Over 25% of retail investors' SRS amounts still untapped

Singapore

OVER a quarter of all Supplementary Retirement Scheme (SRS) contributions in Singapore are still sitting idle in cash, left uninvested by most retail investors here, checks by The Business Times showed.

SRS is a voluntary scheme that incentivises individuals to save for retirement on top of their Central Provident Fund (CPF) savings while enjoying tax-relief benefits.

Fund managers and robo-advisory players say this situation is in part due to a limited range of SRS-approved investment products in the market amid several restrictions and lengthy fund approval processes.

On the consumer side, SRS investing has, perhaps, so far appealed largely to high-income earners with excess liquidity that can be parked away for the long term. Those who earn more also see the greatest tax benefits by contributing to SRS due to their higher marginal tax rate.

As at December 2020, there were 221,849 SRS account holders with total contributions of S$12.23 billion. About 26 per cent are held in cash - earning just 0.05 per cent interest per annum - while 1 per cent of the funds were left in Singapore-dollar fixed deposits. Only 11 per cent were invested into unit trusts, data from the Ministry of Finance (MOF) showed.

SRS was started in 2001, and has been enhanced over the years. Since Jan 1, 2016, the annual SRS contribution cap has been upped to the current S$15,300 for Singapore citizens and permanent residents. The cap is at S$35,700 for foreigners.

Contributions to SRS are eligible for tax relief. Investment returns are tax-free before withdrawal and only 50 per cent of the withdrawals from SRS are taxable at retirement.

SRS funds can mainly be used to invest in stocks, ETFs, Reits, bonds, unit trusts, retirement-related insurance products and fixed deposit schemes through any of the three SRS operators: DBS, OCBC or UOB.

Still, it is worth noting that SRS monies can only be invested in domestic instruments and, to that end, only Singapore dollar-denominated investments, Phillip Yeo, joint global head of ETF business at Nikko Asset Management, told BT.

For example, if an ETF is traded in US dollars on the Singapore bourse, or if a Singapore-registered unit trust only has share classes denominated in Chinese yuan, SRS monies cannot be used to invest in either instrument. This narrows the options that investors have, said Mr Yeo.

Less than 5 per cent of Nikko AM's assets under management (AUM) come from SRS investors, with no noticeable change in this trend.

Samuel Rhee, chief investment officer at robo-adviser Endowus, told BT while the process of getting funds approved for SRS investing is not a "difficult or onerous" one, it can be time consuming and resource-intensive as fund management companies (FMCs) have to apply for approval for each individual share class of funds.

"FMCs have to balance between the additional resources needed to make funds available for SRS against the benefit of gathering more assets through SRS," he said.

New distributors and investment platforms may also face challenges in getting their products approved due to their custodian arrangement and complexity of offerings.

Mr Rhee added that FMCs are often unable to make their low cost, clean institutional share class unit trust available, as financial advisers and fund platforms are used to receiving trailer fees from their fund products.

Retail investors are therefore unable to gain access to a wider range of products, and fund managers are unable to provide better offerings for SRS investing, he noted.

That said, Mr Rhee observed that there is still a much broader selection of funds available for SRS investing than via the CPF investment scheme.

Over 35 per cent of Endowus' customers invest their SRS monies, amounting to over S$100 million.

StashAway chief Michele Ferrario reckoned that the main hurdle comes from setting up operational processes with SRS operators.

"In practice, this means aligning with DBS, OCBC and UOB on the flow of funds and required information between all parties," he said.

About 14 per cent of StashAway's customers invest their SRS monies.

A MOF spokesperson told BT the offering of products under the respective SRS operators is a "commercial decision"; the government does not oversee the approval process nor maintain a list of approved products.

Still, checks by BT showed that the lack of incentive to roll out more SRS investment products in Singapore cannot be pinned entirely on industry bottlenecks.

Retail investors are still warming to the idea of investing their SRS monies, evidenced by the slow pick-up over the last decade.

From December 2011 to 2018, total SRS contributions sitting in cash hovered between 30 to 35 per cent. This number came down to 28 per cent in 2019, and 26 per cent in 2020, MOF data showed.

At Franklin Templeton, less than 2 per cent of its total retail AUM comes from SRS monies. The firm has 31 SRS-approved funds available.

"This can be attributed to the fact that generally, the typical SRS investor would be in the higher income bracket with excess cash to be parked away for the long term," said its Singapore head of retail Clement Lee.

As it is, Singapore citizens and permanent residents can only withdraw their SRS funds penalty-free at age 62.

"Given the penalties that come with an early withdrawal, make sure you're confident that you have enough liquidity elsewhere that you won't need to tap into this account early," said StashAway's Mr Ferrario.

The fintech saw a "significant" increase in SRS investing among its customers earning at least S$90,000 annually.

Nikko AM's Mr Yeo noted that some SRS contributors may be content with the amount of tax relief and do not wish to risk their savings.

Others may be unsure of what investments are suitable or have not found time to deploy their funds.

It is also perhaps their strategic intent to leave some portion of their SRS in cash, in case a "compelling opportunity" presents itself, he said.

While the amount of SRS cash left uninvested remains significant, industry players pointed out that recent trends have been encouraging.

Franklin Templeton recorded strong growth in SRS transactions from 2019 to 2020, with a 53 per cent jump in SRS accounts created and more than double the amount of subscription orders placed, leading to a 35 per cent rise in total SRS AUM.

This was due to a rise in educational activities led by digital wealth management platforms as well as a focus on retirement planning by the consumer banks, said Mr Lee.

Meanwhile, StashAway tends to see a surge of new SRS customers in Q4 and in particular, December, which is the last month for SRS contributions each year, said Mr Ferrario.

Though only a range of 8 to 11 per cent of total SRS contributions in Singapore have gone into unit trusts over the past decade, the proportion of SRS monies invested in shares, Reits and ETFs have risen steadily, up from 22 per cent in 2011 to 29 per cent in 2020, MOF data showed.