What happens when 4% CPF rate ends in 2014?

Published by The Online Citizen on October 15, 2012

By Leong Sze Hian

I refer to the article “4% interest rate on CPF extended till end 2013” (ST, Sep 26).

It states that “Since Jan 1, 2008, SMRA savings have been invested in Special Government Securities, which earn an interest rate pegged to the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1 per cent.

2.5% floor rate?

The CPF SMRA interest rates will be pegged to that rate from Jan 1, 2014, subject to the statutory floor rate of 2.5 per cent per year that applies to all CPF accounts”.

As the yield of the 10YSGS is now at 1.45 per cent, does it mean that if the yield remains at this low level, the CPF SMRA rate may be just the floor rate of 2.5 per cent from 1 January, 2014?

What will happen to CPF Life payouts?

How will this affect the estimated life annuity payouts under the CPF Life scheme, as these are based on the SMRA rate of 4 per cent plus minus 0.25 per cent?

Cheap CPF funds to invest?

In such a scenario, how do we reconcile paying just 2.5 per cent for CPF funds which may then be channeled for investment to derive say a return of 6 per cent per annum?

In this connection, I understand that the Government Investment Corporation’s (GIC)  historical annualised return was about 6 per cent in US$ terms.

Any other countries keep the excess returns?

How much have Singaporeans’ CPF savings been in a sense, given to the Reserves, instead of being credited with the actual returns like Malaysia’s Employee Providend Fund (EPF)?

Are there any countries in the world which pay a low interest rate for the citizens’ pension funds to invest and keep the difference?

About the Author

Leong Sze Hian is the Past President of the Society of Financial Service Professionals, an alumnus of Harvard University, authored 4 books, quoted over 1500 times in the media , has been host of a money radio show, a daily newspaper money column, Wharton Fellow, SEACeM Fellow, columnist for theonlinecitizen and Malaysiakini, executive producer of Ilo Ilo (40 international awards), and invited to speak more than 100 times in about 25 countries on 5 continents. He has served as Honorary Consul of Jamaica and founding advisor to the Financial Planning Associations of Brunei and Indonesia. He has 3 Masters, 2 Bachelors degrees and 13 professional  qualifications.