$20,000 requirement on CPF OA

(Reposted as WP somehow deleted it.....)

I’ve read the Sunday Times piece on 7th Oct 2007, “Taking a closer look at the growth of unit trusts”, with great interest, because I’m concerned with the impact the latest changes to CPF will have on my funds bought under the CPF Investment Scheme (CPFIS).

There will be a minimum requirement of $20,000 on the Ordinary Account (OA) before you can use money from the OA for investment, so if you have $25,000 in the OA, you can use only $5000 for investment. It seems that the changes will take effect in April 2008.

I’m a little dismayed by this development, because my financial advisor has helped me come up with a portfolio that’s beating 2.5% by a mile. Even with the additional 1% on OA interest that is part of the CPF changes, I’m still getting much better returns on my portfolio than from CPF. There is a lot of talk about the risk-free nature of CPF returns, how the government guarantees it and no one else can make such claims.

Risks besides loss of capital

Yes it is risk-free returns, but are there other risks besides potential loss of captial? I think so. To me, there is a potential loss of opportunities. I’ve randomly selected some bond funds from fundsupermart:

ABN AMRO Star Asia Bond
AIGIF Singapore Bond Fund
Franklin Templeton F-Global Bond Fund
Henderson Global Bond Fund - Class A Units
ING Singapore Dollar Bond Fd
Schroder Asian Premium Bond Fund
UOB United International Bond Fd
UOB Optimix Asian Bond

I looked at their performance for the last 10 years, and all of them beat 3.5% with the exception of Schroder Asian Premium Bond Fund which has been established for less than a year I think. This is just a quick-and-dirty look, let’s see what the Sunday Times report says:

How CPFIS funds have done

    THE Sunday Times commissioned fund data house Morningstar Asia to assess the performance of CPFIS-approved unit trusts over a 10-year period up to the end of June this year. Note that the table provided does not reflect when a fund joined CPFIS. Its track record might range from three to 10 years, but it may have joined the scheme two years ago, for example.

Of the 53 funds with a 10-year history, 43 grew over 5 per cent every year in the period studied. Of the 156 funds with a five-year history, 128 beat this growth. In the three years to June 30, 145 funds out of 185 have managed at least a 5 per cent annual return.

While underperforming funds tend to be excluded from the CPFIS, it seems clear that, in absolute numbers, more funds have beaten the annual 5 per cent returns in recent years.

My point is that it is risk-free returns, but there are other opportunities lost as well, especially when so many of them have beaten the annual 5% returns rate.

Different minimum requirement based on age

It’ll take me some time before I can invest again, once the new changes kick in. What I cannot understand is why can’t they have some sort of tiered system where you have different minimum OA requirements based on age. For example, let’s say you’re 20-29 years old, you need to have $10,000 in the OA, anything above that you can invest. If you’re 30-39, you need to have $20,000, or something like that.

The article, “Taking a closer look at the growth of unit trusts”, is reproduced on:

ChannelNewsAsia Forums

Alvin Soong