Tan Kin Lian's Blog: How can CPF be improved to give a better return?

Sunday, July 15, 2007

How can CPF be improved to give a better return?

FIRST POSTED IN MARCH 2007.

My views about investing CPF savings

1. A Member of Parliament said the Government should aim to help CPF members grow their money by 8 to 10 per cent a year. Do you agree with this target?

Reply: I believe that a reasonable long term target is 5% to 6% per annum. This is higher than the rate of inflation and represents an attractive real rate of return.

2. Should the CPF improve its rate of return?

Reply: The CPF should make it easy for its members to invest in a large, well diversified, low cost fund of global equities and bonds. Although the return may fluctuate from one year to another, the fluctuation should average out over a period of 10 years or longer. The average return can meet the target that I have indicated. I believe that the CPF is actively considering this option, as reported in the newspapers. I agree with this approach.

3. What are the obstacles to raising the rate of returns? How to overcome them?

Reply: They key obstacle is the need to provide a guaranteed rate of return. This forces the CPF to adopt a safe investment strategy which produces a low rate of return. If the member is willing to take the risk and fluctuation in an investment fund, they will be able to get a higher average return over the long term. The risk can be reduced by investing in a large, well diversified, low cost fund.

4. Are Singaporeans ready to bear higher risks that comes with higher returns?

Reply: I believe that Singaporeans will prefer to invest in a large, well diversified, low cost fund. It will actually reduce the risk (through diversification in many investments and over man years) and give a higher return over the long term. A low cost fund charges can charge as low as 0.5% to 1% per annum, giving most of the return back to the investor.

5. Are there any lessons from pension plans in other countries that Singapore can study and learn from?

Reply: We should study the success of the indexed funds and the exchange traded funds in the United States. They are large, well diversified, low cost funds. They offer an attractive return to their investors over a period of 10 years or longer.

6. The Manpower Minister said that CPF now provides risk-free return and safeguards members' savings against interest rate changes and stock market volatility. Its returns are above market rates, when compared against products of similar risk and tenure. Do you agree?

Reply: The guaranteed rate of 4% per annum on the special account is attractive, as it is risk free. CPF members should be given the option of investing in large, well diversified, low cost funds, to get a better return for their ordinary account. Many of the approved funds under the CPF Investment Scheme are too small and their charges are too high. The CPF has recognised this deficiency and have taken steps to get the funds to reduce their charges. It is a good time to introduce the PPP type of funds.

To read more about investing in large, well diversified, low cost funds:

FAQ

3 comments:

Khiat Han Hwee Adrian said...: CPFOA returns of 2.5% is low. There seems insufficient transparency on how our CPF monies are invested. If GIC invested with a higher returns, are the monies returned to Singaporeans.

A balanced portfolio historically had returned 5-7%pa. Its time Singaporeans should take charge of their own money but through proper guidance.; July 15, 2007 7:21 PM
Anonymous said...: Although a well-diversified portfolio could return 5 to 7% on average over the long term, I guess it is difficult to guarantee such rate of return while maintaining the liquidity required for CPFOA uses for the whole population.

Now, since individuals can optimize investment plans for themselves, let's hope that a simple strategy for long-term investment, like indexing, can be realized.; July 16, 2007 1:37 AM
Anonymous said...: I agree that CPF members' money should be invested in broadly well diversified portfolios to get better return.
Investment should be direct to avoid all intermediary charges. Over the years the intermediaries like the insurance agents or so called investment advisers have not done anything to better the CPFOA 2.5%, instead they impoverished the members' hard earned money.
What do the insurance agents know about investment? What investment qualifications do they have? They only know how to sell funds. That is what cert. in ILP equips them to do.What do they know about portfolio management?
They behave more like stock brokers, giving tips on hot funds, advising on when to buy and sell. They are fooling with members' money. They churned clients' money. They give cash back; all kind of illegal incentives to entice the members.We hear of the cliched "invest for medium to long term. This is never practised. tHE ADVICE IS SELL WHEN YOU MAKE MONEY.This a dangerous advice becasue the members will not be able to achieve the long term goal of retirement.
How can we will leave our money in the hands of incompetent buayas; like having a thief in charge of your till.
To avoid all this, make members invest directly into portfolios with different risk return profile ( 3 portfolios) The CPF is to be the administrator.The CPF appoints the fund managers. THe CPF monitors their performance. In this way all members can see light at the end of the tunnel and look forward to their golden years. Leave it the insurance agents you can kiss good bye to retirement.; July 16, 2007 11:30 AM