Long Term, You'll Get More

Source: The Straits Times, Aug 22, 2007

MANPOWER Minister Ng Eng Hen yesterday fielded questions about the recent Central Provident Fund changes.

The interest rate for the Special, Medisave and Retirement Accounts (SMRA) will now be pegged to long-term bond rates. What will happen to the rates during severe economic downturns?

There will be some fluctuations that will move together with financial markets, but they'll be less volatile than equities. So if you look, for example, at our historical bonds, there is some fluctuation, but it's a narrow band and, more or less, it's within a smaller fluctuation range.

So yes, there might be some instances where it will be slightly below our current rates, but over the longer period, our projections show that it will be more than what you get now for your SMRA and that's the intent.

What's your response to people who are not happy with the delay in the CPF draw-down age from 62 to 65?

We never expected people to thank us for this. We know it's unpopular. But I think from what I read of what people are saying, they know it's sensible. They understand... the head has accepted it. The heart is taking slightly longer, but that's to be expected.

Why give only one percentage point more on the first $60,000 of combined CPF accounts?

PM said this is not tikam-tikam. This has to go to the President. We have to make sure that this is financially sensible.

For example, for the OA (Ordinary Account), the (first) $20,000 will draw 3.5 per cent. Can you get an equivalent product in the market, risk-free, that, in essence, you can still use for housing and education and get 3.5 per cent? Very hard to get.

For the SMRA rate, it will be very competitive and it will hard to match, risk-free, for the tenure. It cannot be out of sync with what the financial markets offer because then it becomes a subsidy.

Will there be an opt-out option for those who prefer to invest the $60,000 on their own?

That's conceivable, maybe down the line. It would be very complex now. But I would say that for somebody who feels that he can invest on his own, then he will be earning more. Beyond $20,000 in the OA, you can still take it out.

When the higher CPF interest kicks in, then the restrictions will come into place as well for investments. Will that affect people who have already invested their CPF savings?

Let me assure you that even after the new restrictions, there will be ample billions that will still be investable... quite tens of billions to be investable.

Those that are currently already in funds, we will still allow them. There will be no changes to that. They will still continue, so not to worry. We won't touch those funds.

Our message is not to send a signal to say that I don't want you to invest. What we're saying is that for those below $60,000, we think that it's safer and we're providing you higher interest.

Honestly, in our assessment, it's going to be very hard for the market to outbid the rates that we're going to give you, either on OA or in the SMRA, as a risk-free aspect.

So we feel some justificationthat this is long-term money to keep in-house because we really don't want you to take the higher interest that we give you and then invest, lose the money and then come back for higher interest again. Then all our efforts are wasted.

Can people opt out of the compulsory annuities scheme?

Although people say, 'well, why can't I provide for myself?', the reality is when you're old, if you don't make the provision and there's nobody to support you, then the rest of Singaporeans will have to support you. So I think that it's sensible to make it compulsory.