SINGAPORE: Central Provident Fund (CPF) interest rates are pegged to returns on investments of comparable risk and duration in the market, but the Government has maintained higher floor rates and continued to pay generous interest rates despite the low interest rate environment, said Manpower Minister Tan See Leng on Tuesday (Aug 2) in Parliament.
Dr Tan was responding to parliamentary questions by Mr Henry Kwek (PAP-Kebun Baru) and Mr Louis Chua (WP-Sengkang) on the CPF interest rate.
Mr Kwek asked whether the CPF interest rate would be increased for the next few years to compensate for a high inflation rate and to strengthen the retirement adequacy of Singaporeans.
Mr Chua asked for details on how the CPF Ordinary Account interest rate is computed and if there has been a change in parameters used since the formula was introduced.
The floor interest rate for the Ordinary Account is currently 2.5 per cent, and 4 per cent for the Special, MediSave and Retirement (SMRA) accounts.
CPF members get an additional 1 per cent on the first S$60,000 of their combined CPF balances, and those aged 55 and above get another 1 per cent more on their first S$30,000.
This means members below 55 years old can earn up to 5 per cent in interest, while members aged 55 and above can earn up to 6 per cent.
HOW IT IS COMPUTED
Dr Tan noted that the Ordinary Account interest rate is pegged to the three-month average fixed deposit and savings rates of three major local banks - DBS, UOB and OCBC.
“These three banks have a larger share of domestic deposits than other banks,” said Dr Tan.
The formula was last changed in 1999 when the ratio of fixed deposits to savings was updated from 50 per cent-50 per cent to 80 per cent-20 per cent. This was to reflect the longer duration that CPF Ordinary Account funds remain with the CPF Board.
In the Board’s press release in May on the CPF interest rates from July to September 2022, the local banks’ three-month average interest rate was 0.09 per cent, and it remains at that level based on latest estimates, said Dr Tan.
The SMRA interest rates, meanwhile, are pegged to the 12-month average yield of 10-year Singapore Government Securities plus 1 per cent. The peg was 2.72 per cent as of May, and is around 3 per cent based on CPF’s latest estimates.
As these are below the floor rates for CPF accounts, the interest rates for the Ordinary Account and SMRA are maintained at 2.5 per cent and 4 per cent respectively.
“Despite the low-interest rate environment since the global financial crisis, the Government has continued to pay generous interest rates due to the floor rates," said Dr Tan.
“If the pegged rates exceed the floor rates, members will correspondingly earn the higher interest rates on their CPF savings.
“Members can also transfer their Ordinary Account monies to the Special or Retirement Account to earn the higher risk-free rate," he added. "I want to emphasise, this is risk-free.”
RATES FOR THE LONG TERM: MINISTER
Mr Chua asked in a supplementary question what would be the hurdle for the Government to consider granting extra interest rates. He also noted that local banks have raised interest rates for their savings accounts in recent days, and asked if this would prompt the CPF Board to review its pegging formula.
Dr Tan said that the CPF system is aimed at giving members better security in retirement over the long term and in old age, while the bank accounts mentioned by Mr Chua are short-term, volatile instruments.
“The CPF interest rates … continue to be attractive,” said Dr Tan, reiterating that CPF floor rates are higher than the rates they are pegged to.
The minister also pointed out that CPF rates have no further conditions attached, while the promotional rates for the banks’ accounts are contingent on the customers fulfilling criteria such as minimum spending on credit cards, or crediting of salaries into their accounts.
“These benefits are not uniformly applicable to all balances of all the depositors,” he said.
The CPF interest rates are reviewed periodically. The interest rates on the Ordinary Account, Special Account, and MediSave Account are reviewed quarterly, while the interest rate on the Retirement Account is reviewed annually.