Simpler investment scheme to grow retirement nest egg

Govt accepts proposal to offer low-cost investment option for CPF members

Central Provident Fund (CPF) Building at Shenton Way. PHOTO: THE BUSINESS TIMES

Central Provident Fund (CPF) members who want to take bigger risks to grow their nest egg, but lack the time or know-how to do so, can look forward to a new, simplified retirement investment scheme.

The Government yesterday accepted a proposal from an advisory panel that the CPF Board introduce a low-cost investment option for its members.

The Lifetime Retirement Investment Scheme (LRIS) would offer a smaller number of well-diversified funds, which do not need active management.

This is because an existing high-risk investing option has not helped many members realise returns superior to CPF interest rates.

Panel member Christopher Tan, chief executive of financial advisory firm Providend, called the scheme a "game changer" for CPF investments.

He said: "For the longest time, there have been members who don't have regular experience investing their CPF, because they don't have the time or knowledge, and it is also very expensive."

Another panellist, Mr Ng Cher Yan, managing partner of auditing and accounting practice Plus LLP, noted that a majority of CPF members met the savings threshold for this scheme, and this figure was likely to increase in the future.

Six in 10 active CPF members aged 45 today have Special Account (SA) savings in excess of $40,000, he said. This is expected to go up to nine in 10 in 2030.

The LRIS aims to bridge the gap between leaving one's savings in the Ordinary Account (OA) or SA, and putting them into the CPF Investment Scheme (CPFIS), a higher-risk option more suitable for savvier investors.

CPF members can currently invest their OA and SA savings above the first $20,000 and $40,000 respectively through the CPFIS, which has more than 200 funds to choose from.

At the end of last year, $25 billion was invested through the CPFIS. A further $105 billion remains to be invested.

The panel recommended that the LRIS funds should not be managed actively, which would incur higher management fees, but passively by a single administrator.

Because the CPFIS operates under a retail model, investment fees are high - as much as 3 per cent for sales charges - and this significantly erodes returns.

These costs could be reduced by aggregating a "critical mass of assets" from many members, said National University of Singapore (NUS) Business School practice professor of finance Joseph Cherian.

He added that returns are also affected when inexperienced investors "churn", or buy and sell their investments frequently. The new scheme should have measures to prevent such "churn", he said.

The panel engaged consulting firm Mercer to study models such as static risk funds and life-cycle planning, in which the exposure to risk is reduced the closer the investor gets to retirement.

It advised the Government to establish an expert investment council to set up and implement the LRIS.

It also suggested that the Government review the CPFIS so it can be better targeted at experienced investors.

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A version of this article appeared in the print edition of The Straits Times on August 04, 2016, with the headline Simpler investment scheme to grow retirement nest egg. Subscribe