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New annunities scheme offers better returns: Minister
Keith Lin
Wed, Feb 13, 2008
The Straits Times

MANPOWER Minister Ng Eng Hen on Wednesday assured Singaporeans that the new compulsory annuities scheme will offer more attractive returns than similar products offered by the private sector.

This is because the scheme will be administered by the Central Provident Fund (CPF) Board, which operates a more favourable interest rate structure than commercial annuity providers, he said. As such, those who opt for the scheme will enjoy payouts based on a minimum guaranteed interest rate of 3.5 per cent.

In comparison, most commercial annuity providers guarantee only a 2 per cent rate of return, Dr Ng said. Whether they give more depends on how well their investments fare, he added.

Under the new CPF Life scheme, CPF members aged 50 and below will have their Minimum Sum cash balances divided into two segments when they turn 55.

One part goes to the Retirement Account, which will be used for monthly annuity payouts, while the Refundable Premiums (RP) portion will be used to pay for the premiums of the scheme.

From Jan 1, the Government has floated the interest rates for the Retirement, as well as the Special and Medisave accounts, and pegging them to 10-year Singapore Government Securities (SGS) rates.

But to help members adjust to the floating rate, the Government has guaranteed it will pay out a minimum of 4 per cent on such accounts for the next two years, after which all CPF accounts will attract a floor rate of 2.5 per cent.

At the same time, the Government will pay an additional 1 per cent interest on the first $60,000 of all accounts, with up to $20,000 in the Ordinary Account.

This means that the annuity payouts will be calculated based on an interest rate in the Retirement Account that ranges between 3.5 per cent - 2.5 per cent plus 1 percentage point - and 5 per cent. Besides the better returns, Singaporeans also trust the CPF Board to run the scheme well, Dr Ng said.

Dr Ng, however, made clear that the CPF Board did not set out with the intention of running the scheme.

It was only after the Lim Pin-chaired committee tasked to design the scheme received 'overwhelming response' in favour of it doing so, that the board decided to shoulder the task, he said.

Dr Ng also took the opportunity to respond to concerns on why the payouts will not factor in rising living costs.

Under the CPF Life scheme, participants get a fixed income as long as they live.

He said that having an inflation-indexed scheme would mean that initial payouts need to be smaller, so that participants would have bigger payouts when they grow old.

The other issue is the certainty that those who will live long enough will stand to receive the higher payouts.

But he said Singaporeans are free to sign up annuities plans with commercial providers and be exempted from the national scheme.

 

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