Debated in Parliament on 14 Jan 2019.
Assoc Prof Walter Theseira asked the Minister for Manpower (a) whether computation of the CPF Ordinary Account (OA) interest rate, based on indicative Singapore bank fixed deposit and savings rates, reflects the actual market interest rate for deposit accounts, given banks' widespread use of bonus interest rates linked to salary credits, and so on; and (b) whether the Ministry will study alternative methods of CPF OA interest rate computation to reflect the actual average weighted interest rates earned on deposit accounts with Singapore banks and the implications thereof for retirement adequacy.
Central Provident Fund (CPF) interest rates are pegged to returns on investments of comparable risk and duration in the market.
The Ordinary Account (OA) is a liquid account as the savings can be withdrawn at any time for home purchases. This is why the OA interest rate is pegged to the higher of (a) the three-month average of major local banks' interest rates or (b) the legislated minimum interest of 2.5% per annum.
As the computed rate based on the three-month average of major local banks' interest rates is 0.4% per annum, the current OA interest rate is 2.5% per annum for the first quarter of 2019.
Bonus rates given by banks are not comparable with CPF interest rates. The bonus rates are typically contingent on customers fulfilling other criteria, such as minimum spending on credit cards, crediting of salary, or making bill payments through an account. The effective interest rate may be much lower because the bonus rates are usually capped to a certain amount. In other words, they are not uniformly applicable to all balances of all depositors.
Members may consider transferring their OA savings to the Special Account (SA) to earn a higher interest rate. Balances in the SA currently earn 4% to 6% per annum. In 2017, over 20,000 members transferred nearly $470 million into their SA.
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