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Structural issues behind CPF monies not flowing to mutual funds: Imas

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New caps on expenses that CPFIS-listed unit trusts and investment- linked insurance products can charge kicked in on Jan 1 .

Singapore

THERE are structural reasons why it is difficult to attract Central Provident Fund (CPF) monies to mutual funds, said an industry association representing asset managers in Singapore.

They include relatively high guaranteed returns offered by CPF, a preference for property assets, and high distribution costs that eat into investor returns.

Members of the Investment Management Association of Singapore (Imas) said at a media lunch on Tuesday that while the industry has the capacity to set up a private pension fund or lifecycle fund scheme to give CPF members higher returns, these various reasons will impede the development of such a scheme here.

"In a zero interest rate environment, it's pretty attractive to leave your money in CPF. There's not much incentive to take it out," said Imas chairman Nicholas Hadow, who is Aberdeen Asset Management's business development director.

Fund managers looking at Singapore's CPF scheme thus get disappointed when they find out, in reality, that the theoretically big pool of money there does not get mobilised into their products, he said.

Mr Hadow was responding to a question on whether fund managers can still attract money through the CPF Investment Scheme (CPFIS), which allows CPF members to invest their extra monies, beyond certain limits, in a wide range of products. These include 86 unit trusts, otherwise known as mutual funds, and 146 investment-linked insurance products (ILPs).

As at September 2015, a net S$184 billion were withdrawn for public housing and private properties, versus S$19 billion of Ordinary Account (OA) monies and S$5 billion of Special Account (SA) monies invested under CPFIS. Members are keeping S$109 billion in the OA and S$73 billion in the SA.

New caps on expenses that CPFIS-listed unit trusts and ILPs can charge kicked in on Jan 1. While this will eat into profitability, just one or two funds, anecdotally, have decided to "come out" of the scheme, Mr Hadow said. Funds also face challenges as Singaporeans prefer to keep their CPF assets in property, said Gopi Mirchandani, Imas deputy chairman and senior vice-president of business development at Fullerton Fund Management Company.

The asset management industry is watching what a government-appointed CPF advisory panel will recommend such that CPF members can achieve inflation-linked, as well as higher, returns. Recommendations are expected in the coming months.

One potential boost to the industry is the implementation of a private pension plan scheme for CPF monies, a dead idea resurrected in 2014.

Under such a scheme, CPF members pick a risk profile they are comfortable with, such as a "balanced" or "growth" profile. The administrator of the scheme then chooses fund managers that will suit the risk appetite of investors, and invests their monies accordingly.

Ideally, CPF members in such a scheme can get higher returns instead of relying wholly on the "risk-free" structure currently in place for guaranteed returns of 2.5-4 per cent.

The private pension plan idea was first floated in 2004. The government then had reservations over the risks members would have to take. The scheme was also not practical then as most members did not have excess monies to invest in the scheme - a situation that might be different today.

Nevertheless, concerns over risks remain alive. Mr Hadow said he does not expect a "seismic" change when the committee publishes its recommendations.

"I don't see the appetite for a major overhaul," he said, noting that any change could be marginal, but incremental and progressive.

Another intractable issue is the high distribution fees investors pay to buy funds, said Mr Hadow. Investors currently pay a sales charge of 2-3 per cent upfront, or as much as 5 per cent, to distributors such as banks and insurers. Distributors also receive half of a fund manager's annual management fee as trailer fees, Mr Hadow said.

"As an investor you're paying 4.5 per cent on your first year. That's an awful lot," Mr Hadow said.

However, he said fund managers and distributors need each other. Fund managers create the products while distributors have access to the clients that buy the products.

Asked about recent market volatility, Mr Hadow said the industry will continue to grow in the long term due to an increasing savings pool as the region develops.

Singapore's established infrastructure, stability and policy predictability mean it will continue to attract global fund managers catering to not just retail but institutional clients, he said.