Debated in Parliament on 13 Apr 2015.
Ms Foo Mee Har asked the Minister for Manpower whether interest rates for CPF accounts will be revised upwards in line with rising interest rates and, if so, how will this be implemented.
Mdm Speaker, the CPF interest rates are pegged to returns on investments of comparable risk and duration in the market. Hence, changes in the yields on market instruments, such as Singapore Government Bonds and fixed deposits, will automatically have an impact on CPF interest rates through the interest rate pegs.
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 on an annual basis. This ensures that the CPF interest rates remain sensitive to market conditions.
However – and it is important to highlight this – to shield members from the risk of low market interest rates, the Government has maintained a floor interest rate of 2.5%, or 3.5% for balances of up to $20,000, for the Ordinary Account and a floor interest rate of 4%, or 5% for balances of up to $60,000, for the Special, Medisave and Retirement Accounts (SMRA). These floor rates are considerably higher than the computed interest rates currently of about 0.2% for the OA and about 3.4% for the SMRA, based on the interest rate peg formula.
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So, if market interest rates rise sufficiently, such that the interest rate pegs are above the floor interest rates, then the interest paid to members for the respective CPF accounts will be adjusted upwards accordingly.
Madam, I thank the Minister for his answers. I have one supplementary question for the Minister. As the Minister has explained, currently, the CPF pays a floor rate which is actually very attractive considering the current low interest rate scenario, thereby helping CPF members accumulate savings despite the low interest rate environment. So, I would like to ask the Minister, would the Government consider preserving that positive difference between the current floor rates that they are offering to CPF members as the interest rate changes?
Let me ask it again: can CPF consider a guaranteed premium rate over market interest rates to at least preserve the current positive differences? Currently, there is a floor rate that is offered. So, despite a very low interest rate offered in the market, there is a floor rate of 2.5% for Ordinary Account and 4% for the Special Account. But as the interest rate increases, that gap, the positive difference that a CPF member enjoys, is likely to narrow if CPF rates are not adjusted accordingly.
So, what I am asking is, given that the people are beginning to understand the attractive interest rates that members are getting on their CPF accounts – but it is a moving target, as things are now, market interest rates are also expected to go up – would the Minister adjust the interest rates of CPF accounts in tandem with the market interest rates so that CPF members can enjoy a guaranteed positive spread?
Mdm Speaker, I would like to thank the Member for the supplementary question. I am sure all of us will, generally, if given a choice, prefer much higher interest rates. As I have mentioned, we will review it regularly. It is important for us to do that. What is important is to make sure that the CPF system as a whole benefits. For example, the additional plus 1% that is provided under the SMRA account and, especially, recently, with the announcement that the first $30,000 at the age of 55 or 65 would attract another additional 1%. All this is a sum total package. It is meant to keep the CPF system viable and to continue to make sure that it is adequate in terms of supporting our retirement adequacy. We look at it holistically. Reviewing the interest rates will be part of that whole process. That is something that we will continue to do.
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