Why market returns can come up ahead of CPF OA rates
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Why market returns can come up ahead of CPF OA rates

Mar 2024
Jun 2023
Science of Wealth - The Business Times - Elderly couple retiring with peace of mind - individuals need to invest in the financial markets over the long term to better prepare for retirement adequacy

Fear of investment loss keeps most CPF members from investing. But failure to invest lets inflation eat into savings, resulting in a smaller retirement nest egg. A series of announced CPF policy changes gives urgency to why individuals need to take control and invest in financial markets over the long term to better prepare for retirement adequacy.

The original version of this article first appeared in The Business Times.

There has been a plethora of news surrounding the Central Provident Fund (CPF) in recent months. The CPF monthly salary ceiling has started rising progressively since September 2023, and will reach $8,000 in 2026, up from $6,000 prior to the change.

Already one of the largest contributions of any national systems globally, these increases mean that for every Singaporean, the CPF becomes even more important as a form of savings, and our vehicle in building a future nest egg and preparing for retirement adequacy. 

There will also be a change to the CPF Special and MediSave Accounts (SMA) interest rate to 4.05% p.a. from 1 April to 30 June 2024, down from 4.08% in the first quarter of 2024.

CPF OA rates have lagged Singapore inflation

With the piling amount of savings in the CPF system, many have taken to investing in Singapore Treasury bills (T-bills), especially with their OA monies which earn 2.5% per annum (p.a.) in the account.

But while these can be temporary options to boost returns when interest rates are higher, it is not a long-term solution — especially if interest rates start coming down. Yields of T-bills, which were temporarily above 4%, are already back down to the 3% level. If we consider the cost of foregone interest as we transfer the money in and out of the CPF account, as well as the cost of investing, the gain is very little.

However, it is encouraging to see more CPF Investment Scheme (CPFIS) accounts being opened as members become more aware of options to boost returns and take control of their CPF accounts to secure their future. 

This is especially important as the Singapore inflation rate has been outpacing CPF OA interest rates, with the Singapore Consumer Price Index (CPI) rising faster than 2.5% p.a. in the past five years. Inflation is effectively eroding the purchasing power of CPF members, with an increasing amount of assets accumulating in the CPF OA. If we are to build a meaningful nest egg that will support the future income and sustain our quality of life, we cannot afford to fall below inflation or to just keep up with inflation. We must do better — much better. 

Singapore inflation has gone up more quickly than CPF OA 2.5% rate in the past five years

Date since Singapore inflation (CPI) CPF OA CPI vs CPF OA
Total return Ann. return Total return Ann. return Excess total return Excess ann. return
Year to date 1.7% 2.9% 1.1% 2.5% 0.7% 0.4%
1 year 6.2% 6.2% 2.5% 2.5% 3.7% 3.7%
2 years 11.9% 5.8% 5.1% 2.5% 6.9% 3.3%
3 years 14.3% 4.5% 7.7% 2.5% 6.6% 2.0%
4 years 13.5% 3.2% 10.4% 2.5% 3.1% 0.7%
5 years 14.7% 2.8% 13.1% 2.5% 1.6% 0.3%

Source: Endowus Research, Singapore Department of Statistics.
Note: Data as of end-May 2023. Ann. return is short for annualised return. CPF OA: CPF Ordinary Account. CPI: Consumer Price Index, which is widely used as a consumer inflation measure. The CPI measures the average price changes over time of a fixed basket of consumption goods and services commonly purchased by resident households in Singapore.

We know there is an investment that has empowered individuals with the ability to beat inflation rates, which erode our purchasing power in the future. That is to invest in financial markets. This is true for your personal savings whether in Cash, CPF or SRS (Supplementary Retirement Scheme). The power of compounding market returns through low-cost passive index investing has been proven over cycles and over decades. This is empirical evidence and the science of wealth. 

Using the most recent end-May 2023 data, we can see that the returns from the global stock market, as represented by the MSCI All Country World Index (ACWI), has exceeded both the Singapore inflation rate and the CPF OA interest rate of 2.5% p.a., except the 1-year and 2-year periods to May 2023, which included the 2022 market correction. Even this year, in 2023 year to date, the market has surprised everybody with a healthy 9% return, or 16% on an annualised basis. From the lows of October 2022, markets have rebounded by double digits. 

