This is to benefit CPF members who have already invested in the funds. High sales charges and expense ratios erode investment returns. Lowering funds’ charges for CPF members would enable them to build up their retirement savings faster.

Consider this:
An investor who invests $10,000 at 5% sales charge will have $500 deducted upfront. If the sales charge is 3%, only $300 will be deducted. This leaves the investor with $200 more to invest. In the case of expense ratios, for an investment of $10,000, growing at an annual rate of return of 5%⁴, an expense ratio of 3% will yield $18,113, whereas an expense ratio of 2% will yield $24,272 at the end of 30 years. The lower expense ratio will give the member $6,159 (or 34%) more in his retirement savings.

The Board has been in consultation with industry associations on reducing sales charges. The sales charge criterion of 3% is reasonable for a start. The Board will continue to work with the industry to study ways of further lowering funds’ charges.

Funds are given six months and twelve months from the date of announcement to comply with the criteria for sales charge and expense ratios respectively. Reducing expense ratios may take a longer time as fund management companies ( FMCs) need to work with their intermediaries to review and lower their funds’ costs. Thus, the expense ratios criterion will be implemented later to give industry players time to adjust their costs. However, the Board welcomes any company which can comply with the criteria for sales charge and expense ratios earlier, to implement earlier.

The expense ratio criterion was first set for evaluation of new funds coming under CPFIS from Feb 2006. The median expense ratio as of end 2005 did not change significantly. The Board also does not expect any significant change in the median expense ratio for the various risk categories as of end 2006. In view of that, the Board has decided to retain the median as of end 2004 for the relevant risk categories, as the expense ratios criterion.

A fund’s expense ratio based on the fund’s audited expenses for its latest financial year will be used to assess whether its expense ratio is lower than the expense ratios criterion.

For funds that do not meet the expense ratio criterion by 1 Jan 08, the Board requires FMCs and insurers to provide free switches to other funds included under CPFIS within 3 months of the implementation date. However, existing CPFIS investors could also choose to remain invested in these funds even though no new injection of CPF money is allowed. Existing cash investors would not be affected.

There are 440 funds under CPFIS as of end of 3rd quarter 2006. About 45% of them exceed the expense ratios criterion of their risk categories (see Annex A). A fund’s past performance is no guarantee that it will continue to perform well in future, so reducing cost could be a better way to assist CPF members to build up their retirement savings. However, CPF Board is prepared to extend a concession to funds that exceed the expense ratios criterion, if they volunteer for re-evaluation and meet the performance criterion of top 25th percentile of funds in their global peer group before 1 Jan 08. These funds will be given an additional year to comply with the expense ratios criterion by 1 Jan 09.

The Board encourages existing funds to undergo re-evaluation under the funds admission criteria⁵ effective from 1 Feb 2006, as they may wish to use this avenue to differentiate themselves and give added confidence to members to invest in them.

Unlike funds that undergo mandatory re-evaluation, funds that undergo voluntary re-evaluation have not had material changes in organizational structure, fund structure or management team. The latter can still accept CPF monies even if they fail to meet the performance criterion, as long as they do not exceed the sales charge and expense ratios criteria.

Members who have already invested in funds with sales charges and expense ratios exceeding the criteria for sales charges and expense ratios can continue to remain invested in the funds, or consider switching to other funds, or selling out of the funds, if the funds no longer meet their investment objective.

New investments into funds with sales charges and / or expense ratios exceeding the criteria are not allowed after the grace period (i.e. by 1 Jul 07 for sales charges and 1 Jan 08 for expense ratios). Members wishing to invest new monies could consider investing in other funds that have sales charges and expense ratios below the criteria that meet their investment objectives. Members could go to http://www.fundsingapore.com/ to find out the sales charges and expense ratios of CPFIS funds that they wish to invest in.

The Board will publish two separate lists on the CPF website:
a) List “A” - funds that have met the CPFIS admission criteria
b) List “B” - all other funds that have yet to be re-evaluated under the CPFIS admission criteria or have failed to meet it after undergoing voluntary re-evaluation. These funds may continue to take in new CPF monies only if their expense ratios and sales charges are below the criteria for expense ratios and sales charges, even though they may not be among the top 25% of their global peer group.

In general, members should consider their investment objectives, financial circumstances and needs before rebalancing their portfolios. Members who are unsure about their investments should approach their financial advisers.

Members who have already invested in such funds can continue to remain invested in the funds, or they could consider switching to other funds or selling out of the funds if the funds no longer meet their investment objective. Insurance companies and FMCs will inform members about their options and the period during which members could switch free of charge.

Members will be educated on the impact of sales charges and expense ratios on funds' performance through the simplified quarterly funds report published by Standard and Poor’s, or articles in inTouch (the Board’s newsletter published in newspapers), as well as other news and investor education platforms.