We all like Deputy Prime Minister Tharman Shanmugaratnam. According to a recent Yahoo! poll, some 69 per cent of Singaporeans want him to be the next Prime Minister. even though he's personally not into that.
What Mr Tharman is into, is in making sure Singaporeans have enough saved for their retirement, and yet still feel like they have a say in how to grow their retirement funds.
With that in mind, he recently spoke about the CPF Investment Scheme system and how it needs to be tightened up.
Wait, so the Government is actually admitting that they made a mistake with CPF-IS?
If you think the answer to this is yes, then you're probably not going to be happy with the rest of this article. And for the two of you who think I'm some PAP stooge, this opinion is probably not going to be changing your mind.
The fact is, the CPF Investment Scheme is a good idea, just one that is could be better executed. Echoing the CPF Advisory Panel's recommendations in August, Mr Tharman didn't mince any words - he flat out said that the CPF Investment Scheme is "not fit for purpose".
The implication here is that the CPF-IS is a good idea - since it allows you to invest your excess CPF funds in order to build your retirement savings. Other than for housing, your CPF account is essentially just accumulating money and guaranteed interest in preparation for your retirement. Some don't like the idea, since they feel the money could be better invested and earn higher returns than what CPF can offer.
That's where the CPF-IS comes in. It gives you all kinds of options - including fixed deposits, bonds, ETFs and unit trusts. Most of these investment vehicles claim to earn returns significantly higher than the 2.5 per cent interest rate that the CPF Ordinary Account currently offers.
So… what's wrong with the CPF-IS right now?
Well, we'll soon find out how investors did this year, but according to last year's statistics, only 15 per cent of investors earned more than the guaranteed 2.5 per cent OA interest rate. On the other hand, 40 per cent of investors actually made a loss. As in, they not only lost out on the otherwise guaranteed interest, but they also lost their initial investment.
There are a number of factors, and the chief of them is that most investors don't realise just how much investing costs. This is because many current investment options are actively managed by individuals in order to mitigate risk. And to compensate fund managers for their time and expertise, a percentage of each transaction amount is paid as a fee.
But surely those investing in CPF-IS would have factored fees into their decision-making?
There is a lot of research that needs to go into making an informed investment decision, and unfortunately, the way CPF-IS organised, it's harder to really drive home the need for sufficient investment education.
CPF-IS draws from your CPF funds, which is often no more than a series of numbers that you're only reminded of once a year when you receive your CPF statement, What's more, because you can't withdraw your earnings even if you've made a profit, the desire to maximise your profit may not be there.
So if you don't really feel the pinch when it comes to profit and loss, I wouldn't be surprised if people were treating CPF-IS with the same kind of effort that they treat a fantasy football league.
But, I'm not that kind of investor!
Well, perhaps you're the kind that sees a statistic like 15 per cent of CPF-IS investors made a profit larger than the OA interest rate and think "I'm one of the 15 per cent". And you could be right! But let's be fair, that's only a little better than those who look at lottery winners as role models.
But as a result of trying to maximise your investment earnings, you end up doing multiple transactions, buying low and selling high like the next Warren Buffett. All the while though, you're incurring fees and charges with each transaction, those fees and charges add up.
Ultimately, your CFP account is supposed to be a significant part of your retirement fund. The last thing you want is to take a gamble on it.
Well then, how is the revamped CPF-IS going to be any better?
In August, the CPF Advisory Board made a series of recommendations to change the CPF-IS. Calling it the Lifetime Retirement Investment Scheme, it's supposed to be a cheaper investment model because it relies on passively managed funds instead of active management. Because the costs are lower in a passively managed fund, your profits should be higher. A passively managed fund works by following a market index. At the risk of oversimplification, that means buying a basket of stocks and then not worrying about whether the prices are going up or down.
What's more, the Board recommended that there be less investment options. This might go against the desires of most CPF investors, who probably like the idea of having more choices. But the wisdom is that the broad variety of investment vehicles that you can use your CPF for is a significant hurdle for the new investor.
Of course, these recommendations are simply that - suggestions on how to revamp the current CPF-IS. Mr Tharman revealed that the Ministry of Manpower will be studying the Lifetime Retirement Investment Scheme "very carefully", but there was no mention of what the timeline would be like for what is surely a massive project.
Concerns Singaporeans should have about the Lifetime Retirement Investment Scheme
For one thing, it would have to be a choice to opt into this Scheme. When it comes to CPF, it seems we Singaporeans need to be assured that every new initiative is for our benefit and not another conspiracy to hold on to our money. As odd as it sounds, we should have the option to decide not to earn more money.
That's because no matter how low the risk, the Lifetime Retirement Investment Scheme is ultimately still riskier than just leaving your CPF funds in your OA and SA to earn guaranteed interest. The last thing Singaporeans (and the government!) would want is to have no option to choose whether to earn less with no risk, or to earn more with some risk.
But here's the clincher - for the Lifetime Retirement Investment Scheme to really work and earn "superior long-term returns", as Mr Tharman puts it, there needs to be critical mass and a lock-in period. That means, not only will Singaporeans need to be convinced to invest in this Scheme, but they need to agree to invest over a longer period of time.
As you can imagine, trying to come up with a system that meets all this criteria isn't going to happen overnight.
What should Singaporeans do now?
At first, it would seem like the right thing to do with your CPF is nothing. After all, the majority of investors not being able to earn more than the guaranteed interest rate of your OA. But if there's something we can learn from the recommendations, it's that funds that track a market index are likely to keep your costs low. Consider investing in an ETF that tracks the Straits Times Index, for example.
This should work as transitional measure until the Lifetime Retirement Investment Scheme is introduced. Remember, the ultimate goal of investing with CPF is not to make big bucks overnight, but to grow your retirement funds, so you should be focused on the long-term goals.
The article first appeared on MoneySmart.
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