No change to 'generous' CPF interest rates amid inflation, with floor rates still higher than bank rates: Tan See Leng

SINGAPORE — The interest rates for the Central Provident Fund (CPF) will remain unchanged for now because interest rates at banks continue to be below the effective CPF floor rates.

Manpower Minister Tan See Leng said this in Parliament on Tuesday (Aug 2), adding that the CPF interest rates will be reviewed periodically.

Interest rates for CPF — where employed residents hold accounts and contribute part of their earnings to save for retirement, medical and other needs — are maintained at a floor rate of 2.5 per cent for the Ordinary Account, and 4 per cent for the Special, Medisave and Retirement Accounts.

In a CPF Board statement in May, when it announced the CPF interest rates effective from July to September, the three-month average interest rate of the top three Singapore banks was 0.09 per cent, and based on latest estimates, the rate remains at this level. 

Therefore, despite the current climate of high inflation, the CPF interest rates will not be changed. 

Dr Tan was responding to questions posed by Mr Henry Kwek, Member of Parliament (MP) for Kebun Baru, and Mr Louis Chua, MP for Sengkang Group Representation Constituency.

They both asked questions relating to whether the CPF interest rate paid on members' funds will be raised for the next few years to compensate for the high inflation rate, which is expected to persist for some time. 

Mr Chua also asked a supplementary question on whether the CPF Board would review its interest rate formula, which is pegged to the top three Singapore banks' interest rates, given that the banks have raised their interest rates over the last few days. 

Dr Tan replied to say that the CPF system is aimed at giving its members better security in retirement and old age over the long term, and that interest rates offered by banks are more short term and volatile. 

HOW CPF INTEREST RATES WORK 

The CPF comprises four components:

• The Ordinary Account is for housing, payment for insurance and investment
• The Special Account is for old age and investment in retirement-related financial products
• The Medisave Account is for hospitalisation and approved medical insurance
• The Retirement Account is for monthly retirement payouts for members aged 55 and above

Dr Tan explained that the interest rate for the Ordinary Account is pegged to a three-month average fixed deposit and savings rates of the three major Singapore banks: DBS, OCBC and United Overseas Bank, because these three banks "have a larger share of domestic deposits than other banks".

The interest rate formula had been the same since 1999, where the ratio of fixed deposits to savings is 80 to 20, to reflect the longer duration that money in the Ordinary Account remain with the CPF board. 

For the Special, MediSave and Retirement Accounts, the interest rates are pegged to a 12-month average yield of 10-year Singapore Government Securities, plus 1 per cent. The peg was 2.72 per cent as stated in CPF Board’s May announcement, and it is around 3 per cent based on latest estimates, Dr Tan said.

Singapore Government Securities are investment options and interest-earning debt instruments issued by the Monetary Authority of Singapore on behalf of the Government.

At the moment, the pegged rates for all the above CPF accounts are below the floor interest rates, which is maintained at 2.5 per cent for the Ordinary Account, and 4 per cent for the Special, MediSave and Retirement Accounts. 

Dr Tan added that the Government has maintained the floor rate of 4 per cent for the Special, MediSave and Retirement Accounts since 2008 and will continue to review this yearly.

"Therefore, despite the low interest rate environment since the Global Financial Crisis (in 2008), the Government has continued to pay generous interest rates due to the floor rates.”

Dr Tan also said that if the pegged rates exceed the floor rates, members will correspondingly earn the higher interest rates on their CPF savings.

He explained further that there is "some time-lag in CPF interest rate adjustments to avoid subjecting members to unnecessary fluctuations".

For instance, CPF members with Housing and Development Board (HDB) concessionary loans who pay the prevailing Ordinary Account interest rate also benefit from the stability with regard to market mortgage rates.

"This is the case when interest rates are rising, but the converse also applies when interest rates are falling."

Dr Tan said that the CPF Board will continue to review its rates 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."

The CPF Board will announce in September its interest rates effective from October to December.

FORMULATED FOR LONG-TERM STABILITY 

Responding to Mr Chua's point that Singapore banks are raising interest rates, Dr Tan said that these financial institutions have a short-term approach that is different from the objectives of CPF Board. 

"I think what (Mr Chua) was alluding to in terms of all of these bank accounts, multiplier accounts and so on, these are very short-term volatile instruments," he said. 

"The emphasis (for the CPF Board) is really long term... So for us in being custodians of members’ monies, we take a very long-term view in providing members with a fair rate of return." 

Dr Tan added that in addition to the interest rates being generous, these deposits in the CPF are also risk-free. 

"I think that the rates that are chosen, these are effective rates, basic rates with no further conditions." 

He added that banks that offer attractive interest rates often do so conditionally. 

He gave the example of the multiplier account offered by DBS, which on Monday increased rates up to 0.8 percentage point, with customers able to earn a maximum of 3.5 per cent a year. However, this rate applies only to customers who have account balances of between S$50,000 and S$100,000.

"If you look at the promotional materials and look at the fine print, they are contingent on customers fulfilling other criteria such as minimum spending on credit cards, crediting of salary or making bill payments through an account," Dr Tan said. 

"The effective interest rate, which is what would impact all of us, may be much lower because the bonus rates are usually kept to a certain amount."