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CPF issue: Retirement scheme fair and one of world's safest: DPM Tharman

The Straits Times | Tham Yuen-C | Tuesday, Jul 8, 2014

Madam Tan Kim Hing, 66, a housekeeping attendant at Royal Plaza on Scotts. The Central Provident Fund (CPF) scheme may not provide the highest returns, but the returns are fair, and it is also one of the safest retirement funds in the world, said Deputy Prime Minister Tharman Shanmugaratnam in Parliament on Tuesday, July 8, 2014.

This is because CPF interest rates are pegged to comparable investments in the market, and are also guaranteed by the Government, Deputy Prime Minister Tharman Shanmugaratnam said, in a statement that explained how CPF monies are invested and why the interest rates are set where they are.


Get the full story from The Straits Times.

Here are excerpts of DPM Tharman Shanmugaratnam's reply to parliamentary questions on CPF interest rates:

"The CPF is not a perfect retirement savings scheme, but it is among the better regarded internationally. As PM has stated, we want to improve the CPF to provide greater security in retirement, especially for those with lower wages and to help retirees cope with inflation. We also want to give those who are 'asset-rich and cash-poor' more convenient options to get cash from their homes.

"But as we seek to improve the CPF or to add any flexibility, we must retain its basic strengths and avoid the huge problems seen elsewhere:

"First, our CPF system is sustainable. There are no unfunded or sudden liabilities that will burden our children's generation;

"Second, the CPF offers some flexibility for members to withdraw savings, indeed more so than many other social security systems. In particular, by tapping on their OA savings, the vast majority of Singaporeans have been able to own their homes and service their mortgages with little or no out-of-pocket cash, which Minister Tan has just emphasised.

"Third, while the CPF scheme does not provide the highest returns, it gives fair returns and certainly one of the safest in the world. Few systems offer the guaranteed floors on interest rates - 3.5 per cent for OA and currently 5 per cent on SMRA for those with smaller balances, who comprise the majority of members, and 1 per cent less for larger balances. The interest rates are guaranteed by one of the few remaining triple-A rated governments in the world. The CPF also offers the option to members who wish to place more money in their SA account, or take higher risks through the CPF Investment Scheme (CPFIS) in the hope of higher returns;

"Fourth, on top of the guaranteed interest rates, the Government subsidises CPF members through the Budget in a targeted and sustainable manner. We provide significant help to lower income members to build up retirement assets, , by giving them housing grants in their OA and CPF contributions through the Workfare Income Supplement (WIS). Members of the Pioneer Generation also now get top-ups for life, in their Medisave accounts;

"Taken as a whole, our CPF system prepares Singaporeans well for the future. Based on current policies, a new entrant into the workforce today can expect to draw a retirement income of about two thirds of his last-drawn pay if he is a median income earner. This is around the OECD average. He gets a much higher ratio of his previous pay if he is a lower income worker, chiefly because of Government subsidies. As Minister Tan has said, our key concern is to help the current generation of older Singaporeans who have low CPF balances, due to their much lower wages in the past and the more liberal withdrawal rules then.

CPF pays fair interest rates

"Let me now address the specific questions on how CPF interest rates are determined. The current CPF interest rate structure was implemented in 2008. It was an enhancement, especially for members with smaller balances. We debated the changes in Parliament in 2007, as part of the broader package of reforms to strengthen retirement security.

"The fundamental principle is to peg CPF interest rates to returns on investments of comparable risk and duration in the market. We also structured the interest rates to provide greater benefit to members with small and medium-sized balances, by paying Extra Interest (EI) on the first $60,000 of balances. Interest rates on the Ordinary Account (OA)

"In determining the rates, we have to recognise the fundamental difference in the purpose of the OA compared to the longer-term SA, MA and RA (or SMRA). OA savings can be withdrawn at any time for home purchases and servicing mortgage loans, or education. It is a liquid account. The interest rate on OA has therefore been pegged to the 12-month fixed deposit and month-end savings rates of the major local banks. However, unlike market interest rates, it pays a guaranteed floor rate of 2.5 per cent, or 3.5 per cent for OA balances of up to $20,000. More than half of all members enjoy the full 3.5 per cent on their OA.

"Members also have options to earn more than these OA interest rates. They can transfer OA savings to the SA so that these become long term savings, earning higher returns. This is a useful option for those who have paid up their housing loans. Those who want to take on market risks in the hope of earning better returns can also invest part of their OA balances through the CPFIS.

"Furthermore, the CPF interest rates are not the only help members get to build up their savings. As I just mentioned, the Government also provides subsidies through the Budget to CPF members, targeted especially at lower and middle-income members. These subsidies in effect amount to a significant boost to what the typical low-income member earns on his balances7 . If we look at his OA in particular:

"On top of the 3.5 per cent interest rate on his OA, he gets Workfare payments and housing grants. When he sells his home to upgrade or downgrade later, the housing grant is returned to his OA as part of his savings for retirement. Based on current policies, these grants (amortised over his working life) will in effect grow his savings by at least 2.5 per cent per year over a 30-40 year working life. In effect, his savings 'earn' 6 per cent per annum through the combination of CPF interest rates and Government subsidies.

"This does not include the OA savings used to purchase the housing asset, which benefits separately from appreciation in housing value. As Minister Tan explained, his home is an important retirement asset, and based on its value he can withdraw monies from his CPF balances at age 55.

"The OECD highlighted this critical role of homeownership in its recent analysis of pension systems in the advanced countries. Homeownership "can make a big difference for many pensioners, both reducing the need for cash and providing a way to generate income later in life."

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