Peg CPF Rate To Bonds But Keep 4% Minimum

Source : The Straits Times, Forum, Aug 31, 2007

I REFER to Manpower Minister Ng Eng Hen's recent proposal to change the interest structure for CPF members' Special, Retirement and Medisave accounts.

Presently the interest rate for the Ordinary Account is based on the 12-month fixed-deposit and month-end savings rates of the major banks. For balances in the Special and Retirement accounts, members earn an additional 1.5 percentage points over the normal interest rate. From Oct 1, 2001, this also applied to the Medisave account. This is to help CPF members build up their Medisave savings in view of escalating medical costs.

Under the CPF Act, the Board pays a minimum interest of 2.5 per cent per annum when the CPF interest formula yields a lower rate. The corresponding minimum for the Special, Retirement and Medisave accounts is 4 per cent. The provision of the minimum rate is commendable, and serves to preserve the value of CPF savings. This has underpinned the social compact regarding CPF savings between the Government and the people for as long as one can remember.

The importance of this minimum rate can be seen from the fact that the CPF formula had yielded a lower rate for eight years, from July 1999 till now. I am sure many people are quietly thankful that there is a minimum rate during this prolonged period of low interest rate.

Recently, Mr Ng proposed pegging the interest rate for the Special, Retirement and Medisave accounts to 'long-term bond rates' with no minimum. He conceded that in the prevailing low-interest regime, the new rate would initially be lower than 4 per cent.

Going by past trends and present outlook, I am concerned that 'initially' is likely to be a fairly long period, with the interest rate shaved by 1 percentage point or even more.

Hence I suggest that the longstanding social compact on CPF interest rate be preserved, that is, to peg the rate to the long-term bond rate, but subject to the present minimum of 4 per cent per annum.

Either that or defer any change until the overall target date of 2012.

This will be fairer to CPF members, and will dispel any perception that the Government is taking from the Special, Retirement and Medisave accounts to fund the one-point bonus interest on the first $60,000 of CPF members' combined accounts.

Loke Yue Chong