Should there be a broader pool of investment options under CPFIS?

EACH month, over a third of most working Singaporeans’ salary enters their Central Provident Fund (CPF) accounts – forming a significant part of one’s net worth.

For decades – with low inflation and bank interest rates at near zero per cent – many would have done well by simply leaving their funds untouched and receiving risk-free guaranteed returns.

But sticky inflation and rising interest rates have made the base 2.5 per cent interest paid on funds in the Ordinary Account (OA) less attractive.

Savvy investors have been applying to invest their CPF savings – particularly OA funds with lower yields – with many opting for Singapore Treasury bills (T-bills).

Statistics from the CPF board show S$2.7 billion was withdrawn from members’ OA for investment in the fourth quarter of 2022, more than any quarter since at least 2018.

The trend has intensified: Over S$4 billion of CPF savings were invested into T-bills and fixed deposits in the first two months of the year, according to a report by The Straits Times.

The investment flows are significant – considering the total amount invested from OA and Special Account savings as at end-2022 was S$25.4 billion – and can be seen as an indication of the desire for higher returns and the growing willingness to actively manage one’s finances.

It may be worthwhile to tap this enthusiasm, to explore how investment options under the CPF Investment Scheme (CPFIS) can be broadened or simplified for the benefit of all members.

Risk and return

Singapore’s T-bills, as short-term instruments, are probably not the best product for retirement savings, which should be invested with a long-term horizon. The current yields, while risk-free, do not beat inflation; and investors would need to continually reinvest every six months or one year at maturity.

Other assets are needed for a portfolio to generate positive real returns.

CPFIS also allows investments in other assets, such as insurance products, unit trusts and shares. But can these fully meet the needs and desires of investors?

Self-directed investors may prefer stocks or exchange-traded funds (ETFs). Under the CPFIS, only stocks or ETFs listed on the Singapore Exchange (SGX) are eligible.

Investing in Singapore-listed instruments protects investors from some risks, such as currency, political or regulatory risks, and it makes sense that CPFIS should be limited to less-risky investments.

But the CPFIS still allows investors to make highly risky choices. For instance, investors can put up to 35 per cent of their investable savings into a single SGX-listed stock. This creates the potential for concentration risk, and exposes investors to the business risk of that company.

The same investor would find it more difficult to buy a well-diversified ETF that tracks the largest and most prominent global stocks.

There are only six ETFs available under CPFIS, and only three are passive equity ETFs: two track the Straits Times Index and one is for Asian real estate investment trusts.

CPFIS investors who prefer ETFs are left out of opportunities to profit from the rise of the best-performing stocks over the last decade: Amazon.com, Meta, Apple, Microsoft, for instance, have contributed to the strong performance of the S&P500 Index. Bloomberg data showed the index delivered total returns of 241.7 per cent over the past decade – or 13.1 per cent on an annualised basis – in Singapore dollar terms, assuming dividends were reinvested.

By comparison, Singapore’s benchmark Straits Times Index (STI) has managed total returns of 39.5 per cent – or 3.4 per cent on an annualised basis – over the same period.

Outsized returns come with risks and volatility, and it should be acknowledged that many of the tech counters in the US have seen sharper corrections more recently. But such business and economic risks apply to SGX-listed counters equally.

Giving investors direct access to more ETFs that track diverse geographies and sectors can provide better diversification, which could help ensure a portfolio generates better risk-adjusted returns.

Forming a strategy

Some investors may want better returns but lack the expertise to invest directly or don’t want the bother of actively managing a portfolio.

The CPF Advisory Panel in July 2016 proposed an alternative to the CPFIS for such investors, dubbed the Lifetime Retirement Investment Scheme.

It was intended to offer members access to low-cost aggregated investment choices with a long-term investment approach.

Such an option could not come sooner, as time in the market is important to grow retirement savings.

If an investor had invested in the MSCI World Index at end-2016, they would have seen 57.7 per cent total returns – or 7.9 per cent on an annualised basis – in Singapore dollar terms by end-2022.

With nearly one in four CPF members having an investment account as at end-2022, and strong interest in CPF investing in recent months, taking steps to make long-term diversified options available can help investors meet their goals in a risk-appropriate manner.