AN ANALYSIS OF THE CPF INVESTMENT SCHEME

Abstract

The CPF savings are meant to provide for one's retirement. However recent studies have shown that these savings might be insufficient. Hence, the Board has been trying to help its members solve the problem, without giving outright grants. One of the ways to do so is to promote investing. The unit trust was chosen as a good instrument to use, during the latest development of the CPFIS, as it supposedly caters to the typical CPF investor.

This academic exercise highlights the functions and goals of the CPF Board, the evolution of the CPF investment schemes and the recent liberalization of the CPFIS, especially pertaining to investments in the unit trusts. It also examines the pros and cons of unit trusts investments. Finally, it provides an assessment of them, studying especially the disadvantages of the high transaction costs involved. This is an area that had been frequently neglected but it is important for making investment decisions.

Due to the difficulties in obtaining data, this academic exercise, had to rely primarily on published data by CPF, supplemented by the interviews by policy makers and experts in the fields. In view of a large number of possibilities in structuring investment portfolios simulations have been used to provide an indication of the transaction costs involved in investing with unit trusts.

The study finds that these cost are substantial. However, they tend to decline with the amount of investments undertaken. The annual cost as a percentage of investment for $1,000 and $100,000 amount of money invested falls from 4.48% to 1.66%. Thus for small investors, it is particularly important to take the transaction costs of investing through unit trusts into account in investment decisions.

The analysis has revealed that there is considerable need to continuously monitor the transaction costs of the unit trusts. It may be useful if the CPF Board requires the unit trusts companies to make available after transaction costs rates of return of their portfolios to the prospective CPF investors.