Growing CPF Returns…Work In Progress

A LONG-STANDING gripe against the financial industry comes from retail investors who often pay fees for products that do not deliver returns as promised.

This is common in the mutual funds space, as mom-and-pop investors are frequently sold actively managed funds that cost nearly three times more than passive funds in terms of fees.

Passive funds, such as exchange-traded funds (ETFs) and index funds, mirror the movements of market indices and do not need active monitoring by investment professionals, which keeps costs low. Further, few actively managed funds actually outperform indices.

Passive investments are being talked about again in Singapore, in relation to the Central Provident Fund Investment Scheme (CPFIS). The CPFIS allows members to allocate a portion of their CPF money to approved investments of their choice, in hopes of getting investment returns above the 2.5% guaranteed by the CPF.

However, last September, Deputy Prime Minister Tharman Shanmugaratnam said that CPFIS is “not fit for purpose” and due for a review. This came after the government-appointed CPF Advisory Panel submitted a report, which arrived at the same conclusion a month before, after multiple delays.

Patchy Performers

Official data shows that more than 80% of CPFIS investments did not manage to outperform the 2.5% guaranteed return rate in the 2015 financial year, with 40% of them making losses.

Marynchenko Oleksandr /
Marynchenko Oleksandr /

It is not that CPFIS-approved investments are poorly performing products. In fact, they are subject to fee caps and performance requirements. As of September last year, the CPFIS had an average one-year return of 6.7%, more than double the 2.5% guaranteed rate. The main reason for the poor showing is that investors are trading CPFIS funds with the mindset of trying to time the market to draw quick returns.

To counter investors’ short-termism, the Advisory Panel proposed an alternative, low-cost investment option, termed Lifetime Retirement Investment Scheme (LRIS), made up of passive investments. LRIS will offer a handful of simple, diversified products that track Singapore’s stock market indexes. CPFIS will then be repositioned for more confident investors who are seeking riskier and potentially higher-yielding products.

This solution is unlikely to gather much traction. Passive investments have not been popular with the retail crowd simply because tracking a market index goes against their instinct to chase returns.

Secondly, it is not in the industry’s interest to educate investors on the benefits of passive investing. After all, fund managers and distributors such as private banks earn many times more on active funds. Passive investments are hardly actively sold, marketed or communicated to retail investors.

Chasing The Lucre

While lusting for immediate returns is one of the characteristics of Asian investors, it is exacerbated by self-serving fund managers and distributors who are out for bigger paydays with actively managed products. Investor education is widely discussed but never truly committed to. Promotional materials from financial institutions highlight investment returns, which further exacerbates the questionable habit of chasing for quick returns.

It is not easy to wean investors off this habit. However, it has become an imperative to get people investing for their retirements as early as possible. In Hong Kong, the authorities have introduced a Default Investment Strategy (DIS) for the territory’s CPF equivalent, the Mandatory Provident Fund (MPF).

Unlike the CPFIS, members’ entire sums in their MPF accounts are managed by professional managers at the discretion of the members.

The DIS provides a low-cost default option for members who do not specify how they want their MPF money to be managed.

The DIS follows a simple concept of investing according to people’s life stages, with allocation shifting from a diversified higher-risk equity portfolio to a lower-risk global bond portfolio as they approach retirement age. In line with what the CPF Advisory Board is looking for, DIS is formulated to lower the investment costs for contributing members.

pathdoc /
pathdoc /

Still, even as Singapore and Hong Kong regulators push for lower costs of investing for retirement, it may be too late for Baby Boomers, who form a substantial portion of the population and are nearing retirement age, to benefit.

Thus, the younger generation should be targeted in this passive investment for retirement movement. The earlier they start investing the better because the longer they wait, the longer they will have to work.

Provided there is still relevant work to be had….

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