(Picture) : Minister of Manpower, Dr Ng Eng HenWHEN it was revealed last month that interest rates for the Central Provident Fund (CPF) Special, Medisave and Retirement Accounts (SMRA) would be pegged to longterm bond rates, there was much concern that the new system would be subjected to the vagaries of often-volatile financial markets.
Many wondered what would happen to the rates during a severe downturn, while others fretted about fluctuations.
Yesterday, many of these worries were laid to rest, as Manpower Minister Ng Eng Hen spelt out details of the new interest rate system.
It would be “essentially risk free” — allowing a member to gain when rates move up, and yet, ensuring that whatever he has accumulated in his accounts is completely protected and guaranteed.
Speaking on the CPF reforms in Parliament, Dr Ng said that from Jan 1, the SMRA interest rates will be re-pegged to the yield of 10-year Singapore Government Securities (10Y SGS) and an extra 1 percentage point would be added to this rate.
Currently, the SMRA interest rate is fixed at 4 per cent — or 1.5 percentage points above the Ordinary Account interest rate of 2.5 per cent. But, as Dr Ng explained, had the new SMRA formula been in place since 10Y SGS were first issued in 1998, the
rate would have averaged 4.5 per cent.
As a guide, the average 10Y SGS yield for the 12 months ending Aug 31 was 3 per cent.
If this average is maintained for the rest of the year, the SMRA rate would be 4 per cent, after adding the extra 1 percentage point under the new formula.
What’s more, with a further 1 percentage point in interest set to be paid out to the first $60,000 of a member’s combined CPF balances, he can look forward to an average of 5-per-cent interest for his SMRA balances for the $60,000.
Many considerations were taken into account before deciding on the new formula, said Dr Ng.
“It should be based on market returns for the same risk and duration that the SMRA monies stay in their accounts. It should be simple to understand, widely quoted and have no currency risk,” said the Minister.
Ideally, the best peg would be a 30-year SGS as this would be the average length of time SMRA monies stay in these accounts, he explained.
But 30-year SGS do not exist, with the longest duration bonds set at 15 or 20 years. However, these two bonds, unlike the 10Y SGS, are not actively traded and hence not suitable as a peg.
As such, said Dr Ng, the extra 1 percentage point interest under the new formula, “will adequately provide for the difference that we would expect between the interest on the 10Y SGS … and the 30Y SGS if it existed”.
The SMRA rate will be set every quarter. To help members adjust to this floating rate, the Government will keep the 4 per cent base rate for the SMRA until the end of 2009. This floor will also apply to the extra interest tier for the first $60,000 in members’ accounts, said Dr Ng.
From 2010 onwards, the 2.5 per cent floor interest rate will apply to all accounts as stated in the CPF Act.
The new SMRA formula aside, Dr Ng said that seven in 10 CPF members — or 55 per cent of all active members — would receive the extra one percentage point interest on all their CPF monies.
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