RATES OF RETURNS ON CPF ACCOUNTS

Abstract

The Central Provident Fund Scheme in Singapore has enabled four out of five Singaporeans to own the roofs over their heads, boosting the real assets of Singaporeans. But one major complaint about the CPF has been the denial of liquidity. With its meagre interest rate of 2.6 per cent, it seems like the CPF has denied Singaporeans the opportunity to spread their risks and widen their portfolio of investments. However, in a dramatic move announced in March 1993, Singaporeans would have greater freedom of choice in managing their own resources. The radical shift in government policy appears to have pleased everyone. Stockbrokers, fund managers, realtors and bankers are over the moon about the prospect of more money coming into their industries. CPF members, of course, can get to try their hand at making investment decisions on a large part of their enforced savings. Senior Minister Lee Kuan Yew agreed with the idea of allowing excess CPF funds to be invested more liberally and that the Government should not over-protect the people and should give them opportunities to take risks to enrich themselves. He expressed concern that Singaporeans are too risk-averse and conservative about investing their CPF savings [The Straits Times, 27 Jan 1993]. So the liberalisation measures, coming at a time when the Government is anxiously trying to nurture a crop of entrepreneurs, could not have been more timely. This Academic Exercise will look into the effects on the financial position of 3 hypothetical groups of workers, namely, the professional worker, clerical worker and production worker who invest their CPF savings in financial instruments, such as blue chip shares, shares listed on the Stock Exchange of Singapore, fixed deposits, gold, and the property market. Such investments (with the exception of the investment in properties) are done subject to the following 3 scenarios ; (1) CPF members are allowed to utilise the entire amount in their CPF accounts; (2) CPF members are allowed to utilise up to 40 per cent of their investible surplus, or the net balance in their Ordinary accounts, whichever is lower. and (3) CPF members are allowed to utilise up to 80 per cent of their investible surplus, or the net balance in their Ordinary accounts, whichever is lower. Using the simulated results, the rates of return on CPF savings are compared with the expected returns from alternative investments such as those mentioned in the preceding paragraph. The investment, which yields the highest expected returns, may then be singled out. In fact, from the results obtained, investments in blue chip shares and properties are found to be the most profitable. While investments in S.E.S. shares and 12-month fixed deposits also yield higher expected returns than the rates of return on CPF savings, investment in gold is proved to be the least worthwhile. Meanwhile, a massive public education campaign on shares investments led by the Stock Exchange of Singapore is already underway. Hence, this Academic Exercise may in a sense be viewed as complementary to the Government's recent move in educating the public on the use of more liberalised CPF funds.