You read right, its 0.01% or 1/100 of 1%!
CPF has announced that the interest rate for the Special and MediSave Account (SMA) of Central Provident Fund (CPF) members will increase to 4.01% per annum, up 0.01% from 4%, for the three month period from July 1 to Sept 30. The interest rate for the Ordinary Account (OA) will remain unchanged at 2.5%. The interest rate for the Retirement Account (RA) will also remain unchanged at 4%.
Looking at comments on various social media sites, needless to say, the response was not one of excitement. A 0.01% increase for a three month period means that for every $100k in savings, one will receive a mere $2.50 extra in interest. For every $40k in savings, this translates to $1 in interest.
In the first place, how many of us have that much in our SMA accounts?
Why is CPF increasing SMA interest rates?
The increase in interest rate was due to an increase in the 12-month average yield of the 10-year Singapore Government Securities (SGS), which the SMA’s interest rate is pegged to.
The Government has maintained a floor interest rate of 4% for the Special, Medisave and Retirement accounts since 2008. This is the first time the rate for the SMA has gone above 4% since then.
It is worth noting that CPF has maintained its rate since then and did not cut interest rate even when interest rates were very low. Even till today, a 4% rate is slightly higher than other shorter term money market options such as fixed deposits and 6 month / 1 year treasury bills.
This is still not enough!
Although every cent counts, the general consensus is that this interest rate is not enough. Singapore’s headline inflation for April was 5.7%, 1.69% higher than the SMA account and 3.2% higher than the OA. Many investors are hungry for higher yields.
A 10 year bond like the 10 year SGS tends to reflect a mixture of short term interest rate expectations and longer term economic conditions.
Using a 12 month average yield means that it takes a while for the average yield to increase above 4%, but it will also take a while to fall below 4% baring any sudden interest rate movements.
This means that we can all look forward to the possibility that rates will remain above 4% for the fourth quarter of 2023.
Risk and return is correlated
For investors clamoring for higher yields, do remember that risk and return is correlated. Higher returns require higher risks, there are no free lunches.
For investors that treat the CPF funds as the bond portion of the investment portfolio. In actual fact, it is much safer than bonds as monies in CPF are not subject to price volatility. This would give the investor courage to invest their cash monies knowing they have a secured CPF retirement fund.
Although the CPF monies cannot be directly withdrawn baring any extreme circumstances, there is some flexibility as the CPF monies can be placed in alternative investments. Funds in both the OA and SA can be invested in products such as equities, unit trusts and commodities for people who are willing to take on more risk to obtain higher returns.
CPF vs other systems
There is a well known study carried out by Mercer in 2021 called the Global Pension Index which ranks 43 retirement income systems covering 65% of the world’s population. It looks at factors such as integrity, adequacy and sustainability. Singapore ranks #1 in Asia and #10th globally. Singapore ranks higher than the US at #19 and the Swiss at #11.
Scandinavian countries top the lists. Iceland is at #1, Norway is at #5 and Sweden is at #8. One other pension system that Singapore is frequently compared to due to the geographical closeness is Australia who comes in at #6.
The study notes that the overall index value for the Singaporean system could be enhanced by reducing the barriers to establishing tax-approved group corporate retirement plans and opening the Central Provident Fund (CPF) to more non-Singaporean employees who currently make up a significant percentage of the labour force. This can be further complemented by increasing the age CPF members can access their retirement savings as well as enhancing communication on CPF to Singaporeans.
Other pension systems like the US’s 401K and Australia’s superannuation allows for the financially savvy ones to manage the level of risks they want to undertake and even allows one to choose the fund in which the monies would be invested in. Funds can be switched with a fee, similar to unit trust funds in Singapore.
Some pension systems like the Malaysian EPF also allows for early withdrawals to pay for specific needs.
0.01% better than 0%?
At the end of the day, the proof is in the pudding – the ranking by Mercer is based on the track record of the CPF.
A minimum of 4% interest is provided without any risk while those who are keen to take risks can do so. While the CPF SMA accounts are less accessible than many other pension systems, it acts as a forced saving.
In addition, with home ownership being one of the most tangible dreams globally, the OA enables that dream by allowing for the OA to be used for house purchases. This strikes a balance between spending on house and saving for retirement.
I asked Alvin what he thinks about CPF, here’s what he said:
“But at the end of the day, there is no best system because there are different types of people. The responsible ones will prefer CPF because no one wants to foot the pension for others who have been irresponsible in their lives.
While those who don’t have the money will want a pension system because they do not have much money saved up even with the support of the CPF system.
Some are even asking for the government to share returns from the two sovereign wealth funds (Temasek & GIC).
Of course, some feel that they want to have control of their money because they think they can do better than a 4% return. But although we are a small country, its impossible to tell who can and who cannot beat the 4%; most people are just overconfident because majority of the people still lose in the markets. And when they lose, who is going to support them?”
