Govt : CPF Move Won't Hit Capital Market

Source : The Business Times,Tue, Sep 18, 2007

Even as he spelt out how all CPF members would enjoy higher interest rates on their contributions and have a more comfortable cushion for their retirement years, Manpower Minister Ng Eng Hen said that the restrictions put on investing in the CPF Investment Scheme would have 'no adverse impact' on the capital market.

Under the proposals first outlined by Prime Minister Lee Hsien Loong at the National Day Rally last month, CPF members would be paid an additional one percentage point interest on the first $60,000 in their accounts, which would go towards boosting their retirement savings.

The $60,000 may comprise up to $20,000 from the Ordinary Account (OA) and the rest from the Special, Medisave and Retirement Accounts (SMRA).

While all the OA monies can still be used for existing housing, CPF insurance and education plans, Dr Ng yesterday said the first $20,000 in both the OA and Special Account can no longer be used in the CPFIS. The extra interest aims to provide a risk-free nest- egg for Singaporeans who are living longer.

The restrictions will kick in from April 1 next year and money already invested in CPFIS will not be affected. But some have speculated on the impact of this move on the capital market.

'Even after these restrictions, $42 billion will still be available for use in the CPFIS,' Dr Ng told Parliament yesterday.

According to CPF figures in June, about $81 billion was available for the CPFIS.

But as the government moves to provide more support to Singaporeans who could be in danger of outliving their retirement savings, it has unveiled a series of reforms to the CPF scheme.

While the OA rate, which is pegged to banks' interest rates, has until now been 2.5 per cent, the SMRA rate has been 1.5 per cent higher at 4 per cent. The SMRA rate is now being re-pegged to the 10-year Singapore Government Security (SGS) rate plus one per cent.

The new SMRA rate pegged to the 10-year SGS will be set quarterly.

'A month before the next quarter, we will compute the new SMRA rate from the average daily yields of the 10-year SGS benchmark of the previous year,' Dr Ng said. 'The average 10-year SGS yield computed on this basis would now be 3 per cent.'

Based on the revised SMRA formula, the SMRA rate would be 3 plus one per cent, or 4 per cent - the same as what members currently earn.

But historically, this yield has been higher.

'Had the SMRA formula been in place since the first issue of the 10-year SGS (in 1998), the SMRA rate would have averaged 4.5 per cent,' Dr Ng said.

Of course, the ideal peg would have been a 30-year SGS because that is the average time that the members' SMRA monies stay in their accounts. Since Singapore does not have such 'long bonds', the 10-year SGS was picked as the peg for the SMRA rate because it is actively traded.

The additional one per cent would provide for the difference expected between the interest on the 10-year SGS and the 30-year SGS, if it had existed.

Dr Ng said the new interest rates will kick in on Jan 1 next year. To help CPF members adjust to the floating SMRA rate, CPF will keep the 4 per cent floor for the SMRA rate for the first two years.

'The 4 per cent floor will also apply to the extra interest tier, in the very unlikely event that the 10-year SGS rate falls below 2 per cent,' Dr Ng said. 'After two years, the 2.5 per cent floor rate will apply for all accounts as prescribed under the CPF Act.'

He said all CPF members will enjoy higher interest payments under the new system, which will cost the government at least $700 million more in the first year - and more in subsequent years.

But Dr Ng said the government is not giving handouts through the CPF system, which is not meant to be subsidised.

'We have put in place a long-term framework which provides a fair rate of return on CPF monies that compares well with any offer from private pension plans,' he said. 'Most importantly, our CPF system minimises the financial risk to members.'

But CPF members may still run out of savings if they live beyond 85 years. So the government is setting up a committee to look into starting a National Longevity Insurance Scheme, headed by Professor Lim Pin, currently chairman of the National Wages Council.

'The extra interest that members will get in the new CPF system will be more than enough to pay for this longevity insurance,' Dr Ng said.

He also said the government will be flexible in accommodating the different circumstances of CPF members and offer different ways to provide for their full-life expectancy.

Members of Parliament generally welcomed the CPF reforms, but some are concerned that yields from long-term bonds will fall, reducing the SMRA rate.

'Can the government instead guarantee a minimum 4 per cent interest rate, which is what Singaporeans are already enjoying regardless of the market performance?' said Lam Pin Min (Ang Mo Kio).