Biggest problem with Medishield Life

The other day, I wrote about the problem with lack of transparency of CPF Life, first and foremost, that “CPF Life” needs to be separated as an independent entity with its annual financial statements and audits! 

The same also applies to Medishield Life! 

Medishield Life needs to be separated as an independent entity with its annual financial statements and audits as well! 

Next, there needs to be transparency of how premiums for Medishield Life are derived and calculated.  Only when “Medishield Life” is a separate entity with its financial statements will we know whether accumulated over the years, are managers of Medishield Life recommending Medishield Life premiums that is much above optimal amount and a lots of profits have been accumulated, thus that should allow Medishield Life premiums to be reduced!  Without a separate book (i.e. financial statements), Medishield Life in its current form which is not detached from CPF Board means that when there are profits accumulated, it belongs to CPF Board (and hence the Government)? And when Medishield Life premiums are adjusted higher in future (just a matter of time I suppose?), then we will know is it because of trying to accumulate more profits or really the existing Medishield premiums are too low and hence not sustainable?  Empty words are just useless!  Actions speak louder than words!  By continually refusing to separate Medishield Life into a separate entity with its financial statements and cashflows and publish them annually etc, you can't fault people from starting to speculate and believe that they are trying to make profits out of the Medishield Life scheme isn’t it? 

Transparency, transparency, transparency!  We really need transparency and separate book (i.e. financial statements) for Medishield Life individually (and separate from the book of CPF Board)!!!!!!!!!!!!!!!!!!  

The CPF problems that never get fixed!

CPF Life had been revamped with new recommendations from CPF Advisory Panel recently.  However, the myriad of problems with CPF Life still never seem to get fixed!  They are:

1)      The solvency of CPF Life has still NOT BEEN GUARANTEED by the Singapore government!  Reasons (or rather excuses?) have been given, but there is no shrieking of responsibility here when the Government had passed law to make it compulsory and enforced on its citizens in the first place!  It seems totally at odd that on one hand, they passed laws to make CPF Life compulsory, and on the other hand, they cannot stand behind and be responsible for the proper management of the system called “CPF Life” that they set up and guarantee its solvency?  By continually refusing to guarantee the solvency of CPF Life, are their actions telling us that they have totally no confidence behind the people they appoint to manage “CPF Life” and hence they don't dare to guarantee the solvency of CPF Life?

2)      Transparency of CPF Life has still not existed! 

Transparency, yes, transparency! CPF Life is about mandatory locking up of their citizens’ money by Government, and hence transparency of the book of “CPF Life” is of utmost importance!  Nobody likes their own money to be forced into management by somebody else who cannot open their books and show how their money are managed and the performance! 

To improve transparency, firstly, “CPF Life” needs to be separated as an independent entity with its annual financial statements and audits!  This is the single most important criterion!  Next, there needs to be transparency of how the CPF Life payout are being calculated, how the bequest amount are being calculated etc.  Only when “CPF Life” is a separate entity with its financial statements will we know whether accumulated over the years, are managers of CPF Life recommending CPF Life payout that is below optimal amount and a lots of profits have been accumulated, thus allowing CPF Life payout to be increased! 
Without a separate book (i.e. financial statements), CPF Life in its current form which is not detached from CPF Board means that when there are profits accumulated, it belongs to CPF Board (and hence the Government)? And when CPF Life payout is adjusted lower in future (possible), it is because of trying to accumulate more profits or really the existing payout is not sustainable?  Empty words are just useless!  Actions speak louder than words!  By continually refusing to separate CPF Life into a separate entity with its financial statements and cashflows and publish them annually etc, people obviously will start to believe that they are trying to make profits out of the CPF Life scheme isn’t it? 

Transparency, transparency, transparency!  We really need transparency and separate book (i.e. financial statements) for CPF Life individually (and separate from the book of CPF Board)!!!!!!!!!!!!!!!!!! 

Warren Buffett uses "Leverage" to his advantage!

Much has been written about the investing methodology of Warren Buffett, yet most did not touch on one of the most important strategy : Using leverage!  

It was only recently that there has been discussions about this, and an article in Forbes on this strategy.  You can read this article titled "Explaining The Secret Of Warren Buffett's Success: Double Leverage" at this URL:

--------------------------------------------------              

Explaining The Secret Of Warren Buffett's Success: Double Leverage

The Economist has a nice piece detailing a good half of Warren Buffett’s incredible investment success over the past 50 years. It is, as I have long maintained, because he is running an insurance company. Yes, he’s clearly a great investor, there’s no doubt about that. But his outperformance comes from his being able to finance his investments from within the premium pool of those insurance companies:

Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.

Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance operations, which provide more than a third of its funding. An insurance company takes in premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders. This would be an expensive strategy if the company undercharged for the risks it was taking. But thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this source have averaged 2.2%, more than three percentage points below the average short-term financing cost of the American government over the same period.

If you can borrow below market and make only market returns then you’re going to outperform the market in your returns on equity.

And this really is the great big secret about insurance companies. To some extent they’re really just large investment funds that happens to run insurance premiums through their books. It depends which specific insurance market you’re in but you might get to hang on to those premiums for a few months or a few years. And the real profit in the business (to the point that it’s not unusual at all to see an insurance company making a loss on the actual insurance and underwriting side of the business) comes from the performance of that investment fund. By the time you get to being a reinsurance company (which Berkshire Hathaway also is) you might hang on to the premiums for a decade or more. Making the performance of the investments really just about the only thing that matters to the company.

That’s one form of leverage that Buffett has used. The other is that he went and bought an insurance company or three in the first place. He made good money as an investor first, yes, he very much did. Which he then used to purchase his way into the insurance business. He then applied his investment technique, as the Economist describes it, to the much larger investment funds that the insurance company controlled. Those funds being a good multiple of the funds that it had cost to purchase the company.

Imagine, just as a made up numerical example, that Buffett outperformed the market every single year by 1%. Another made up number, he started with $1 million. He’s going to, over the decades, make himself a very rich man that way. But look at it this way: if he uses the $1 million to purchase control of an insurance company with $10 million to invest, then he gets that 1% outperformance on that $10 million, then he’s going to be making himself richer ten times faster than by not leveraging up by buying the insurance company. For of course the outperformance in the investments flows to those who own the insurance company.

As I say, these are entirely made up numbers. But the basic point is true. Buffett’s superb investment record obviously and clearly depends upon making the right investments at the right time. But it’s also been hugely helped by that double leverage. Borrowing by the company itself and being able to fund investments at less than market cost. Then the second level of leverage, the very purchase of the insurance companies in the first place. It’s been a stunning performance over the decades, most certainly. But the sheer size of it has indeed been based on those two pieces of leverage.

--------------------------------------------------              

Singapore Government just announced an “Ang Bao” budget today!

Many Singaporeans would have been looking forward to today when Singapore Government would announce the Singapore’s 2015 budget.  The budget is expected to be very favourable, since Singapore is celebrating SG50 or 50 years of Independence this year, and also because the next General Election is coming soon (must be held latest by January 2017).

With the announcement of such a big “Ang Bao” budget for 2015, I am speculating that the coming Singapore General Election is mostly likely going to be held before next Singapore Budget date, i.e. before end of February 2016!  Let’s see whether I get my prediction correct! 

You can read all thedetails of the Singapore 2015 Budget at this URL…

If you have no time to read the details, you can also read the key summaries at this URL…

 

--------------------------------------------------              

Singapore Budget 2015: Key initiatives announced

Monday, Feb 23, 2015

AsiaOne

Enhancements and changes were announced in the Budget 2015 on Monday. Finance Minister and Deputy Prime Minister Tharman Shanmugaratnam said the Budget was focused on building Singapore's future and strengthening social security. The Budget 2015 also paid attention to investing in innovation and internationalisation of SMEs, as well as providing more assurance for retirement.

Here are the key changes announced by DPM Tharman today:

1) SkillsFuture

Mr Tharman said: "Through SkillsFuture, we will help Singaporeans learn at every age, and develop expertise and flair in every field. We will develop a whole array of learning options for individuals to choose as they shape their journey through life. We will support this through higher subsidies and a range of awards and fellowships for those pursuing mastery in their fields".

Singaporeans 25 years old and above will receive an initial SkillsFuture Credit credit of $500 from 2016. The Government will provide further top-ups at regular intervals. These credits will not expire, but can only be used for education and training.

2) Foreign Domestic Worker Levy Concession

The foreign domestic worker concessionary levy will be reduced from $120 per month to $60 per month. The concessionary levy will also be extended to households with children aged below 16, up from below 12 today. These changes will provide greater support for middle-income families who are taking care of their children and elderly parents.

The reduction will take effect from 1 May 2015, and will benefit 144,500 households. This will cost about $125 million per year.

The annual savings from the reduced levy amount to $720 a year.

The savings will be much larger than the rise in petrol duties if the same family also drives a car, Mr Tharman added.

3) Enhancing CPF Savings

a) Higher CPF Salary Ceiling and Supplementary Retirement Scheme Contribution Cap

The income ceiling for CPF contributions will be raised from $5,000 to $6,000 from 2016.The increase will benefit at least 544,000 CPF members. The contribution cap within the Supplementary Retirement Scheme (SRS) will also be raised.

b) Raising CPF Contribution Rates for Older Workers

Contribution rates for workers aged 50 to 55 will be restored to the same level as those for younger workers. he contribution rate for these workers will go up by 2 percentage points in 2016 -- 1 percentage point from the employer, and 1 percentage point from the employee.

