Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam yesterday took Parliament through the nuts and bolts of setting Central Provident Fund (CPF) interest rates and managing CPF monies to ensure safe and fair returns. He was responding to questions from five MPs on whether higher returns can be paid without changing the risk-free nature of CPF accounts.
How interest rates are determined for different accounts
THREE MPs - Ms Lee Bee Wah (Nee Soon GRC), Ms Tin Pei Ling (Marine Parade GRC) and Mr Lim Biow Chuan (Mountbatten) - asked how CPF interest rates are determined, and whether the CPF Board would consider paying higher interest rates. Mr Tharman: CPF interest rates are pegged to returns on market investments of comparable risk and duration.
Extra interest - an additional 1 per cent - on the first $60,000 of combined balances also helps members with smaller balances.
- Interest rates on the Ordinary Account (OA) - minimum of 2.5 per cent per year.
OA savings can be withdrawn at any time for home purchases and repaying home loans, or for education.
The OA interest rate is therefore pegged to market deposits that can be withdrawn at any time, like the 12-month fixed deposit and month-end savings rates of the major local banks.
But unlike market interest rates, it pays a guaranteed minimum of 2.5 per cent, or 3.5 per cent for OA balances of up to $20,000. More than half of all CPF members enjoy the full 3.5 per cent on their OA.
This floor of 2.5 per cent to 3.5 per cent is above market rates.
In comparison, 10-year Singapore Government Securities (SGS) - which are government bonds - earned an average of 2.4 per cent over the last 10 years, and currently earn 2.3 per cent.
- Interest rates on the Special, Medisave and Retirement Accounts (SMRA) - minimum of 4 per cent per year.
The Special, Medisave and Retirement Accounts are meant for retirement and held for the longer term.
SMRA interest rates are hence pegged to the rates given for similar long-term, risk-free investments.
They are pegged to the return on the 10-year SGS bond, plus 1 per cent to approximate the total return over 30 years, the typical time for which SMRA monies are held.
The additional 1 per cent is higher than what has been observed for 30-year bonds in international markets and allows for future market uncertainties, such as a sharp rise in inflation over the long term.
This formula would give a 3.4 per cent return, but SMRA has been paying a floor of 4 per cent since 2007, or 5 per cent for balances of up to $60,000.
Two-thirds of CPF members earn the full 5 per cent on their SMRA. In practice, therefore, the SMRA interest rates are well above current market returns.
How the lower income earn higher interest rates
SEVERAL MPs including Ms Lee and Mr Gan Thiam Poh (Pasir Ris-Punggol GRC) asked if CPF members could earn more returns. Mr Tharman noted that the lower income effectively earn higher interest rates on their CPF balances.
Mr Tharman: A typical lowerincome CPF member - in the lowest tenth of Singapore's earners - also has his CPF earnings boosted by Workfare Income Supplement payments and housing grants he receives.
This is on top of the 3.5 per cent interest rate on his OA balances.
If he sells his home to upgrade or downgrade later, the housing grant he has received is returned to his OA to form part of his retirement savings.
Based on current policies, these grants will effectively grow his savings by at least 2.5 per cent per year over 30 to 40 years of his working life.
This means that his savings in effect "earn" a total of 6 per cent interest per year.
How CPF monies are pooled and invested
MR GAN and Ms Lee asked how the Government invests CPF monies. Ms Lee also asked whether CPF members could invest their funds directly in Temasek Holdings.
Mr Tharman: CPF monies are pooled and invested together with the rest of the Government's funds, such as proceeds from SGS bonds and land sales, as well as any government surpluses.
This is done through the GIC, the Government's fund manager.
Temasek Holdings does not manage any CPF monies.
Why GIC does not manage CPF monies directly
MR LOW Thia Khiang (Aljunied GRC) asked why CPF monies, managed and invested on their own, cannot enjoy investment returns as high as when they are managed together with the Government's other net assets.
Mr Tharman: Pooling CPF monies together with the Government's net assets means that these assets can act as a buffer to absorb losses in years when the market is weak.
In such years, when the GIC's returns fall below CPF interest rates, the net assets still allow the Government to guarantee CPF monies and pay the interest on them.
This buffer lets the GIC aim for higher returns over the long term, by investing in riskier assets like equities and real estate.
Currently, it can invest over the long term and ride out the market cycles by taking big losses when the markets go down, knowing that as a long-term investor, it would ultimately stand to gain when markets go up again later.
Things would be different if the GIC were to manage a separate, standalone CPF fund.
In this scenario, the GIC would have to be conservative. It would not accept risks that lead to higher long-term returns, but will aim to avoid any short-term shortfalls.
Its portfolio would therefore not earn as much over time, because lower risk investments typically yield lower returns.
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