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Tuesday, November 15, 2011

Pension and provident fund

There is a difference between the operations of a pension fund and a provident fund. A pension fund promises fixed benefits to the pensioners and may face a deficit when the value of its assets fall below its obligations. This is explained here: http://www.cnbc.com//id/45307724

In a provident fund, the amount due to the members vary according to the value of the assets. If the assets earn a low yield, the interest credited can be quite small and may fall below the rate of inflation. The members have to bear the fluctuations of the market.

I am personally in favor of a provident fund system, as it is better for the risks to be spread among its members, rather than in the government. But, it is also important that the provident fund be invested efficiently to earn a market rate of return for its members, and the administration expenses, including the cost of managing the investments, be kept at a low level (which is possible due to the economy of scale).

The Central Provident Fund in Singapore started on the right track, but over the years, it has grown to be too complicated. It is time to move back to its basics.

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