Plans is that the Medisave Withdrawal Limits are too low, forcing them to cough out cash to pay their premiums. This is especially so for older policyholders, who now have to top up anywhere between $100 and $3,500 a year in cash to pay their B1 plan premiums. This is frustrating for many of them, especially retirees who are short on cash but have sufficient Medisave balances.

I hope the development of a Standard B1 Plan will raise the Medisave Withdrawal Limit to better meet the cost of Integrated Shield Plan premiums, especially for older policyholders.


Madam Speaker, MediShield Life is a welcome shift in policy towards stronger social safety nets. In its 1993 Healthcare White Paper, the Government sounded a warning against an over-reliance on medical insurance and the risk of moral hazard. Now, 21 years later, the Government has responded to a louder voice of the people with a universal scheme that has better benefits, lower co-payments and subsidised premiums. This is a step in the right direction towards a more caring society.



Following my speech, PAP MP Janil Puthucheary said that the minimum medical loss ratio of 80 to 85 per cent under the Affordable Care Act (“Obamacare”) includes not just direct claims but also the money put aside for “unpaid claim reserves and contingent benefits”. On further research after his speech, I found a US state government website which defines “medical claims” as including “adjusted incurred claims”, not just direct claims. I realise I made an oversight about how insurance companies in the US define “medical loss ratio”. Dr Puthucheary said that a more appropriate comparison in Singapore is the incurred loss ratio, which compares the premiums people pay with the claims that are paid out as well as what the MediShield fund will need to meet its future liabilities. While both medical loss ratio (in the US) and incurred loss ratio (in Singapore) include future liabilities, it is not clear whether they both use exactly the same input factors. Therefore, comparing MediShield’s incurred loss ratio with the medical loss ratio of US insurance companies may not yield a like-for-like comparison either. This is one of the reasons why I asked for more transparency of MediShield’s actuarial data, so that the public can make their own assessments and arrive at their own conclusions.

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Govt should take on more risk on behalf of citizens

During the debate in Parliament on 27 May 2014 on the President’s address, I made a speech in which I criticised the Government for not taking on sufficient risks on behalf of the people, but had instead passed many risks to them. I cited the increasing of the CPF Minimum Sum, the raising of the CPF drawdown age, and the high capital adequacy ratio of the MediShield insurance scheme as examples.

PAP MP Janil Puthucheary took issue with my remark that MediShield was “collecting a lot more in premiums than it is paying out in claims”. He suggested — without mentioning me by name — that this was an example of “intellectual dishonesty” and “sound-bite politics”, paraphrasing what I said as, “Medical insurance premiums are higher than the pay-outs”.

He left out my phrase “a lot more”, which gave the impression that I thought MediShield should be making a loss by collecting less in premiums than it pays out in claims. I immediately clarified that “I never said or suggested that health insurance pay-outs should be more than the premiums collected. But for a social health insurance scheme which is what MediShield Life should be, the premiums collected do not need to be so much more.”

In any case, these are not simply sound-bites, but facts. Between 2001 and 2013, based on CPF Board Annual Reports, MediShield collected $3.704 billion in premiums but paid out $2.190 billion in claims — a difference of $1.514 billion. I leave it to Singaporeans to assess whether or not they consider $1.5 billion to be “a lot more” in premiums than pay-outs.

Dr Puthucheary also questioned the validity of my comparison between MediShield and Obamacare, the US Affordable Care Act, which requires all Americans to buy health insurance and mandates commercial insurers to take on more risks on behalf of their policyholders. He said that “we are talking about a public social insurance and he is comparing it with a private, for-profit environment in the United States”.

In fact, Obamacare served to illustrate my point that even profit-oriented health insurers in the US are required to take on more risks on behalf of their policyholders than our MediShield, which is a social health insurance scheme. I pointed out that Obamacare mandates a loss ratio of at least 80-85%, and that insurers who do not meet this minimum must now issue rebates to policyholders. (Loss ratio = [claims paid-out] / [premiums collected] x 100%. The higher the loss ratio, the more risk on the insurer.)

MediShield’s loss ratio between 2001 and 2012 had been, on average over this period, 63% (59% if year 2013 is included). It dropped from 75% in 2012 to to a historical low of 43% in 2013. The latter figure was revealed in the latest CPF Annual Report released on 6 June (after the Parliament sitting). It is likely due to the higher premiums collected as a result of the premium hike last year.

