THE new Central Provident Fund (CPF) rules that kicked in on April 1 sparked an extraordinary rush by members to withdraw cash from their Ordinary Accounts, so they could place their savings in other higher-earning investments.

About $1.72 billion was pulled out of CPF accounts in the first three months of the year, and re-invested in insurance and investment-related products, giving insurers one of their best quarters on record.

The Life Insurance Association (LIA) yesterday said the $1.72 billion of new CPF business premiums was 17 per cent higher than the last quarter of last year.

'This is not an unexpected result, given the CPF rule change,' said LIA president Mark O'Dell.

The new rules require members to keep a minimum of $20,000 each in their Ordinary and Special Accounts.

Excess cash can be invested in CPF-approved bonds, equity-linked funds, unit trusts and investment-linked insurance products.

That gave thousands of CPF members plenty of incentive to get their cash out before April 1 and place their savings in investments that could earn better returns, especially with inflation above 6 per cent.

That is why there is 'a surge in business towards the end of the first quarter', said Mr O'Dell.

One who joined the rush to re-invest was marketing coordinator Winnie Kwa, 24.

She had taken money from her Ordinary Account and invested it in regional equity funds with Manulife.

She first put in $5,000 in February last year and topped it up with $8,000 in March this year. That left just over $1,000 in her Ordinary Account. As the withdrawals occurred before April 1, she did not have to meet the $20,000 minimum balance rule.

'My CPF was just sitting in my account and not earning a lot of interest, and I thought investing it could earn me more, with just a bit more risk,' said Ms Kwa, adding that her initial investment of $5,000 in February last year had earned her 20 per cent returns by Christmas.

Interest rates are the critical factor.

Mr Apelles Poh, a financial planner with Professional Investment Advisory Services, said the rush to empty Ordinary Accounts before April 1 was understandable, given the relatively low rates the CPF paid.

Part of the new rules is that an extra 1 percentage point of interest is paid on the first $60,000 in a member's combined CPF accounts, with up to $20,000 from the Ordinary Account, since the start of this year.

That means the Government has guaranteed a 3.5 per cent annual return for the first $20,000 in a person's Ordinary Account, and 5 per cent a year for the remaining $40,000 in the Special, Medisave and Retirement Accounts (SMRA) for this year and the next.

The floor rate for the SMRA will be maintained at 4 per cent for the first two years beginning Jan 1 this year. After that, the 2.5 per cent floor rate will apply to all accounts.

'People are looking for better returns than that, especially amid inflation fears. A yield of 6 per cent or 7 per cent in equity funds is considered by most to be a reasonable return,' said Mr Poh.

With the new rules now in place, Mr O'Dell anticipates that the CPF Investment Scheme sector will experience a 'significant downward trend' in the second quarter and, maybe, the following two quarters as well.

'We expect about a 30 per cent reduction in the single premium market,' he said.

On the whole, the life insurance sector recorded a total of $2.99 billion of new business premiums for the first quarter, up 53 per cent from a year earlier.

This article was first published in The Straits Times on May 7, 2008

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