CPF’s Puzzling Investment Philosophy

By Gangasudhan / Image from Monetary Authority of Singapore

The Central Provident Fund (CPF) Board invests the monies in the CPF into Special Singapore Government Securities (SSGS) which are guaranteed by the government but can only be used for investment purposes (and not government spending). The money itself thus becomes the funds of the Monetary Authority of Singapore (MAS) which then invests in Government of Singapore Investment Corporation (GIC) and Temasek Holdings (TH).

According to the MAS (2011, p.13), the returns of the bonds are ‘pegged to the CPF interest rate’ which means the CPF Board decides the effective interest rate – and by extension, the returns offered by the SGSS. Currently the Ordinary Account (OA) interest rate is based on the fixed deposit interest rates of major local banks while the Special, Medisave and Retirement Account (RA) rates are based on the average yield of 10-year Singapore Government Securities (SGS), and adds 1% on top of that.


Figure A: Snapshot of section with regard to SGS in the Singapore Bond  Market Guide (MAS, 2011, p.13)


Interest Rate Peg Makes No Sense

But there is no reason why the OA should not be pegged to the SGS since the SSGS is basically an adapted version of this type of government bond and has nothing to do with actual bank lending or bank-initiated investment. By investing in standard 10, 20 or 30-year SGS bonds, the annual yield could be between 2.5% to 3.5% (or even higher[1], depending on the bond available at the time of investment) which the CPF Board could pass on directly to the account holders. Even without the ‘additional 1%’, the overall interest rate returns would be substantial – bearing in mind that the OA is where the bulk of the monies are and stand to benefit from the higher interest rate. And this is all risk-free with the capital investment being returned 100% upon maturity, by our Triple-A rated government.

With the CPF meant to be a long-term savings option, it would make sense for the Board to invest the funds in vehicles that generate the most benefit to the members. With the simple move of investing in SGS bonds rather than as SSGS, a person earning $30,000 per annum could see their OA become $318,000 (at an interest rate of 3.5%) rather than just $268,000 as illustrated below.



Figure B: Comparison of OA account balance at 2.5% and 3.5% interest rates

Even pegging it to the 10-year average yield of SGS as compared to bank lending rates would routinely give it an interest rate more than the current – in 2013, the rate was 2.75% (Figure C). Granted, there will be some years that fall below a 2.5 % interest rate return, but even without a floor rate (i.e. the CPF Board honours the rate of 2.5% under any circumstances), the rate would have only gone below 2.5% on three occasions in the last fifteen years.


Figure C: 10-year average yield for SGS bonds for the past 15 years (Cai, 2013)

Go Straight To The Source & Earn

However, the CPF Board could actually be much more proactive and take it a step further to explore investing in GIC or TH directly. With a dividend rate of about 5.4% (based on net income and asset value in 2013[2]) and Total Shareholder Return about 15% per annum over the past 30 years, a direct investment model in a robust investment firm with strong ties to the government could give even better returns.


Figure D: Temasek Holdings’ Total Shareholder Return over the past 10 years (Temasek, 2013)

A dividend of 5.4% could mean an interest rate that is double what members get now (i.e. 5%) and the Board could still retain the surplus as buffer for contingencies or to honour a floor rate. Under such favourable conditions, the person in the earlier example would be able to more than double their money over 30 years.


Figure E: Comparison of OA account balance at 2.5% and 5% interest rates

Why Doesn’t The CPF Board Work Harder?

Thus the case can be made to suggest that the CPF Board is not exploring the best options for the people of Singapore as the custodian of their compulsory savings. Smarter investment options are clearly available and the avenues through which such smart moves can be achieved do not necessarily have to be outside the current system of operations.

If a layman without any financial, investment or accounting qualifications or background (i.e. this author) can consider these options, it does not augur well for the CPF Board not to educate the public as to why such investment vehicles cannot be used (assuming that the CPF Board has considered and rejected them for some reason).

*Further reading on SGS bonds at http://www.moneysense.gov.sg/understanding-financial-products/investments/guides-and-articles/making-sense-of-singapore-government-securities.aspx



Cai H. X. (2013). The name is Bond, Singapore Bond. Retrieved on 30 May, 2014 from http://www.btinvest.com.sg/wealth/wealth-planning/name-bond-singapore-bond-20130909/
Monetary Authority of Singapore. (2011, December 31). Singapore Bond Market Guide. Retrieved on 30 May, 2014 from http://www.sgs.gov.sg/Publications/~/media/SGS/MAS_SBondMarketGuide_2012.pdf
Temasek. (2013). Portfolio Performance. Retrieved on 30 May, 2014 from http://www.temasek.com.sg/investorrelations/portfolioperformance

[1] See https://secure.sgs.gov.sg/fdanet/BondPricesAndYields.aspx
[2] According to financial information published by Temasek Holdings at http://www.temasekreview.com.sg/#performance-groupFinancialHighlights

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