On his last point, about what if the “supposition that we could increase pay-outs is wrong”. He cited a “worst case scenario is that our public healthcare financing becomes insolvent and we are unable to support the healthcare needs of a generation possibly.”

Increasing the loss ratio to 80-85% is not going to make public healthcare financing “insolvent”. That is clearly a hyperbole (an accusation he made about me). But more importantly, wouldn’t it be better for a government to take on more risks, so as to prevent individual citizens from suffering financial ruin due to high healthcare costs?

The PAP MP’s argument that it is okay for the Government to “save more” (by collecting more premiums than necessary) but disastrous for it to pay out more, proved the central point in my speech: That the Government is reluctant to take on more risks on behalf of Singaporeans.

The MediShield Life Review Committee is expected to submit its full report to the Government this week. I hope the Committee can prove me wrong, and that the Government will show that it is willing to take on significantly more risks on behalf of its citizens. If not, this will certainly not the last time I will be raising this issue.

This is the transcript of the full exchange in Parliament:


Mdm Speaker: Mr Gerald Giam.

Mr Gerald Giam Yean Song: Thank you, Madam, I just want to clarify a point that Dr Janil said in his speech earlier on. I never said or suggested that health insurance pay-outs should be more than the premiums collected. But for a social health insurance scheme which is what MediShield Life should be, the premiums collected do not need to be so much more.

As a point of comparison, the US Affordable Care Act, the new ObamaCare, mandates that a minimum loss ratio of between 80% and 85%. Ours is, on average, 63% over the last 11 years, and it was 75% in 2012. So, the US Affordable Care Act mandates that the minimum loss ratio should be between 80% and 85% and that insurers who do not spend 80-85% of their premiums in healthcare costs must now issue rebates to consumers. And these are all commercial insurers. These are not social health insurers.

Mdm Speaker: Dr Puthucheary.

Dr Janil Puthucheary: Thank you, Madam. Mr Giam brings up some very good points. And if I could take them in reverse order. Firstly, we are talking about a public social insurance and he is comparing it with a private, for-profit environment in the United States. So I do not think his comparison is valid.

Secondly, I am loath to use the United States as the be-all and end-all for a model of where our healthcare system should evolve to. Even the policy-makers and office holders in the United States would readily admit that the short-term electoral outlook significantly constrains their ability to take a long-term strategic vision for the healthcare system of their nation.

But lastly, I would like to make one point, which is that what if he is wrong? What if Mr Giam’s supposition that we could increase pay-outs is wrong? And we should compare that to what if the current situation is the wrong decision? If the current situation where, as he puts it, the pay-outs are far less than the premiums collected, that is the wrong decision. We save a little bit too much. If he is wrong, and we pay out more, if we pay out more and he is wrong, what is the worst case scenario? The worst case scenario is that our public healthcare financing becomes insolvent and we are unable to support the healthcare needs of a generation possibly.

This has happened in many other countries. The intellectually honest thing to do is to compare risks versus risks, benefits versus benefits, and worst-case scenarios against worst-case scenarios – not to cherry-pick the benefits of your proposal against the potential risks of the proposal in front of you. Thank you, Madam, for your indulgence.

Mr Gerald Giam Yean Song: Madam, I am glad he made that clarification. In fact, I cited ObamaCare precisely because of the US health system and the trouble that it is in today, and the fact that it is a commercial insurance scheme rather than a social insurance scheme. In fact, a social insurance scheme should have a much higher loss ratio than a commercial insurance scheme because commercial insurance wants to make money, whereas the Government is not in the business of making money. In fact, MediShield is supposed to be a not-for-profit insurance scheme.

Secondly, he asked about the grave scenario if pay-outs become more than the premiums collected. Now, in the case of medical insurance, it is relatively easy to be able to project what are the likely pay-outs to be and compared to, let us, say, earthquake insurance or something that has a much low frequency compared to health insurance, where you are able to see the trend and the cost of medical expenses over the years and be able to project what the pay-outs should be.

So, the question is: if it comes to the point where, because of the miscalculations, we aim for a 90% or 80% medical loss ratio but, for some reason, there is SARS that year or something like that happens, then we have a situation where the Government would have to step in to subsidise a bit more of the cost and the premiums can rise behind the increase in cost, not before you know that the costs are going to increase, then you raise the premiums.

