The Government's move to review the Central Provident Fund Investment Scheme (CPFIS) has been hailed by investment managers and economists as a timely move - and for good reason.
Deputy Prime Minister Tharman Shanmugaratnam's comments that the CPFIS "hasn't worked out" and "is not fit for purpose" give a good idea of how the scheme has failed to live up to its intended purpose.
The CPFIS was set up to give CPF members with more than the basic CPF level of savings an option to take some risk to earn higher returns than what is guaranteed. But in a speech on Tuesday at the Economic Society of Singapore's annual dinner, Mr Tharman noted that the scheme has not quite borne fruit. Over the past 10 years, he said, 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.
One reason for this is that investors who buy into investment funds via the CPFIS have to pay fees to investment managers, which then eats into whatever returns they may have earned. Another is the fact that most investors are prone to behavioural biases that work against their interest.
In revamping the CPFIS, the Government has its work cut out for it. It has to find a way to offer investments that would be conservative enough for the average investor while still delivering reasonably high returns. It will also have to come up with a structure that ensures investors will not have to pay high fees that end up eroding those returns.
And it will have to create a mechanism to prevent investors from giving in to their impulses.
Whatever the Government comes up with, this review is especially important as savers are now earning ultra-low interest rates on their deposit accounts, and economists forecast that low interest rates will stay low for several more years.