Why Did Singaporeans Lose Money in the CPF Investment Scheme?

If most CPF Investment Scheme (CPFIS) assets are low-risk, why did some Singaporeans make losses in the last 10 years?

There have been some news reports about the CPF Investment Scheme (CPFIS) being reviewed. The reason? Many Singaporeans have tried to invest their CPF money and ended up making losses.

Given that the majority of CPFIS assets are low risk, how is this happening to them?

What is the CPFIS?

The CPFIS allows you to invest a portion of your CPF savings once you have at least S$20,000 in your Ordinary Account (OA) and S$40,000 in your Special Account (SA). This is up to a limit of 35 per cent of investible savings for stocks, and 10 per cent for gold. You can find the details on what assets are approved on the CPF website.

The CPFIS is supposed to give financially-savvy Singaporeans a chance to beat the CPF’s regular performance. This is 2.5 per cent per annum on the OA, and four per cent on the SA and Medisave accounts (or 3.5 per cent and five per cent respectively, after the first S$60,000 in CPF savings).

In 2015 however, it was revealed that just 15 per cent of Singaporeans managed to beat the CPF rates. Some 40 per cent lost money in their attempt. Here’s why.

1. Buying Financial Products with High Fees

Some of the permissible investments include financial products, such as Investment Linked Policies (ILPs). These products are often more expensive because they have to be managed. This means that behind the scenes, the insurer has to hire a fund manager to control the buying and selling.

However, many Singaporeans are not clear about the cost. As an example, a nominal return of 5.7 per cent on an ILP may translate to just 3.7 per cent, after subtracting the fees (these fees are often around two per cent).

This price tag may not be obvious to the buyer. For example, an insurance policy may describe the fees as a “distribution cost”, or buyers may get confused between the management fees and the Total Expense Ratio (TER).

Regardless, the high fees eat into returns. And with buyers unaware of it, they may not switch or abandon these products for many years. The end result is losing money on their CPFIS.

2. Switching Assets Too Often

The opposite problem may also occur, in which investors lose money by switching assets too often.

Investment products have a long horizon, often taking 15 to 20 years to pay off. This long time period allows for recoveries after a downturn. For example, a fund may be down six per cent right now, but the same fund may yield annualised returns of seven per cent per annum over 10 years. It’s important that long-term investments be given time to mature.

Some investors, however, get impatient. They switch as soon as their investment dips, or they keep switching based on the recommendations of friends and new insurance agents.

This often results in a “buy high, sell low” situation. By the time you have received news that a particular stock is good or bad, the price has already changed to reflect it. So by selling because you hear bad news, you are probably selling at a low.

On top of this, there are additional costs in switching your investments around. For example, an ILP may impose a penalty, that requires you forfeit a certain sum if you quit abruptly. As such, this kind of “flip-flopping” can cost you money.

3. Lack of Attention Because It’s Not “Money in the Pocket”

Many Singaporeans are a little cavalier with their CPFIS investments. It’s certainly easier to be unconcerned, due to the perspective that this is “money you can’t touch anyway”.

Some Singaporeans may feel that, because they are not able to access their CPF funds anyway, they don’t have to care about the consequences. It doesn’t help that any profits made from the CPFIS simply go back into the CPF, instead of into the investor’s bank account.

This may not be the wisest approach. While CPF comes with many strings attached, you will still need it for many things. The down payment on your flat or your payouts at retirement are dependent on a healthy CPF.

Does This Mean You Shouldn’t Invest Your CPF Money?

Not at all. There can be advantages to investing your CPF savings if you do so with the proper direction. But you have to be sure to get qualified advice from a wealth manager, and you have to be patient. The rewards may only come after a decade or more.

Alternatively, you can move your OA monies into your SA if you are afraid to lose money. This will provide a near risk-free source of returns at five per cent per annum.

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