Cost structures in defined contribution systems: The case of Singapore's central provident fund

Low, L. and Aw, T. C. (1997) ‘Housing a Healthy, Educated, and Wealthy Nation through the CPF’, The Institute of Policy Studies,Times Academic Press, Singapore.

CPF (2007a) ‘Asset Enhancement: CPF Investment Scheme — How it Works’, Central Provident Fund Board, http://mycpf.cpf.gov.sg/Members/Gen-Info/FAQ/investment/CPF-Invscheme.htm , viewed March 2007.

In Singapore, unit trusts (also known as collective investment schemes) refer to professionally managed funds offered by fund management companies. The unit trusts may have different investment objective, styles of management and different levels of equity risk depending on their portfolio allocation. This is unlike the US where a unit investment trust generally refers to a fixed, unmanaged portfolio of income-producing securities. Shares in the trust are sold to investors who received capital gains, dividend payments and interest at regular periods. A unit investment trust is typically considered a low-risk, low-return investment. Unit trusts in Singapore are more comparable to mutual funds in the US.

Koh, B. S. K., Mitchell, O. S., Tanuwidjaja, T. and Fong, J. (2007) ‘Investment patterns in Singapore's central provident fund system’, Pension Research Council Working paper, The Wharton School, February.

Another $79bn is held in the investment saving scheme but has not been actively invested.

Chai, N. C., Chua, S. T. and Tsui, A. K. (2007) ‘Central provident fund investment scheme in Singapore: A preliminary comparison of returns', Department of Economics, National University of Singapore. Working Paper presented at the 15th Australian Colloquium of Superannuation Researchers, July.

CPF (2007e) ‘Performance and Risk Monitoring Report for Unit Trusts Q4 2006’, Standard & Poor's Fund Services, Asia, February, http://www.imas.org.sg/downloads/imas/CPFIS_Performance_Q4_2006_2202.pdf .

CPF (2007c) ‘CPF Investment Scheme — Annex D: Charges Typically Incurred for Various Investments’, Central Provident Fund Board, http://mycpf.cpf.gov.sg/Members/Gen-Info/FAQ/Investment/INV.htm , viewed March 2007.

Investment Management Authority of Singapore (IMAS; 2007) (2007) ‘Fund Information Service for CPFIS-Included Unit Trusts & Investment-Linked Insurance Products’, IMAS and Life Insurance Association of Singapore, http://www.fundsingapore.com , viewed 6th November–7th March.

A comparison of the online data with figures in fund prospectuses shows that the ‘initial charges’ reported by IMAS may refer to the initial sales charge or the sum of sales charges. For instance, IMAS includes the realisation charge in the ‘initial charges’ reported for five funds but omitted it for one fund (as of 12/06). In another case, the ‘initial charges’ reported included a transaction charge on purchase.

The agent banks are appointed to maintain members’ CPF Investment Accounts under the CPFIS-OA as they have an extensive network of branches and facilities to support the investment and settlement of shares and bonds listed on the Singapore Exchange. The agent banks’ electronic banking services such as ATMs are easily accessible and allow members to conveniently apply for shares or bonds during an IPO. The banks are also able to handle the complex processing of corporate actions such as bonus and rights issues, dividend payments and schemes of arrangement under the CPFIS-OA12.

CPF (2007b) ‘CPF Investment Scheme — Investing For the First Time’, Central Provident Fund Board. http://mycpf.cpf.gov.sg/Members/Gen-Info/FAQ/Investment/INV.htm , viewed March 2007.

A switching transaction will involve a buy transaction plus a sell transaction.

Other fees include service fee, asset allocation fee, legal fee, printing fee and distribution fee.

The NAV of a unit trust is the value of the unit trust fund's assets less its liabilities.

IMAS (2005) ‘Revision to Guidelines on Calculation of Expense Ratio and IMAS Guidelines for the disclosure of expense ratios’, Investment Management Association of Singapore, 25th May. www.imas.org.sg/downloads/imas/IMAS_Revised_Guidelines_on_Expense_Ratio.pdf .

Expense ratios are furnished by fund management companies and insurers. These ratios are made available to the public through the quarterly Performance and Risk Monitoring Reports for CPFIS-included funds published by Standard & Poor/Morningstar and are also be found on IMAS website. These expense ratios are supposed to be calculated according to IMAS latest guidelines.

Mercer Investment Consulting, CPF Board's consultant, developed a risk classification system for the CPFIS that assigns various risk levels to permitted investments. The unit trust or ILP with a greater proportion of its assets invested in the more volatile stock market will have a higher equity risk. Based on its level of equity risk, the unit trust or ILP will be assigned one of the four risk categories.

The ‘first-year total costs’ figure computed in this study is derived by adding average sales load to the average expense ratio. Two points are worthy of further note. (i) Although the average load is expressed as a percent of the amount invested and expense ratio is expressed as a percent of the average NAV, these bases should more or less be equal as long as the fund is not growing rapidly. (ii) A more precise way to compute ‘first-year total costs’ might be to convert the sales load into an annualised load to align it with annual expense ratio component.

Bateman, H. and Mitchell, O. S. (2004) ‘New evidence on pension plan design and administrative expenses’, Journal of Pension Finance and Economics, Vol.3, No.1, pp.63–76.

Mitchell, O. S. (1998) ‘Administrative costs of public and private pension plans’, in Feldstein, M. (ed.)‘Privatizing Social Security’, NBER.Chicago: University of Chicago Press, pp.403–456.