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CPF rate peg ensures sustainable return

Employment practices
  • The Straits Times (26 Mar 2011) : CPF rate peg ensures sustainable return
  • The Straits Times (22 Mar 2011) : Keep CPF rate at 4% next year too
CPF rate peg ensures sustainable return
- The Straits Times, 26 March 2011

We refer to the letter by Mdm Florence Heng with regard to CPF interest rate (ST, 22 March 2011).

2.   Since 2008, the interest earned on Special, Medisave, and Retirement Account (SMRA) monies has been pegged to the 10-year Singapore Government Security (SGS) yield + 1%. Such a market-based peg ensures that members receive a fair and sustainable return on their CPF monies. This was one of the measures introduced as part of the 2007 CPF reforms to enhance retirement adequacy.

3.   However, due to the unprecedented global recession and the low interest rate environment in recent years, the Government had introduced and extended a special 4% floor rate for the SMRA Accounts up till the end of this year, as previously announced.

4.   As for the extra 1% on the first $60,000 of CPF savings, it is enjoyed by all members and in particular, aims to benefit members with low balances. Members will continue to enjoy this extra 1% interest even after 2011.

Keep CPF rate at 4% next year too
- The Straits Times, 22 March 2011

I am puzzled why the Government has decided to change the minimum rate for interest earned on Central Provident Fund Special, Medisave and Retirement account monies to 2.5 per cent per annum with effect from next year.

These accounts have been a risk-free source for growing Singaporeans' retirement funds and for taking care of their medical costs, hospitalisation and health insurance.

The drop of 1.5 percentage points from the current 4 per cent will significantly affect especially the low-income and middle-income groups with the rise in inflation.

Moreover, the extra 1 per cent interest will be paid only to members who have the first $60,000 of combined balances of member's Ordinary (capped at $20,000), Special, Medisave and Retirement accounts.

The status quo - that is, maintaining the interest rate of 4 per cent for accounts other than the Ordinary account - will be much preferred.