The government is pegging the interest rate of CPF's Special, Medisave and Retirement accounts (SMRA) to the 10-year Singapore Government Securities (SGS) so that the CPF scheme can be sustainable in the long term. This was according to Second Finance Minister Tharman Shanmugaratnam.
Speaking in Parliament on Tuesday, he also explained why the government would not underwrite a national pension plan based on its earnings through Temasek Holdings and the Government of Singapore Investment Corporation.
The government is making a key change by pegging the interest rates for SMRA to the yield of the 10-year Singapore Government Bond.
There have been concerns that by so doing SMRA interest rates would go below what is currently being paid out.
But Mr Tharman explained why it is important to take the step.
He said: "Our fundamental principle must be to peg CPF interest rates to those in the financial markets, to instruments of comparable risk and duration. This is because our ability to meet our CPF obligations will also depend on financial market conditions. For the CPF scheme to be sustainable, not just now, but in the decades to come, it should not become an interest rate subsidy scheme."
Under the changes, the new rate for SMRA will be one percentage point higher than the 10-year Singapore Government Securities.
With the 10-year SGS now standing at 3 percent, this matches the 4 percent that is being paid out for those accounts right now.
He said: "We look at what the markets are expecting for the future, and it is for the 10-year SGS rate to be above 3 per cent on average over the next 5 to 10 years and hence for the new SMRA to be above 4 per cent. Any scheme that provides higher returns must come with higher risk. The new SMRA offers the prospect of better returns over time but with slightly higher interest rate risk."
Some MPs have called on the government to use its reserves to underwrite a national pension plan, pointing out that Temasek Holdings achieved total shareholder returns of 18 per cent each year on average since its inception.
But the Minister said this would not be prudent: "It would be unwise to forecast future returns for either Temasek or GIC on the basis of past returns. This has to be a disciplined process of assessing the investment environment, looking forward to the next 5 to 10 years, and projecting what we can realistically expect in investment returns."
However the minister notes that if the government earns more on its investments, it will then decide on the most prudent use of the resources in its budget. - CNA/ch
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