For workers aged 55 to 60, the contribution rate will be increased by 1 percentage point from employers.

For workers aged 60 to 65, the contribution rate will go up by 0.5 percentage points from employers.

c) Enhancing Progressivity through Extra CPF Interest

From 2016, an additional 1 per cent interest will be applied to the first $30,000 of CPF savings for those aged 55 and above. This is on top of the existing 1 per cent extra interest on the first $60,000 of savings. Given the 4 per cent interest rate on Retirement Account balances, members with lower balances can earn 6 per cent interest.

4) Silver Support Scheme

The bottom 20 per cent of Singaporeans aged 65 and above will get receive a supplement between $300 and $750 every quarter. The average recipient will get $600. Silver Support recipients who live in smaller flats will receive more. All the seniors who qualify for Silver Support will receive these supplements for life, as long as they remain eligible. Silver Support is estimated to cost about $350 million in the first full year

5) GSTV - Seniors' Bonus in 2015

Before the Silver Support Scheme comes into effect in 2016, senior citizens above 65 years old will recieve a one-off Seniors' Bonus. This will effectively double the GSTV - Cash that they usually receive. They will therefore get up to $600. Furthermore, those aged 65 and above and living in HDB flats will get an additional $300 this year. They will therefore get a total of $900.

6) Enhancements to GST Voucher scheme

To help lower-income households, about 1.4 million Singaporeans will get $50 more in GST Vouchers from this year. This means that eligible individuals will receive up to $300 in cash.

7) Personal Income Tax Rebate

To help middle-income tax payers, there will be a one-off tax rebate of 50 per cent, capped at $1,000. This is for the year of assessment 2015 for income earned in 2014. This will help 1.5 million taxpayers and will cost the Government $717 million.

8) Waive Exam Fees for Singaporean Students

Singaporeans in Government-funded schools sitting for the Primary School Leaving Examination (PSLE), and GCE N, 0, and A levels exams will not need to pay examination fees from 2015.

9) Enhance Affordable, Quality Child Care

The Government has introduced a new Partner Operator (POP) scheme to complement the Anchor Operator scheme. Child care operators on the scheme will have to commit to keeping fees affordable, developing their teachers, and enhancing quality.

In addition, the Government will help families pay for pre-school fees through a top-up to the Child Development Accounts (CDAs) of every Singaporean child aged six and below in 2015.

The majority of children will receive $600. For a middle-income household, the top-up of $600 is sufficient to cover more than a month of child care costs after subsidies.

The top-up will cost $126 million and benefit 230,000 children.

10) Petrol Duty and Road Tax Rebate

Mr Tharman announced that petrol duty rates will be increased by $0.20 per litre, and intermediate grade petrol by $0.15 per litre. These changes will take effect today, and yield about $177 million a year.

To ease the transition to the higher petrol duties, the Government will provide a one-year road tax rebate of 20 per cent for cars, 60 per cent for motorcycles, and 100 per cent for the small number of commercial vehicles using petrol. The road tax rebate will offset about two-thirds of the impact of the petrol duty change on intermediate grade petrol for a typical car. The one-year road tax rebate will cost Government $144 million.

11) More tax deductions for donations made

Donations made in Jubilee year 2015 will be given 300 per cent tax deductions, up from 250 per cent.

12) Wage Credit Scheme

The Government will extend the Wage Credit Scheme for 2016 and 2017, to give employers more time to adjust to the tight labour market.

Over the next two years, the Government will co-fund 20 per cent of wage increases given to Singaporean employees earning a gross monthly wage of $4,000 and below. This will apply to wage increases given in 2016 and 2017.

13) Corporate Income Tax (CIT) Rebate

As firms continue to face cost pressures in this period of restructuring, the CIT rebate for YA 2016 and 2017 will be extended at the same rate of 30 per cent of tax payable, but up to a lower cap of $20,000 per YA.

14) Support for Innovation and Internationalisation

There are three new measures to help local companies go global.

This includes increasing the support level for SMEs with activities under 1E Singapore's grant schemes.

The Double Tax Deduction for Internationalisation scheme will also be extended to cover salaries incurred for Singaporeans posted overseas.

Thirdly, a new International Growth Scheme (IGS) will provide allow qualifying companies to enjoy a 10 per cent concessionary tax rate on their incremental income from qualifying activities.

15) High-income earners to pay more tax

The top marginal rate will be increased by two percentage points, from 20 per cent to 22 per cent for the highest income earners, with a chargeable income above $320,000. Smaller adjustments will be made to raise income tax for the others in the top 5 per cent.

--------------------------------------------------