Will Peg Be For Better Or Worse?

Source : TODAY, Thursday, September 6, 2007

CPF rate, tied to bonds, may fluctuate with market

Letter from LEONG SZE HIAN

I REFER to media reports that the rates of the Central Provident Fund (CPF) Special, Retirement and Medisave accounts will be modified next year.

Many Singaporeans might be wondering whether the peg to “an appropriate long-term bond rate” may result in a higher or lower average rate, compared to the 4-per-cent fixed rate now.

What is the basis for the statement that “the new rates will be lower initially than the current 4 per cent, but it should do better than 4 per cent over time”?

Bonds fluctuate and are dependent on various factors such as interest rates and default risks. There is no guarantee that in the future, these bonds “should do better” than the present.

Why give 1 per cent more on the first $60,000 in the CPF and then announce two days later, that the 4-per-cent rate for the three accounts will no longer be guaranteed?

Half of all working CPF members have $45,000 or less in their CPF accounts. I would like to know how much of the $45,000 that is allocated to the three accounts are affected by the rate change, compared to the portion that is eligible to earn the extra 1 per cent?

Has any study been done to estimate the net effect on CPF members? Will most Singaporeans be better or worse off?