Saturday, May 01, 2021

Why policy makers may not plug the CPF Shielding Lifehack Abomination

Ok, this will be my last article on this issue as I've managed to get other bloggers chiming in on this issue and hopefully, the matter will take on greater prominence over time.

One interesting point to note is that matters will not have gone viral if I had not used the word "abomination". The inspiration behind this word was from the third book of the Dune series (Children of Dune) is this character called Alia who is a child savant witch-like character. Alia was imbued with the power of ancestors who lived before her. In the story, her conscious thoughts were like a battlefield where her good and evil ancestors fought to gain control over her mind. When the spirit of her evil grandfather Baron Vladimir Harkonnen took over her eventually, Alia became The Abomination and was the major villain of the third book of the Dune series.

In my opinion, the CPF Shielding issue belongs to the same class of problems known as "The Problem of Evil" that theologians and philosophers have to confront. 

  • If God was good, why does evil exist?
  • If government regulators were that good, why do commissioned FAs exist?
  • If the CPF was so good, why do Singaporeans need to resort to CPF Shielding?

CPF Shielding has been known for a number of years and nothing much has been done about it, I can speculate that authorities have not acted for the following reasons :

a) The impact of this hack was too small to warrant action

This seems to be the best reason for inaction. 

Very few Singaporeans have enough money in their CPF to need this hack urgently because their CPF-OA is normally exhausted by housing needs during their financial lives, so it easy to just shut off one eye and keep things status quo. In this sense, it's useful for us bloggers to keep driving awareness towards this issue so that more people may actively manage their CPF to be able to exploit this shield.

b) The government simply does not want you to get an extra 1.5%, so you need to work for it

Some folks argued that the government just wants to limit the number of folks who can max out their 4% so there was no incentive to make getting that 4% easier for citizens. 

This is less persuasive to me because they can cover up this hack entirely having all accounts flow to CPF-OA at age 55 before CPF-RA is constructed. But I think this will cost another GRC in the next elections for the PAP if carried out. 

c) The technical and operational change may be extensive

Changing the system to allow citizens to elect to top up of CPF-RA via CPF-OA first may require system changes. We really cannot tell whether the systems allow the priority to change. 

If someone hard-coded and compiled it years ago, the expense may not be justified. But it would be really dumb to hard-code the order money pours into CPF-RA from a software engineering perspective. 

d) The CPF Shield is a part of a complex system of compromises with the Finance Industry

This is a most interesting idea. 

If you think about it, allowing citizens to use up CPF-SA to buy select investment products is already quite a dangerous idea given that 4% riskless returns is rather high. CPF currently allows CPF-SA to be invested in balanced funds. From a risk-adjusted perspective, it's giving folks the option to trade off a product with a Sharpe ratio of infinity to maybe something with a Sharpe ratio of 0.4 - 0.6 in the best case. 

I'm totally fine if it's an option folks can refuse. But CPF also does not want to drive out the finance industry or trigger massive unemployment for FAs as well, many count on financial advice as a rare route to millionaire status without a degree. 

So maybe this hack is a series of compromises to keep some career paths open to Singaporeans. 

I like to think about compromise when I put myself in the shoes of a policymaker. There are a lot of things about financial advice that can be improved instantly for the good of most citizens, primarily ensuring that FAs have, at least, a relevant degree since financial planning is not a joke.

But this has not happened, so you've got a bunch of advisors claiming to be doing work as important as medical doctors as taught by their handlers but having no need to meet such standards.  

Sometimes I wonder if financial advice is really based on intelligence and knowledge, then how many Singaporeans will be out of a job if we reform the law to align with this reality?

In summary, I'm not trying to remove the freedom for Singaporeans to invest their monies. I just want the freedom to earn my 4% without resorting to third-party funds, hence I think giving Singaporeans a choice to populate CPF-RA from CPF-OA should be provided by the CPF Board itself. 

If a savvy FA can convince someone to invest their CPF-SA somewhere else, good for them. 

I see our role as financial educators to make sure that folks understand the price they pay when this happens.

CPF Shielding is merely the tip of the iceberg. There are plenty of reforms to the Financial Advisors Act that will benefit the people of Singapore and I hope one day I can convince an Opposition party to take up these issues one day. 



  1. I agree with reason (a); I partly agree with reason (d).

    Govt protects the finance industry, but more at a 30,000-foot altitude which means the pedigrees benefit much more than the mongrels which are the admin staff & lower-level salespeople like FAs and RMs.

    That's why govt has been coming down hard on CPFIS over the past 10 years. It knows that CPFIS has been an ever-shrinking portion of finance industry's profits over the years, so it's no harm to the companies & senior mgmt. But FAs & RMs lose out when MAS & govt makes it harder & harder with CPFIS.

    If ever a FA or RM starts talking to you about investing your CPF --- start running, as it shows a desperate salesman or saleswoman.

    There are many govt policies which are heavily part of the "complex system of compromises". A famous one is allowing HDB owners to buy private properties and to rent out their HDB. Also to allow resale of what is basically public flats & to then peg BTO prices against market prices.

    In S'pore the property industry is the twin of the finance industry, & also gains selective govt protection e.g. it won't allow full laissez faire property booms & busts, while still promoting easy financing & large land sales.

    Like in the finance industry, pedigrees in the property industry reap multi-million dollar salaries while mongrels like property agents live & die with the political mood e.g. the murder of many agent careers from 2014 to 2017 following the multiple waves of property cooling measures.

  2. I am less cynical. Pedigrees can cause the industry to leave Singapore so they need to be taken care of. My issue is that the government expects us to feed the mongrels.

    How much mis-selling of ILPs was done by a close relative?

    It's always the family that has to provide welfare.

  3. I'm not so sure 80% of the locally-based pedigrees can just up & leave S'pore. Most of their income-generating ability comes from local or regional with S'pore still as HQ.

    (Not talking about blue-eyed western white horses rotated here to the "Far East" for their standard 2-year global exposure stint.)

    I'm in total agreement of banning ILPs. Also culling of at least 50% of all FAs, RMs, agents, brokers, etc.

    Just that govt won't bother.

    As long as there's nothing that will lead to a big systemic risk, they'll let the market decide & once in a while tweak the regulations a bit.

    I'm lucky my family's only exposure to ILP was a small stake in the 1980s in one of NTUC Income's product. Which actually did rather well thanks to booming S'pore back then.

    But I got out in the 2000s as the organisation became more mainstream & expensive, which started to impact their net returns to consumers.

  4. errr ... to me, after reading, one think if shielding is left to be unofficially legit - the rich gets richer by exploiting loopholes and the poor get nothing

    1. Then it's up to the masses to educate themselves or learn thru the school of hard knocks.

      You die your biz.

      (And it's 100,000X easier now to educate yourself with google & the web.)

      But many people on this blog are underestimating the abilities of the masses or on the other side of the same coin, over-estimating their own brains i.e. thinking that they know more than the masses.

      The truth is that a lot of those under-50s already know of many loopholes, including SA shielding.

      But most people won't bother due to either (1) all their OA already spent on properties, (2) not willing to use a few hundred K cash to top-up RA, and/or (3) not having the risk appetite to use a short duration bond fund to execute this hack.

      Most S'poreans also don't invest in stocks. So for the average Joe, he will say that the absence of capital gains tax & dividends tax in S'pore is a loophole for the rich. If property rental income can be taxed, why not dividends?? AHHHH, now the tables have turned for many on this blog eh??? LOL.

      As for the rich, a million or 2 in CPF is peanuts. They won't be wasting their mental efforts doing things like SA shielding or hunting for "high yield" bank accounts.