The Central Provident Fund Investment Scheme (CPFIS) is not "fit for purpose" and will be reviewed, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.
He said the scheme, which was set up to offer CPF members a way to earn higher returns on their savings, has not delivered.
He noted that, over the past 10 years, more than 80 per cent of members who invested via the CPFIS would have been better off leaving their money in the Ordinary Account, which earns a guaranteed 2.5 per cent each year. About 45 per cent of those using the CPFIS even made losses over the same period.
The CPF Advisory Panel said last month that the CPFIS needed a review.
Mr Tharman, who was speaking at the Economic Society of Singapore's annual dinner, said the Ministry of Manpower will undertake this review in order to ensure that the CPF system provides a convenient option for those with more than the basic CPF savings levels to earn higher returns.
"We have got to enable people starting from a younger age to take some controlled risk using their CPF money in order to earn higher expected returns... than what the CPF account would offer. The traditional way we try to provide it is through the CPFIS system. It hasn't worked out," he said.
One reason for this is that members investing via the CPFIS have to pay fees to investment managers, which then erode their returns.
Another reason, Mr Tharman said, is that the average investor can undermine his own interest, buying when the market is euphoric and selling when prices are down.
The CPFIS will have to be managed in a way that will keep fees low, he said. There also has to be some minimum holding period for investments in a fund, and incentives to avoid switching in and out of funds. "We have to invest and stay locked in for long enough, because that's the only way to earn superior returns over time," he added.
OCBC economist Selena Ling said the review is timely as the CPFIS' performance has been "less than encouraging and volatile".
CIMB Private Bank economist Song Seng Wun noted that only a minority of CPF members use the CPFIS, and suggested it include overseas investments in future.
Mr Tharman outlined three other priorities to ensure the CPF system remains sustainable into the future.
One is to help the elderly who may have assets but not enough cash, to unlock the value of their homes. One way is through the Lease Buyback Scheme, which lets flat owners sell part of their lease back to the Housing Board for retirement income. This has seen increasing take-up but "there is still some way to go", he noted.
"We've got to make people comfortable with the idea of taking some value out of their home. It's still their home, but take some value out of it because it can improve your quality of life in retirement."
Another priority is to better integrate elderly workers into society. Singapore is still an ageist society, he noted, and the culture must change to allow the elderly to continue contributing economically.
Finally, another key priority is sound governance, Mr Tharman said. The CPF system and the government Budget both depend on it.
"What we have to do is to protect Singapore's long-term interest and protect the interest of the future generations of Singaporeans, through a robust system of checks and balances."
