SINGAPORE - The Central Provident Fund (CPF) scheme may not provide the highest returns, but the returns are fair, and also one of the safest in the world, said Deputy Prime Minister Tharman Shanmugaratnam in Parliament on Tuesday.
This is because CPF interest rates are pegged to comparable investments in the market, and are also guaranteed by the Government, he said, in a statement that explained how CPF monies are invested and why the interest rates are set where they are.
The questions had been asked by four MPs.
"The CPF is not a perfect retirement savings scheme, but it is among the better regarded internationally," he said.
Explaining how CPF interest rates are determined, Mr Tharman, also the Finance Minister, said the basic principle has been to peg CPF interest rates to "returns on investments of comparable risk and duration in the market".
The interest rates are also structured to benefit members with small and medium-sized balances more, so there is an extra interest paid on the first $60,000 of balances, he said. Those with smaller balances comprise the majority of CPF members.
In determining the interest rates, the Government has distinguished between the purpose of the Ordinary Account (OA), and the longer-term Special, Medisave and Retirement accounts (SMRA) meant for retirement.
Since OA savings can be withdrawn at any time for home purchases or education, and is a "liquid account", its interest rate is pegged to the one-year fixed deposit and month-end savings rates of the major local banks, said Mr Tharman.
But unlike market interest rates, he said, the CPF pays a guaranteed minimum rate of 2.5 per cent to 3.5 per cent depending on the amount of balances in the OA.
The Government also provides subsidies through the Budget to CPF members, which are targeted especially at lower and middle-income members, such as through Workfare payments and housing grants.
So they end up with higher balances than they would have had on their own, and in effect earn higher interest rates each year, said Mr Tharman.
Responding to a question on whether CPF interest rates could be pegged to those on 10-year Singapore Government Securities, he noted that the interest rate on the ordinary account, which is pegged to market deposits, is fair, and has been earning higher returns than the 10-year government bond.
For SMRA funds, interest rates are pegged at 1 per cent above the yield of 10-year government bonds.
Mr Tharman explained that the best peg would have been the 30-year government bond, but that it was not yet available when SMRA interest rates were determined in 2007.
This is because 30 years is the typical length for which these long-term retirement monies are held for.
In order to approximate that, the interests rates of the SMRA have therefore been pegged to the 10-year bonds, and then adding another 1 per cent.
This was in fact "a little generous", he said, as it was higher than what has been observed for 30-year bonds in international markets.
The SMRA is therefore a "fair system of returns", he said, explaining that CPF in essence pegs SMRA returns to the returns on long term government bonds, while also paying a minimum interest of 4 per cent to 5 per cent "that is well above market rates in the current environment".
"We have shielded members from the risk of low market rates," he said.