Continued from Part 1
For the past few years, one of the hot topics I hear about often is that the CPF rates are too low. I’ve heard people say that as our sovereign wealth funds are generating higher long-term returns than what is given to CPF members. Is it possible for the Singapore government to give CPF members higher returns on a consistent and sustainable basis?
When I recently attended an investment training conference recently with people from different countries, some of us compared our pension plans and the returns we were getting from them. One of them cited a return of 1.5% p.a. from her pension plan which wasn’t too bad considering her country’s interest rates are currently negative! Another person expressed that his country’s national pension plan will likely blow up sometime in the future, as they don’t have enough money to support the growing number of pensioners and the country’s debt levels are high. We were also aware of others that have higher returns but the returns would fluctuate with markets. Of course, given a choice, we would all prefer to have high sustainable rates of return without any volatility that goes with it.
In Singapore, we currently get 2.5% to 6% p.a. interest from our CPF accounts without any market volatility. Although it would be great to have higher returns, the key question is whether we can accept the short term volatility that comes with it. In certain years the returns could be high when markets are doing well. In other years, the balances in our CPF savings accounts could fall when markets are bearish. Over the long term, the returns could potentially be higher but we must accept the added risk as there is no such thing as a ‘free lunch’. Higher potential returns usually come with higher risks. If we can’t accept the volatility, then we have to accept the lower ‘risk-free’ returns.
The Singapore government currently gives CPF members a choice by allowing members to use part of their CPF savings to invest in insurance or investment instruments of their own choice. If they are not willing to take the risk, they can leave the monies in their CPF accounts. Thus, depending on the risk appetite that you have, you can make a choice between the two, or more likely have a mix of both worlds. There is no perfect system out there, but after speaking to people from around the world, Singapore definitely has one of the globe’s better retirement plan systems. And because we have our own individual CPF accounts, you are also surer of how much you have and can plan accordingly for your retirement years.
Ernest Low holds an MBA from University of Liverpool and is the Head of Investment & Wealth Management with AXA Life Insurance Singapore. He has also written a money management book for kids called Starting Small Finishing Rich.