CPF Interest Rates Will Be Fair: Tharman

Source : The Business Times, September 19, 2007

New SMRA peg offers prospect of better returns over time, he says

Mr Tharman: rosy outlook for the 10-year SGS rate

INTEREST rates will be fair and reasonable for CPF members, and sustainable in the long haul, as a result of the latest changes, Second Minister for Finance Tharman Shanmugaratnam told Parliament yesterday.

Prime Minister Lee Hsien Loong first announced the coming CPF reforms in his National Day Rally speech, and this was followed up by Manpower Minister Ng Eng Hen's elaboration on these measures aimed at providing Singaporeans with better security in retirement and old age.

'The new SMRA peg offers the prospect of better returns over time but with slightly higher interest rate risk,' Mr Tharman said. 'Any scheme to provide higher returns must come with higher risk.'

But the extra one per cent interest that the majority of CPF members are getting will more than offset this increased interest rate risk, he said.

Mr Tharman noted that there was a rosy outlook for the 10-year SGS rate, with markets expecting it to be above 3 per cent on average over the next five to 10 years. This means the new SMRA rate would be above 4 per cent.

Mr Tharman said it would have been ideal to peg the SMRA rate to a 30-year SGS long rate - if there had been such a bond. The 10-year bond was chosen because of its liquidity, while the one per cent spread will more than make up for the spread between the 10-year and 30-year bond, he said.

'The new SMRA rate is a more rational scheme than the old one, which provided an arbitrary fixed premium of 1.5 per cent over a short-term interest rate peg,' Mr Tharman said. 'By any reasonable assessment, the new rate of 10-year SGS plus one per cent offers a very fair long-term return for deposits which have no risk of losing their value, no capital risk, no currency risk.'

He added that the President has been briefed on the CPF changes and is satisfied that the changes will not cause a draw on past reserves.

Denying suggestions from some Members of Parliament that the new interest rates will leave Singaporeans worse off, Mr Tharman said the new formula would mean that 80 per cent of members, who have balances of $60,000 or less, would immediately be earning 5 per cent on all their SMRA.

To keep this CPF formula self-sustaining, he noted that the government has to pay market rates for CPF interest, rather than above market rates, and not provide a 4 per cent floor for the SMRA rate indefinitely.

Earlier, Workers' Party MP Low Thia Khiang had urged the government to set up a 'longevity fund' and provide payouts to people who have lived beyond the age of 85 and who are in financial difficulties.

Mr Tharman said he was not in favour of this suggestion as pressures would inevitably build up over time for the government to spend more, to grant more and to subsidise more, which would bring a need to draw into past reserves.