The Central Provident Fund (CPF) was established in 1955 as a compulsory scheme to help workers set aside savings for retirement. Interest rates earned on CPF balances depend on the account they reside in, and are benchmarked against what such monies could have earned if they had been invested in financial instruments with comparable risks and duration.
Money placed in the Special, Medisave and Retirement Accounts (i.e. SA, MA and RA respectively) tend to have a longer tenure and therefore enjoy a higher rate of return than those in the Ordinary Account (OA), which contains monies that may be withdrawn on demand for approved purposes such as housing. The interest rates of various CPF accounts are computed in the following manner:
- The OA interest rate is based on the 12-month fixed deposit and month-end savings rates of major local banks. It is subject to a floor rate of 2.5% per annum (p.a.) and adjusted quarterly.
- The interest rate for the SA and MA is based on the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, subject to a floor rate of 4% currently, and adjusted quarterly.
- New RA savings are invested in Special Singapore Government Securities2 (SSGS) which earn a fixed coupon equal to either the 12-month average yield of the 10YSGS plus 1% at the point of issuance, or 4% whichever is higher, adjusted yearly. The interest rate credited to the RA is then the weighted average interest of the entire portfolio of these SSGS, and adjusted yearly in January.
Currently, the interest rates are 2.5% p.a. for the OA and 4% p.a. for the SA, MA and RA1. Since 1 January 2008, an additional 1% interest p.a. has been paid on the first $60,000 of a member’s combined CPF balances (with up to $20,000 from the OA. )
This article looks at the 10-year annualised nominal and real3 rates of return on balances in the OA and SA4, and examines how these have changed from 1995 to 2010. Ten-year annualised rates can be thought of as average returns over a ten year period, smoothening year-on-year fluctuations. As CPF monies are generally long term in nature, 10-year annualised returns provide a useful indicator of the long-term returns of CPF monies.
Chart 1 shows the 10-year annualised nominal OA and SA rates of return5 from 1995 to 2010. The 10-year annualised nominal OA rate declined from 3.68% in 1995 to 2.80% in 2010, reflecting the volatile economic environment, as the OA rate is pegged to a market-based interest rate. The decline observed is likely due to the combined effects of various global events - dot.com bubble burst in 2001, the Gulf war and Severe Acute Respiratory Syndrome in 2003 as well as the global economic crisis experienced in 2008-2009.
In 1995, SA savings earned an interest rate that was 1.25% above the OA rate. This difference was subsequently increased to 1.5% in July 1998. Hence, the difference between the 10-year annualised nominal SA and OA rates has widened, with the 10-year annualised SA rate rising from 3.74% to 4.30% in the last 16 years.
Next, we take into account the effects of inflation and examine the 10-year annualised real rates of return for OA and SA savings (Chart 2). Unlike the 10-year annualised nominal OA rate, the real OA rate displayed a different trend, where it decreased slightly from 1.74% in 1995 to 1.06% in 1997 before increasing steadily to 2.15% in 2005. It remained fairly stable until 2008 when a sharp decline was observed, falling from 1.98% in 2007 to 1.26% in 2008. Thereafter, the rate remained fairly stable and registered 1.16% in 2010. The declines in real rates are likely due to the inflationary environment experienced in the last few years.
Similar to the real OA rate, the real SA rate displayed a similar trend, decreasing from 1.8% in 1995 to 1.36% in 1997, and then climbing steadily to peak at 3.57% in 2005. It declined subsequently, reaching 2.63% in 2010.
These fluctuations reflect the combined changes in the nominal rates of return and inflation. However, it is worth noting that despite the fluctuations, the real rates of return were always positive.
The CPF interest rate structure is a long-term framework which provides a fair rate of return. The 10-year annualised real rates of return on OA and SA balances have remained positive throughout the last 16 years in spite of inflationary episodes experienced in Singapore. In addition, as all balances left with CPF Board are guaranteed by the Government, they are essentially risk-free. The CPF interest rates, together with their guaranteed nature, help to preserve members’ savings for their retirement.