Tuesday, June 03, 2014

Give a better return on CPF savings

One source of unhappiness with the CPF is the low rate of interest paid on the savings, i.e. 2.5% on the ordinary account and 4% on the special account. The interest rates are so much lower than the actual return that is earned on the funds invested by Temasek Holdings and GIC.

This unhappiness is valid. It is wrong for the government to invest the CPF funds in low yielding government bonds, although they give the reason that the funds have to be invested securely.

The savings are invested for 40 years or longer. For long term investments, the correct investments are in good quality shares, and not in bonds. The difference in return can be as much as 4% per annum.

If the long term savings were invested mainly in good quality shares, the average yield over the past three decades would be more than 8% per annum, and not the 2.5% or 4% that were distributed.

While the values of the shares may fluctuate from year to year, the changes are immaterial to the CPF members, whose savings are locked up for a long term. They are not allowed to take out their savings prematurely, so the fluctuations in the asset values do not matter to them.

Even if some of the share investments turn out to be bad, they will be compensated by the appreciation in other shares. It is the long term average that count. And the long term average had been more than 8% per annum.

We do not need to expect a yield of 8% per annum. A yield of 6% would be fair. And if an adequate and fair yield had been given in the past years, the CPF savings would be much higher today, perhaps 50% more!

One important change to the CPF is to make the return more aligned to the actual yield that can be earned on quality quality shares.

Tan Kin Lian

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