Global stock market returns have surpassed CPF Ordinary Account (OA) returns in every period except 2022

Date since Global equity markets CPF OA MSCI ACWI vs CPF OA
Total return Ann. return Total return Ann. return Excess total return Excess ann. return
Year to date 9.0% 16.0% 1.1% 2.5% 6.5% 13.5%
Since 2022 low 11.6% 9.9% 1.7% 2.5% 9.1% 7.4%
Since Covid low 46.7% 12.5% 8.3% 2.5% 44.2% 10.0%
1 year -1.0% -1.0% 2.5% 2.5% -3.5% -3.5%
3 years 33.8% 10.2% 7.7% 2.5% 31.3% 7.7%
5 years 42.3% 7.3% 13.1% 2.5% 39.8% 4.8%
10 years 133.0% 8.8% 28.0% 2.5% 130.5% 6.3%
15 years 128.2% 5.7% 44.8% 2.5% 125.7% 3.2%
20 years 274.2% 6.8% 63.9% 2.5% 271.7% 4.3%
30 years 560.2% 6.5% 121.1% 2.7% 557.5% 3.8%

Source: Endowus Research, Bloomberg.
Note: Data as of end-May 2023. Ann. return is short for annualised return. CPF OA: CPF Ordinary Account. MSCI ACWI: MSCI All Country World Index, which is considered a proxy for global equity markets.

Why no change to the CPF OA interest rate?

Many have asked why such a minuscule increase for the CPF Special and MediSave Accounts (SMA), and why no changes in the other CPF accounts' interest rates. This is because the SMA interest rate is pegged to the 12-month average yield of the 10-year Singapore Government Securities (10YSGS). The recent increase is because that rate crossed the 4% floor threshold, in which case the market rates kick in. 

The CPF OA interest rate also has a formula that is computed based on the three-month average of major local banks' interest rates of 0.66%. Despite the rise in interest rates, our banks are not really paying us a lot to keep our money there. As a result, the CPF floor interest rate for the OA at 2.5% applies. The last time market rates exceeded the floor rate was in 1998. So with the CPF OA interest rate remaining at 2.5% p.a., Singapore inflation outpacing that rate, and more and more of our money going into CPF in the form of contributions — what is the sensible and logical next move for us? 

Why people don't invest their CPF money, and how to overcome the fear

Many people say it is risky to invest your CPF OA money. It is true that investing carries with it the risk of losing money. We also know that without risk, there is no return. People used to think that there is no risk in putting your money in the bank and getting a small interest — until recently, when we realised why they created a bank deposit insurance in the first place. Because banks can go bankrupt and you can lose your deposits. It is not zero risk, but near-zero risk, and so you get near-zero returns. The risk and the return is commensurate. 

In that case, one can argue that the only zero-risk option is the CPF, which gives you no risk of losing money and a decent return of 2.5% p.a. in your OA. This is obviously true. However, is market risk the only risk? The purpose of CPF is to save our money today so that we can secure our future. Therefore, the most important risk for CPF money is the risk of failing to secure that future. If, like in the recent past, inflation eats into our returns and we do not invest our CPF savings, then that translates to certainty of failure. 

There is one way to improve your chance of success in investing to such a high level that it will overcome most people’s fear of losing money. That is to invest over a longer time. Especially when inflation is your enemy, time is your only ally. When you extend your investment horizon, this reduces your risk significantly. The longer you invest, the less likely that you will ever lose money. If we look at the actual scientific data, beyond 15 years, the success rate of not losing money is actually 100%. Risk, as defined by the volatility of returns, can be mitigated by time. 

The longer you invest, the lower the risk of losing money

Chart: MSCI ACWI - global stock markets - high and low returns over various periods of time. Returns in SGD. Source: Endowus Research, Bloomberg

Not timing the market, as most people try to do, but time in the market

It is impossible to forecast when markets will rise or fall. This year is a prime example. We have had sticky inflation, rising Fed rates, slowing growth, banks going bankrupt, US debt ceiling concerns, and growing geopolitical risk. However, markets are up year-to-date.

With so much negative news, how is this possible? The reason is because the market is not the economy. The market has bigger, profitable companies and sieves out bad performers and rewards companies that are successfully growing. It continues to increase the weight of the winners over time. This is the power of markets that you can harness over the long term.

Most people may not realise this, but there is a right way to invest. And there is a right way to invest your CPF money. When you are building wealth over the longer term, Endowus advocates investing on a regular basis into a core, diversified portfolio with an evidence-based approach, and without taking unnecessary concentration risk. CPF OA is a perfect pool of money to invest in this way.

Contribution and CPF rates may change further over time, but there is only one time-tested, proven way to invest in financial markets to achieve better success that will never change.

Believe in the numbers


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Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus Singapore Pte. Ltd. (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

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Science of Wealth - The Business Times - Elderly couple retiring with peace of mind - individuals need to invest in the financial markets over the long term to better prepare for retirement adequacy

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