Mdm Speaker: Dr Puthucheary.

Dr Janil Puthucheary: Madam, because we are talking about a social public good, it is therefore incumbent that we take a longer term, prudent approach, past one electoral cycle. I am glad that Mr Giam feels that medical expenditure is predictable. I and my professional colleagues would completely disagree. There is a lot of uncertainty about how costs will rise.

Myself and my brothers and sisters in the healthcare profession are part of that problem because we keep researching and coming up with all kinds of ways to spend the Health Minister’s money. Lastly, the example of SARS is a great example. It is precisely because of the prudent, conservative, risk-averse approach that we take on a day-to-day basis that when something like SARS comes along, the Government is able to step in and do what needs to be done.

Mdm Speaker: Minister Gan Kim Yong.


Source: Singapore Parliament Reports (Hansard)

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Managing risks, incentivising hard work and constructive politics (Debate on President’s address)

Speech delivered in Parliament on 27 May 2014

Madam Speaker,

I would like to focus on three areas in my response to the President’s address: Managing risks, incentivising hard work and constructive politics.

Managing risks

First, on managing risks. We face numerous risks in the course of our lives, or what the President called “the vicissitudes of life”. We could lose our job and suffer a drastic drop in income; we could fall seriously ill or get into an accident, and have difficulty affording the medical treatment; or we may retire but find we do not have enough to live our golden years with peace of mind.

This Government has been an excellent risk manager – it has been very good at managing its own risks, but less so the risks faced by our citizens. It pegs the CPF Minimum Sum amount to inflation, but does not do the same for CPF LIFE annuity payouts to the elderly. It raises the CPF drawdown age, which helps preserve the value of CPF balances, but leaves many retirees struggling to make ends meet, despite decades of contributions to CPF.

Even a risk sharing scheme like MediShield, which is supposed to be a form of social health insurance, is run more on commercial than social principles. The MediShield Fund had a capital adequacy ratio of 161% in 2012, which is more than 40% higher than what the Monetary Authority of Singapore (MAS) expects commercial insurance funds to hold. The loss ratio of MediShield averaged just 63% from 2001 to 2012. This means that it is collecting a lot more in premiums than it is paying out in claims.

In the past two decades, this Government has “marketised” many public services like transport and healthcare, transferring risks from the Government to service providers, which can easily pass them on to customers because of their near monopoly positions.

There are negative consequences for transferring too much risk to citizens. If Singaporeans face very high uncertainties in their lives, they will be less willing to start a business or volunteer their time to help others. Their minds will be so preoccupied with survival, that they find it hard to engage in innovative, creative or compassionate thinking. Instead, they will be under tremendous stress, worrying about how to cope with the rising cost of living and the increasing responsibilities of work and family.

In my maiden speech at the opening of the first session of Parliament in October 2011, I criticised the regressive transfer of risks from government to citizens over the previous decade. I am glad that in the last two-and-a-half years, there has been a shift in mindset and policy, and the Government is starting to bear a larger share of risks.

The HDB says it has de-linked BTO (Built-to-Order) flat prices from resale market valuations. The LTA has just announced that public bus services will undergo a nationalisation of their infrastructure and operating assets, with operations contracted out to private operators under stricter service standards. Changes are underway in healthcare to distribute more risks through universal insurance.

These are moves in the right direction. However, it is not time to declare victory yet. While flat prices have moderated, they come from a very high base and prices are still high relative to incomes of young home-buyers. We have yet to see whether service quality will improve under the new bus contracting model and whether fares will continue to rise as the same rate as now.

While everyone will soon have health insurance, is the risk simply being distributed among all Singaporeans? Will the Government take on some of the risk by subsidising premiums and removing some claim limits, as I proposed in my adjournment motion on healthcare financing last November? I look forward to some good news in this respect when the MediShield Life committee announces its recommendations.

There are other related issues like the increasing cost of living, the adequacy of CPF for retirement, healthcare affordability and job security that continue to cause Singaporeans a great deal of worry. The Government will do well to pay closer attention to these issues in its remaining term.

Incentivising hard work

Next, on incentivising hard work and productive activity.

