Mailbox: Take long-term view when investing for retirement

Higher returns on Central Provident Fund savings may not be as elusive as they seem ("Ways to improve CPF"; last Saturday). There are pension funds that have consistently achieved such returns.

For example, the California Public Employees' Retirement System (Calpers), with 1.6 million members and a fund size of about US$285 billion (S$358 billion), has consistently exceeded its targeted yearly return of 7.5 per cent over the last 20 to 30 years. It does this through a conservative investment mix of stocks and bonds.

The key advantage of a pension fund is the ability to invest over the long term.

Liabilities for pension funds (the time pensions are paid out) depend on when members retire, and can stretch for decades. Thus, pension funds can invest in higher-return assets like stocks for the long term and not be affected by short-term swings in financial markets.

By doing so, they avoid one of the most common causes of dismal returns - the tendency for investors to be overly optimistic during market upswings and overly pessimistic during downturns.

Perhaps the mental block that CPF members have to overcome is the concern that stocks are far too risky for retirement funds. As Calpers and other funds have shown, investing for the long run goes a long way towards enhancing returns.

While returns from stocks can never be guaranteed, CPF members choosing to keep their funds in safe but low-yielding assets will almost certainly not be able to grow their savings enough to fund their retirement.

To enhance returns, the CPF Board could consider adopting a similar model to Calpers'. It could centrally manage funds to lower management fees, and get the best investment managers globally to bid for its mandate.

Another change that could be considered is to limit the use of retirement funds for other purposes.

Pension funds work best when they have the advantage of time. If funds are withdrawn earlier, the end result would be much lower investment returns and less money for retirement.

Benjamin Ho

This article was first published on June 06, 2014.
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