The Curious Case of CPF Investing

Will your CPF savings fare better sitting in cash balances, or invested in funds?

A holistic view toward wealth management is key to achieving one's financial goal of retirement adequacy. Central Provident Fund (CPF) savings, being a large portion of an individual's total wealth, need to be thoughtfully planned.

Based on statistics from CPF, there are more than 4 million CPF members and approximately 1 in 4 Singaporeans invest their CPF-Ordinary Account savings.

CPF members have S$176 billion in CPF-OA and S$131 billion in CPF-Special Account balances. Based on the latest report from CPF, approximately S$17 billion of CPF-OA savings were invested, working out to be under 10 per cent of total CPF-OA assets.

It would be fair to say that so far, not many Singaporeans have invested a substantial amount of their CPF-OA savings.

On one end, investing CPF savings has gained momentum especially with high single digit investment returns being advertised. On the other hand, CPF provides a 2.5 per cent guaranteed annual return for CPF-OA savings with an extra 1 per cent on the first S$20,000. The key question to be asked is "Will I be better or worse off if I invest my CPF assets in the long run?"

Sarah vs Ryan: Deployment of funds and investment approach

Going by official statistics from the CPF Board, the average amount in CPF-OA is S$42,000. This means that the average investable savings in CPF-OA is about S$22,000. (One needs to have at least S$20,000 in CPF-OA before CPF-OA savings can be invested.)

We study two individuals: Sarah and Ryan, who both have S$20,000 (rounding down S$22,000 to the nearest S$10,000) of investable savings in CPF-OA and S$30,000 in cash. Sarah decides to leave her CPF-OA savings uninvested, while Ryan invests both his CPF-OA savings and cash assets. Sarah and Ryan both acknowledge that they have a long time horizon (at least five to 10 years).

Sarah puts all her cash assets in a 100 per cent equity portfolio, assuming that it tracks the MSCI World Index (global developed market equities), and leaves her CPF-OA savings uninvested. She has built her own 60/40 portfolio, with 60 per cent allocated to equity and 40 per cent in CPF-OA, treating that as bonds.

Ryan invests S$30,000 in a classic 60/40 portfolio through ETFs (tracking global developed market equities and global investment-grade rated bonds). His S$20,000 in CPF-OA is invested in a 60/40 portfolio consisting of CPF Investment Scheme-eligible funds. Ryan's two 60/40 portfolios will have different historical returns as the underlying funds and exposures differ.

Sarah and Ryan have a 60 per cent equities and 40 per cent fixed income asset mix overall. They seek to minimise costs where possible, and they use ETFs that track global benchmarks for their cash investments.

Ryan and Sarah take a set-and-forget approach. However, this also means that at the end of 2021, Sarah's portfolio has a larger allocation to equities than she started with as equities have gained more from market movements than her CPF-OA savings.

In the end, Sarah's portfolio of equities and uninvested CPF-savings earns a higher annualised rate of return as compared to Ryan's: 7.06 per cent vs 5.59 per cent (from 2017 to July 2022), and 8.61 per cent vs. 6.97 per cent (from 2012 to July 2022). This works out to be S$15,000 more after 10 years. (see table)

CPF as the 'bond' component of your portfolio

Jack Bogle, founder of Vanguard and best known for revolutionising passive investing, is a strong supporter of considering the defined contribution equivalent of CPF in the US, called Social Security benefits, as part of an investor's fixed income weighting in their investment portfolio. Otherwise, one ends up being over-allocated to bonds and under-allocated to equities.

CPF-OA and SA savings and fixed income share some common traits, especially when we zoom into government-guaranteed bonds specifically, like Singapore Government Securities.

As the certainty on the value of CPF savings is higher than invested assets, that certainty carries intrinsic value but also opportunity cost. In the last ten calendar years, there has been a bull run for financial markets, especially for equities. As this bull run has come to an end, the value of certainty has increased.

Given current volatility, investors may grow to appreciate keeping CPF savings as a form of guaranteed return with no volatility. There is merit in having CPF-OA savings work as they are intended, as there are almost no alternatives to 2.5 per cent annual guaranteed returns.

Ultimately, investing comes down to risk and return; and how to maximise returns while keeping within risk capacity limits.

For now, considering the guaranteed return of CPF-OA (like a bond allocation with guaranteed value) as a safety net enables investors to maximise the potential returns of investments made with cash. In today's challenging market environment, the importance of a strong safety net cannot be emphasised more.

The writer is director of investment research at Syfe



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