In Singapore, almost all government financial assistance is strictly means-tested and time bound. Most Members would have seen cases at their Meet-the-People sessions where a struggling resident with a family to support is given a small amount in financial assistance – sometimes as little as $50 a month – by the community development council (CDC) and has to repeatedly appeal through the MP for it to be renewed every few months.

I presume the purpose of this is to motivate such residents to work harder and reduce their reliance on government handouts. However, in many of these cases, the resident is already working as hard as she can, but her income is simply not enough to maintain her children and elderly parents, while paying off utilities bills, service and conservancy charges and medical expenses, just to name a few.

The Government cannot expect that, by making them jump through hoops to receive financial assistance, they will suddenly be able to pull themselves up by their bootstraps, especially when incomes at the lower end are not rising at a fast enough rate. Some struggling families need to be given financial assistance on a longer term basis, until their circumstances change, for example, when their siblings or children graduate from school and start working.

We must always incentivise hard work and productive contributions to our economy and society. However, these incentives should not be only focused on welfare recipients.

We must be on guard against rent-seeking behaviour, particularly in major industries that have an impact on our economy. The Economist magazine defines rent-seeking as cutting oneself a bigger slice of the cake rather than working to make the cake bigger. In other words, trying to make more money without producing more for customers.

Rent-seeking may or may not be illegal. Some examples of rent-seeking include forming cartels, or lobbying for changes in regulations that benefit one’s own company at the expense of customers. Rent-seeking can impose large costs on our economy without creating any value. It insults our sense of what is fair, and goes against the values of meritocracy and hard work that we expect people to put in before getting rewarded.

The Economist has developed what it calls a “crony-capitalism index”, which ranks countries according to billionaire wealth earned as a proportion of the overall economy, in sectors that are vulnerable to monopoly, or that involve licensing or heavy state involvement. Singapore ranks poorly on this index. We are ranked 5th among the 23 countries that were surveyed in 2007 and 2014.

The Economist identifies several industrial sectors that are prone to rent-seeking behaviour, including casinos, real estate and construction. We should be on higher guard against the risk of rent-seeking behaviour in these sectors.

Madam, as social spending increases, the Government has said that it will need to develop other revenue streams to make up for future budget shortfalls.

We should continue to keep taxes low for income derived from engaging in value-adding activities which bring technological advancement and create good jobs for Singaporeans. This rewards hard work and incentivises productive activity and entrepreneurship.

However, if there is a need to raise more revenue to make up for future budget shortfalls, the Government should look first to increasing the Net Investment Returns Contribution or taxes on profits derived from economically non-productive activities. These should be done before considering raises to the GST or personal income taxes for middle-income earners.

Constructive politics

For my last point, I want to respond to what the President said in his address about constructive politics.

He said that “it is crucial to maintain constructive politics that puts our nation and our people first”. He acknowledged that “politics lives off robust debate and passionate argument” and that “we should continue to have vigorous debates on the challenges facing our nation” as this is important so as to “have the best ideas and best leadership for Singapore”.

I agree with the President on these points. My reason for entering politics was to contribute towards shaping better public policies that benefit my fellow citizens and help Singapore progress. I trust that this was also what motivated all members of this House to enter the political arena.

Robust debates which focus on the issues and problems at hand, and where alternative solutions are proposed and properly considered, can help shape better policies, which will benefit Singaporeans. But when debates start getting personal and descend into unnecessary political attacks, they risk losing focus from the bread-and-butter issues that citizens are concerned about. This sort of politics can cause our people to become cynical about the political process, and erodes their respect for politicians of all parties. We must not let our politics descend to this level because that will weaken Singapore.

Having said that, we must not presume that vigorous and passionate debates will lead to gridlock and paralysis. We should not sacrifice quality for efficiency. As the wise adage goes, “legislate in haste, repent at leisure”.

It is unproductive to rush through new policies, only to have it cause pain and unhappiness for the people, and have to reverse it later. It would be much better to have a proper and informed debate both inside and outside this House, make adjustments in response to feedback from MPs and the public, then roll out better schemes for Singaporeans.

I will continue to join my Workers’ Party colleagues to contribute constructively to debates on issues that matter to Singaporeans. If we assess that a policy will go against Singaporeans’ interests, we will oppose it and where possible, propose alternatives. If the policy is good for our country, we will support the Government for the benefit of our people. This is how we play the role of a constructive opposition.

Madam, I support the motion to thank the President.

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