Mr Chua Kheng Wee Louis asked the Minister for Manpower in computing the CPF Ordinary Account interest rate based on the three-month average of major local banks’ interest rates (a) which are the banks identified as major local banks and what are the criteria for selection; (b) what are the types of interest rates and parameters used in the determination; and (c) whether there has been a change in the banks or interest rate parameters used since the formula was introduced.
The Minister for Manpower (Dr Tan See Leng): Mdm Deputy Speaker, CPF interest rates are pegged to returns on investments of comparable risk and duration in the market.
Ordinary Account (OA) savings is in a liquid account that can be withdrawn at any time for home purchases, for servicing mortgage loans or other specified purposes such as investments.
Mdm Deputy Speaker: Minister, I would just like to check. Are you taking Question Nos 9 and 10 together?
Dr Tan See Leng: Oh, yes. Sorry, that switch from energy to CPF is quite a significant switch! [Laughter.] Can I take Question Nos 9 and 10 together, please?
Mdm Deputy Speaker: Please do.
Dr Tan See Leng: Thank you. I apologise. Ordinary Account (OA) savings is in a liquid account that can be withdrawn at any time for home purchases, for the servicing mortgage loans or other specified purposes such as investments. Thus, the OA interest rate is pegged to the three-month average fixed deposit and savings rates of our three major local banks which are DBS, UOB and OCBC. These three banks have a larger share of domestic deposits than other banks.
The formula was last changed in 1999 when the ratio of fixed deposits to savings was updated from 50/50 to 80/20. So, 80% fixed deposit, 20% savings. This was done to reflect the longer duration that CPF OA monies remained with CPF Board. As stated in the CPF Board’s press release in May 2022 which announced the CPF interest rates effective from July to September 2022, the local banks’ three-month average interest rate was 0.09%. Based on our latest estimates, the interest rate remains at around 0.09%.
The Special, MediSave and Retirement Account, or SMRA, interest rates are pegged to the 12-month average yield of 10-year Singapore Government Securities plus 1%. The peg was 2.72% as stated in CPF Board’s May press release. It is around 3% based on our latest estimates. CPF Board will announce in September 2022 the CPF interest rates effective from October to December 2022.
As these are below the effective floor rates for these accounts, the interest rates for the OA and SMRA are maintained at 2.5% and 4% respectively. The Government has maintained the floor rate of 4% for the SMRA since 2008 and we will continue to review this on an annual basis. Therefore, 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. If the pegged rates exceed the floor rates, members will correspondingly earn the higher interest rates on their CPF savings.
There is some time-lag in CPF interest rate adjustments to avoid subjecting members to unnecessary fluctuations. Members with HDB concessionary loans who pay the prevailing OA interest rate plus 0.1-percentage point also benefit from the stability vis-à-vis the market mortgage rates. This is the case when interest rates are rising, but the converse also applies when interest rates are falling.
The Government will continue to pay the 1% of extra interest on the first $60,000 of members’ combined CPF balances as well as an additional 1% on the first $30,000 of post-55 members’ combined CPF balances to help boost their retirement savings. This means members below age 55 can earn up to 5%, while members aged 55 and above can earn up to 6%. Members can also transfer their OA monies to the Special or Retirement Account to earn the higher risk-free rate. I want to emphasise that this is risk-free.
We will continue to review CPF interest rates periodically. The interest rates on the Ordinary Account, Special Account and MediSave Account are reviewed quarterly, every three months, while the interest rate on the Retirement Account is reviewed annually.
Mdm Deputy Speaker: Mr Louis Chua.
Mr Chua Kheng Wee Louis (Sengkang): I thank the Minister for the reply. I have two supplementary questions. The first is in relation to Member Henry Kwek’s question, in terms of the extra interest that can be granted, especially in the inflationary environment.
I note that if you look at the CPF’s monies, they are invested in special SGS Securities and basically these earn for the CPF Board a coupon rate that is pegged to CPF interest rates that members receive. If you look at the over the last 20 years, I think the GIC portfolio nominal returns were about 7% per year. So, what will be the hurdle for the Government to consider granting extra interest rates, as it has done from January 2008 and 2016?
The second supplementary question is in relation to the formula which Minister shared that was changed in July 1999. So, it has been more than 20 years since. I was wondering whether the Government will consider reviewing this formula. Because even if you look within the fixed deposits and savings rates for the banks, I just had a look last night. Just for DBS, for example, if you look at the 12-month deposit rate, for balances of $20,000 to $50,000, it is 0.05% which is indicated on the CPF Board’s website. But for less than $20,000, then, the amount for a 12-month deposit rate would be 1.15% instead. And I think over the last few days, the various local banks have also raised their interest rates for their savings accounts such as the Multiplier and so on. So, whether or not these changes in the account types would prompt the CPF Board to review its pegging of the formula?
Mdm Deputy Speaker: Minister.
Dr Tan See Leng: I thank the Member for his two supplementary questions. Let me put this into a broader perspective and we also welcome suggestions. Many of the policies are also decided with input from an Advisory Panel and a Board as well.
The CPF system is aimed at giving members over the longer horizon better security in retirement and old age.
I think what the Member was alluding to, in terms of all of these bank accounts, Multiplier accounts and so on, these are very short-term, volatile instruments. I do not want to sort of belabour the point in taking up too much time to go into an extended discussion on this thing itself.
Like I said, the emphasis is really on long term. For us in being custodians of members’ monies, we take a very long-term view in providing members with a fair rate of return. The CPF interest rates, I want to re-emphasise this, continues to be attractive. Members below aged 55 can earn up to 5% while members aged 55 and above can earn up to 6%. Members can also transfer their Ordinary Account monies to the Special or Retirement Account to earn the higher – and I want to emphasis on this again – the interest rate is risk-free. Right? I think that really tells you how secure your savings are.
To his point about the longer-term returns as to whether we can peg it, if you look at where we are today, we peg the rates to the 10-year Singapore Government Securities plus 1%. The pegged rates have been below 4% since the global financial crisis. This is since 2008. So, we are looking at about a 14-year horizon when the peg was introduced.
The average delta, that mean the difference, the incremental difference that CPF has paid is 0.9%. It is quite substantial. That is just for the SMRA.
For the Ordinary Account, the interest rate peg has been below the legislated minimum floor of 2.5% because, if you appreciate the fact that for the Ordinary Account, we pegged it to the prevailing interest rates of the three local banks – DBS, UOB and OCBC. So, using the peg with our legislative minimum floor of 2.5%, since the 1 July 1999, the average delta is double that of the SMRA, which is at 1.8%. And again, I want to emphasise to the hon Member, Mr Louis Chua that this is risk-free.
So, I think that the rates that are chosen, these are effective rates, basic rates with no further conditions. What the Member was talking about earlier on, in terms of the banks, promotional deposit rates, they are contingent on customers, providing fresh funds, or they are only valid for a limited period or for limited amounts of deposits.
Let us just take for example, the DBS multiplier account. The bonus interest rates are typically contingent on customers. If you look at the at the promotional materials and look at the fine print, they are contingent on customers fulfilling other criteria such as spending on credit cards or crediting of salary. The effective interest rate, which is what would impact all of us, right, may be much lower because the bonus rates are usually kept to a certain amount.
So, I think, in other words, as financial advisors, it behooves us to actually be very transparent to all of our clients that they are not – these benefits are not uniformly applicable to all balances of all the depositors.
Ministry of Manpower
2 August 2022