CPF Special, Medisave accounts' interest rates to be modified next year
By May Wong and Tung Shing Yi, Channel NewsAsia | Posted: 21 August 2007 1557 hrs

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	Related News • Draw-down age for CPF minimum sum to be raised progressively to 65 • CPF savings to earn higher interest

SINGAPORE : Interest rates for the CPF Special, Medisave and Retirement Accounts will be re-pegged to an appropriate long-term bond rate.

Manpower Minister Ng Eng Hen said more details on this will be worked out and announced next month.

He said the new rates will be lower initially than the current rate of 4 percent but it should do better than 4 percent over time.

But as the rates will be pegged to the market, fluctuations can be expected.

Dr Ng was speaking at a news conference to explain the initiatives announced by Prime Minister Lee Hsien Loong at the National Day Rally.

Giving more details on the compulsory annuities, Dr Ng said only part of the minimum sum from the CPF will be set aside for it.

A major portion of the minimum sum will still be for the members to withdraw when they reach the draw-down age.

Dr Ng said this is to ensure that members are covered even after the age of 85.

He said the aim is to achieve a subsistence payout first - of possibly between S$250 and S$300 per month.

Private sector economists said the rates could be pegged to government-issued bonds.

"If we peg it to a SGS bond, it will definitely be below the target 4 percent rate. Our thoughts are that, they might be looking at a bond issued by say, Temasek, which has typically in previous years averaged returns more than 4 percent. So we can probably enjoy higher returns in that way," said Alvin Liew, economist at UOB Treasury Research.

Singapore Government Bonds are currently yielding between a modest 3 percent and 4 percent, prompting some analysts to suggest a benchmark that included a guaranteed portion.

Some economists suggested that the government could provide a fixed 1-2 percent base, plus a variable component tied to the Singapore Government Bond yield.

As the rates would be pegged to the market, fluctuations in returns could be expected.

"It is conceivable that CPF members can expect, in the long term, maybe more than 4 percent per annum. On the risk side, if these new rates are variable and it falls below 4 percent, that is a worry for CPF members," said Roy Varghese, Director of Financial Planning, IPAC.

The changes to the CPF interest rates will be effective in 2008.

They will cost the government S$700 million a year, initially.

Meanwhile, the government also wants to provide an "extreme longevity protection" for citizens by making annuities compulsory for those below 50 years old.

Said Dr Ng: "We are basically looking at compulsory annuities to protect members from outliving their retirement savings. Let me first say that we'll consult widely. We do not intend to, when we start this scheme, to put the major proportion of your minimum sum into annuities. That's the first thing that needs to be said.

"In fact, a smaller proportion of your minimum sum will be put into annuities, so the major portion of your minimum sum will still be drawn out, drawn down by members at the draw-down age."

An example of this annuity is that the CPF member pays a basic premium of X dollars which goes into a pool.

That money will be paid out from age 85 - for life.

But if the member doesn't live till 85 years old, the money will then be used to support others in the pool, who are still alive.

It's not determined if the CPF Board or private companies will administer the compulsory annuities scheme.

The Manpower Minister stressed that the basic idea of the compulsory annuities is to insure members for the latter part of their lives, that is after 85 years old.

The aim is to provide a subsistence payout amount first, of possibly between $250 and $300 monthly.

Dr Ng said more details on this scheme will be announced next month.

On the additional one percentage point interest for the first $60,000 in CPF members' combined accounts, Dr Ng said this will be placed in the Special Account and not the Ordinary Account.

He said: "These changes will help Singaporeans work longer, save more, and help give them a peace of mind for their golden years. It will significantly strengthen our economic and social system to better address the ageing population... These new tools, new aspects can be effective, it will give us a lot of hope and optimism as we move forward, even as we age."

Dr Ng said this will give Singapore a more responsive and robust system to address changes as the workforce ages.

The Manpower Minister said the extra one percentage bonus interest will not affect CPF members who are already investing their funds.

He added that "tens of billions" are still available for investing.

The government is not preventing members from investing their CPF funds. - CNA /ls