That immediately refocused attention on the 2.5% that is typically doled out by the Singapore Central Provident Fund (CPF) Ordinary Account.
And Malaysia’s higher rate is not a one-off, as the EPF rate has consistently been higher than the CPF rate over the years.
Different Investment Approaches
The difference in returns can be attributed to how money is managed. The CPF invests in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government. GIC Pte Ltd, along with the Monetary Authority of Singapore (MAS), manages the proceeds from these investments. SSGS are considered risk-free assets because they are backed by the government.
In contrast, EPF acts like a typical pension fund and looks to invest both locally and overseas. Monthly contributions from members are invested in a number of approved financial instruments to generate income. They include Malaysian government securities, money market instruments, loans and bonds, equity and property.
For instance, according to EPF CEO Datuk Shahril Ridza Rdizuan, overseas investments contributed to 41.4% of EPF’s total income in 2017 despite accounting for only 28% of total investments last year.
In fact, EPF had a presence in 30 markets last year, primarily in developed markets, North Asia and ASEAN.
You can argue that both CPF and EPF’s investment processes are thus transparent. However, in CPF’s case, there is an additional layer that is not transparent and this has been one of its drawbacks. The proceeds from SGSS issuance are pooled with the rest of the government’s funds, such as Singapore Government Securities (SGS) issuance, government surpluses and well as receipts of land sales.
That’s when CPF members lose track of their funds. Due to this commingling of funds there is little or no transparency as to how funds that are attributed to the CPF are invested. It is the way that Singapore has been doing things for a long time and attempts to question this method have always been stopped dead in their tracks.
Should the CPF act more like a pension fund and less than a source of funds for the government’s combined assets for investment? The answer is yes but doing that would cut off an easy source of funds for the government.
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More Bang For The CPF Buck
The government has yet to really convince people why they should keep their money locked up in an Ordinary Account that pays a 2.5% return, when members can possibly achieve better returns if they managed their money on their own.
This has inevitably led to constant calls for more bang for the buck with CPF monies, and it is something that may intensify as aging dynamics take root in Singapore amid a very low total fertility rate.
One of the big issues with the way the CPF is set up today is that it tries to be too much, or do too much, for too many people. Rules and regulations are constantly tweaked, and the goalposts are moved sporadically in terms of minimum sums and retirement ages.
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One Nominated Member of Parliament (NMP) also had the temerity to say a few years back that the CPF may not even be the people’s money. “We have heard proponents who argue that the CPF monies is theirs. ‘It’s our money, it’s in our account, it’s our retirement money. I want it out, I will spend it anyway we want.’ Fine. Is it our money? Our CPF savings are enhanced and forced CPF savings which are accumulated through our own deferred consumption, through co-payment by our employers and through top-ups from public funds. Is it really my private money? Do I have the right to spend it the way I would spend my own salary? I’m not entirely sure,” said NMP Chia Yong Yong during the Budget debate in March 2015.
Internal Investment Teams
It is this type of thinking that keeps the pressure on the government about the CPF. Perhaps a solution would be to let the CPF operate more like EPF and have its own internal investment teams. It will then have more flexibility in investing the monthly contributions of its members.
While this will not be risk-free investment, a return based on performance in any given year will be far more favourably received by CPF members.
A decent financial literacy rate in Singapore means that people understand that there are risks associated with investing. Investing in risk-free instruments is akin to putting money in bank deposits. This is no longer how people around the world build their retirement nest eggs.
Indeed, creating internal investment teams for CPF should have been done many years ago, but it inexplicably hasn’t. The government should not always seek to protect CPF members from the vagaries of global markets, if that is its intention. Investing in risk-free instruments is not an efficient use of CPF monies. It has an opportunity cost as the return differentials between the EPF and CPF have shown over the years.
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