Interest on Special, Medisave, Retirement accounts to be tied to long-term bond yield
(SINGAPORE) The buzz that has surrounded changes in the CPF scheme was given a new direction yesterday, when Manpower Minister Ng Eng Hen highlighted a significant move in the offing.
The interest rate on savings in the CPF Special, Medisave and Retirement Accounts (SMRA) will no longer be 4 per cent from next year, but will be pegged to an appropriate long-term bond yield.
'The new SMRA rate will be a little lower, based on current yields, when we introduce it. But over time it should be more than 4 per cent,' said Dr Ng.
Currently, the SMRA interest rate is pegged to the prevailing Ordinary Account (OA) interest rate, earning an additional 1.5 percentage points above this rate.
The current OA rate is 2.5 per cent while SMRA savings earn 4 per cent.
Since the new SMRA rate will be 'pegged to the market', there 'will be fluctuations but it will be less volatile than equities', said Dr Ng.
Dr Ng said that the exact formula for the new peg as well as the benchmark long-term bond rate to be used will be announced during his ministerial statement in Parliament.
Currently, 20-year Singapore government bonds have yields-to-maturity of about 3.3 per cent, but Dr Ng expects the rate to be more than 4 per cent over time.
Speaking to the media yesterday, Dr Ng injected more clarity into the debate on CPF changes when he elaborated on the proposals.
For one thing, he cooled industry speculation that the private sector would probably be asked to manage the proposed compulsory annuity scheme. In fact, CPF Board could well administer the scheme itself, Dr Ng said.
He also assured CPF members that the bulk of their Minimum Sum could still be drawn down, as only a small portion of it would go towards the annuity premium.
Prime Minister Lee Hsien Loong had announced in his National Day Rally speech that some form of annuity would be made compulsory for CPF members.
Dr Ng said the government had still not decided who would administer the scheme.
'But as I outline the scheme - what we want to do - it gives a certain clarity, and if the industry can offer attractive terms and propositions, we are open to them participating,' he said.
The Minimum Sum is aimed at providing CPF members payouts after their drawdown age of 65 until they are 85 years old.
CPF members will receive the annuity payouts after the age of 85.
'The basic idea that we are after...is what I call Very Long Life Expectancy Protection. If you are lucky enough to live past 85...then I want to make sure that you have some savings that can start paying you out after 85,' said Dr Ng.
Some members may want the annuity payouts to go to their family should they die before the age of 85, but such a scheme would mean higher premiums as there would be no pooling of risk, said Dr Ng.
Others thought they did not need the scheme as they were unlikely to live to 85. This was a myth that Dr Ng was anxious to debunk.
Statistics showed that for people here who reach 62, half will live beyond the age of 85. 'This means that 50 per cent might outlive their retirement sums, and that's what I want to cater to,' he said.
The annuity payouts would be small to start out with - around a subsistence level which is about $250-$300 by today's standards. This is so that the CPF member will not have to pay a large premium upfront and can have more in his Minimum Sum at drawdown age.
Another key strategy to ensure that Singaporeans have enough savings for their old age is to increase the returns on CPF savings.
The Prime Minister had announced a one percentage-point increase in interest on the first $60,000 in a CPF member's combined CPF accounts, with not more than $20,000 from the OA account.
Dr Ng said that this additional interest on the maximum $20,000 in OA savings will be paid into the Special Account, instead of the OA. The remaining 2.5 per cent interest will continue to be paid into the OA.
'That makes sense because I am not giving you that extra one per cent to buy a larger home if you can't afford it,' said Dr Ng. This extra interest is for retirement needs.
This $20,000 in OA savings will also not be available for investment under the CPF Investment Scheme.
Industry players have said that with this change, CPF members may be denied higher returns available in the market.
But Dr Ng pointed out that CPF members who invest on their own typically receive less than the 2.5 per cent interest guaranteed in the OA by CPF.
'Our own data suggests that more people have been less smart than they thought.'
Between Oct 1, 2005 and Sept 30, 2006, about 45 per cent of CPF members who invested their CPF savings suffered losses, while another 32 per cent had returns of less than 2.5 per cent.
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