Wednesday 31 July 2013

Best to leave CPF Special Account money untouched

Many commercial funds find it tough to beat the return guaranteed by Govt
By Goh Eng Yeow, The Straits Times, 29 Jul 2013

RECENTLY, a study commissioned by the Singapore Exchange (SGX) throws up an interesting poser: Can the guidelines on investing the monies locked up in the Central Provident Fund (CPF) be relaxed to get higher returns?

The argument in the paper released by the SGX and consulting firm Oliver Wyman is beguiling: Based on its calculations, Singaporeans can achieve returns that hit 79 per cent of their pre-retirement income.

That will be considerably higher than the 68 per cent level which they can expect to get currently.

But to get the higher returns, they will have to put their CPF monies into "life-cycle funds" which invest in higher-risk assets when they are younger that then switch automatically to safer but lower-risk assets as retirement approaches.

Now, most Singaporeans use the bulk of the monies they keep in their CPF Ordinary Accounts for housing. That leaves only the monies in the Special Accounts for investments.

Even so, this is no trifling sum to sneeze at. The study estimates that there is a staggering $15 billion lying idle in the CPF Special Accounts earning the default interest rates offered by the CPF Board.

But there is a snag: CPF members must keep at least $40,000 in cash in their Special Accounts. They can use the remaining balance in excess of the threshold amount for investments.

That, said the paper, is a big dampener. The average Singaporean will reach the minimum $40,000 threshold in their CPF Special Accounts only when they reach 40. "This is a much later age to start investing in equities, compared to retirement saving schemes in many other countries," it said.

Currently, the CPF Ordinary Account pays a return of 2.5 per cent, while the Special Account pays 4 per cent. In addition, the first $60,000 of each person's CPF balance will get an extra 1 percentage point in interest.

But last year, if CPF members channelled their monies into funds under the CPF Investment Scheme (CPFIS), that had been established with a view to give people more investment options for their CPF savings, they could have done better.

Lipper, the fund ratings company, noted that CPFIS investors made an average gain of 10.35 per cent last year.

Those who put their money on CPFIS equity funds enjoyed a 12.27 per cent growth, while bond funds rose an average of 4.73 per cent.

So at first glance, it would seem that taking an active investment approach may be more sensible than leaving the funds idle in the CPF account.

But there are powerful arguments to be marshalled against any relaxation in the CPF investment rules.

Some will say that the SGX may have its commercial interests in mind in trying to get the guidelines relaxed on the use of Special Account monies.

As CIMB Research analyst Kenneth Ng noted in a recent report, SGX had been pushing a lot of initiatives to spur retail participation in the stock market, but so far, that had not seemed to push up the frequency of shares traded.

There is also no way to tell if Singaporeans will do any better putting their money into the so-called life-cycle funds proposed by the SGX-commissioned paper, as compared with the investments now available in the CPFIS scheme.

Statistics show that between 1993 and 2004, nearly three in four people who invested under CPFIS ended worse off than if they had just parked their money in the CPF.

This explains why many financial advisers tell their clients to leave their monies in the CPF Special Account.

Many commercial funds find it difficult year after year to beat the 4 per cent return in the Special Account, which is guaranteed by the Government.

There is also the virtue of compounding. Using a back-of-the-envelope calculation, a 40-year-old Singaporean, with $40,000 untouched in his Special Account, will find the sum growing to about $95,000 by the time he retires at 62, if the interest rate stays at 4 per cent.

If the bonus 1 percentage point in interest is thrown in, the sum adds up to $117,000.

The Finance Ministry was also remarkably prescient when it explained the importance of safeguarding CPF members' monies in a letter to this newspaper in 2007.

This is considering the many financial upheavals we have encountered since then.

It said: "The past two decades have been an exceptional period for global financial markets. Looking ahead, we cannot rule out protracted market downturns, lasting several years. Most CPF members have small balances and will not welcome these risks. Neither will older members waiting to withdraw their retirement funds."

The current CPF arrangement enables all CPF members to earn fair and risk-free returns on their retirement savings, while benefiting from the good performance of GIC and Temasek Holdings through the annual Budget, it added.

The letter concluded: "This is the right way to help Singaporeans save for their old age, and enjoy peace of mind in their golden years."

Many of us would agree.

* Discussion paper on retirement planning: SGX replies

I THANK senior correspondent Goh Eng Yeow for his interest in the discussion paper the Singapore Exchange (SGX) commissioned from Oliver Wyman entitled Retiring In Comfort ("Best to leave CPF Special Account money untouched"; Monday).

He is right that the SGX will benefit commercially from any increase in share investing. Indeed, we have always been candid and upfront about this.

At the same time, we believe, and have invested much resource, in improving financial literacy in Singapore, including knowledge of the risks and potential returns of investing.

Our discussion paper suggests life-cycle funds as one way to make share investing accessible. The simulations used were based on life-cycle funds using a global basket of assets. Drawing a comparison with Central Provident Fund (CPF) Investment Scheme stocks, as mentioned in the article, may therefore not be relevant.

The 4 per cent guaranteed return on balances in the CPF Special Account does seem reassuring considering it is "risk-free". Nevertheless, inflation has been fairly

high in Singapore in recent years. For example, inflation in 2008 stood at 6.6 per cent. The value of a person's savings could therefore be eroded in the years when inflation is relatively high.

At the same time, the result of the compounding of returns from investing may exceed that of compounding a 4 per cent interest rate.

Mr Goh's long-held stance that one should invest for the long term is worth considering. An investing journey that starts early and involves regular small sums may make the difference to one's retirement planning.

There has been much debate recently on how to improve the future of Singapore's silver-haired society.

We owe it to the public to raise issues such as retirement planning and to present possible solutions for wider discussion. Such discussions are healthy and will hopefully get the average Singaporean thinking and taking action.

Chew Sutat
Executive Vice-President
Singapore Exchange
ST Forum, 2 Aug 2013

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