Thursday, July 4, 2013

EPF vs CPF — who pays better returns?

The Employee’s Provident Fund (EPF), which was established in 1951 to provide for the retirement of its contributors, differs from the objectives of the Central Provident Fund (CPF) of Singapore which, on top of retirement of its contributors, also provides for housing, medical and education of its contributors.

The EPF’s dividend payment which is dependent on its investment income for a particular year also differs from the CPF’s interest payment which has been stable for the last 12 years.

If the returns of the CPF and EPF are compared, it would appear that the CPF offers better returns to its contributors even if inflation is taken into account. (Please refer to chart.)

“The size of the EPF funds makes it difficult to pay higher dividends and the EPF Act mandates a minimum of 2.5% dividend to be paid and this has been met by EPF by taking into account inflation,” said a head of research of a local bank-based broker.

EPF had a fund size of RM469.2 billion as at the end of 2011, 34% of its fund size was invested in bonds, 26% in Malaysian Government Securities and 35% in equity. Now the fund is increasing its exposure to real estate in the country and abroad.

CPF, which had a fund size of S$103 billion (RM257.54 billion) at the end of 2011, does not disclose its investment portfolio and this makes tracking its performance difficult.

In addition, it pays its members fixed interest rates since 2001.

The contributors' accounts under the CPF scheme are divided into four accounts namely, ordinary, special, medisave and retirement and the interest rates paid for the respective accounts are 2.5% for the ordinary account and 4% for the remaining accounts.

CPF balances are invested in government bonds, which carry lower risk but also bring relatively low returns.

Since the Singapore government routinely runs a surplus, it does not need the proceeds of these bond issues for funding purposes.

These funds are instead invested in external assets by the Government Investment Corp (GIC). So while CPF members are sheltered from investment risks, the downside is that members are deprived of the opportunity to reap higher returns.

On the other hand, although the actual investments in the GIC portfolio are not disclosed, given the long-term nature of CPF assets, the government can maximise returns by managing long-term risk.

The EPF mandates a 12% contribution from the employer based on the gross salary of the employee while 11% is deducted from the employees’ portion. For CPF, 15.5% is contributed by the employer while 20% is deducted from the employee's gross salary.

The CPF also requires the contributor to have at least S$117,000 in his account before a withdrawal can be made while the EPF, which allows 30% withdrawal by the contributor at the age of 50, makes no such requirement.

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