CPF Investment Options: How New Scheme Compares & Who It Suits

Singapore’s Central Provident Fund (CPF) board is preparing to launch a new investment scheme in the first half of 2028, designed to offer members a simplified and lower-cost pathway to potentially higher returns than currently available through CPF interest rates. The scheme aims to fill a gap in the market, providing an option for those who lack the expertise or time to actively manage investments within the existing CPF Investment Scheme (CPFIS).

Currently, CPF members can choose to invest their savings through the CPFIS, which provides access to over 700 investment products. However, the take-up rate has been relatively modest, with September 2023 data showing that 28.1% of eligible members had active investments in their CPFIS-Ordinary Account and 22.1% in their CPFIS-Special Account. Members also have the option of leaving their funds in their Ordinary Account (OA) and Special Account (SA), which offer base interest rates of 2.5% and 4% per annum, respectively.

A Middle Ground for Investors

Analysts suggest the new scheme will occupy a middle ground between these existing options. “So if you are the conservative type that does not even want to see any market cycle, you still can keep (your funds) in the CPF OA and SA account… Then if you have a higher, aggressive risk profile, you can participate in the CPFIS,” explained Alfred Chia, CEO of financial advisory firm SingCapital. The new scheme is intended to appeal to those who fall between these extremes, potentially improving long-term retirement adequacy.

A key feature of the new scheme will be lower expense ratios, facilitated by the scale of the investment pool managed by private fund managers. This means investors could benefit from reduced investment costs. The CPF board will collaborate with a limited number – two or three – of reputable fund providers to offer a small selection of investment options, streamlining the decision-making process for less experienced investors.

Targeting Younger and Longer-Term Investors

The scheme is particularly geared towards younger members, aged 20 to 45, who are seeking returns exceeding the guaranteed CPF interest rates but may not have the time or knowledge to manage their own portfolios. The longer time horizon available to these investors – potentially up to 20 years – allows them to better weather market volatility and benefit from compounding returns. The CPF board anticipates that successful investments could translate into higher sums for CPF LIFE, the national annuity scheme, resulting in increased monthly payouts after age 65.

However, the scheme is not exclusively for younger members. Older individuals can also participate, but are advised to carefully consider their risk appetite and investment timeframe. Premature withdrawals from long-term investments can lead to reduced returns or even losses.

Simplified Options for a Wider Audience

According to Li Huijing, head of investment management at financial consultant firm MoneyOwl, the simplified investment options offered by the new scheme will be particularly valuable for individuals who want to take on some market risk but lack the expertise to build and manage their own portfolios. She emphasized the importance of a longer investment horizon – ideally 15 to 20 years or more – to maximize the benefits of compounding and navigate market fluctuations.

While there will be no age limit for participation, the CPF board acknowledges that members with a longer investment runway are more likely to benefit. Those with shorter timeframes can still rely on the risk-free CPF interest rates, which currently offer up to 6% on CPF balances.

How Does This Fit Into the Existing Landscape?

The new scheme is designed to complement, not replace, the existing CPFIS. The CPFIS offers a broader range of investment products, but generally comes with a higher fee cap. The CPF board noted that the new scheme will offer a more cost-effective alternative for those seeking a simplified investment approach. The relatively low take-up rates of the CPFIS – around 22-28% of eligible members – suggest a demand for more accessible and user-friendly investment options.

The introduction of this new scheme reflects a broader effort by the CPF board to enhance retirement adequacy for Singaporeans, providing them with a wider range of tools to grow their savings and secure their financial future. By offering a simplified, low-cost, and diversified investment option, the CPF aims to empower more members to participate in the market and potentially achieve higher returns over the long term.