facebookWhy don't the CPF simply buy more of the higher yielding government bonds at 4%, instead of buying those yielding 2.5%? And then pass the higher interest rates to us? - Seedly

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Why don't the CPF simply buy more of the higher yielding government bonds at 4%, instead of buying those yielding 2.5%? And then pass the higher interest rates to us?

Why don't the CPF simply buy more of the higher yielding government bonds (that Mr Soh was addressing in the last question of EP06)? I mean, if they can buy it for the CPF-SA at 4%, why not use the CPF-OA to buy those bonds too, instead of buying 2.5% yielding ones?

SeedlyTV S1E06

Discussion (2)

What are your thoughts?

Hi Amos,
The fundamental principle is to peg CPF interest rates to returns on investments of comparable risk and duration in the market.
In determining the interest rates, there is a need to recognise the fundamental difference in the purpose of the Ordinary Account (OA) compared to the longer-term Special Account, MediSave Account and Retirement Account (or SMRA). The interest rates on the OA and SMRA reflect the durations for which members’ savings are held.

OA savings can be withdrawn at any time for home purchases and servicing mortgage loans, etc. It is a liquid account.
Therefore, the interest rate on OA has 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%, or 3.5% for OA balances of up to $20,000.
On the other hand, the SMRA are for longer-term retirement and medical needs. As such, the interest rate on the SMRA aim to be equivalent to what a 30-year SGS would earn, as 30 years is the typical duration for which SMRA monies are held. As the 30-year SGS did not exist when the government made changes to the interest rate structure in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1%. The current yield on the 30-year SGS, which is not widely traded, is around 3%. This is well below the minimum interest rates of 4-5% that are currently paid on SMRA accounts.
To find out more, you can visit: https://www.mof.gov.sg/Policies/Our-Nations-Res....
Thank you.

Ang Yee Gary

Ang Yee Gary

15 Jun 2019

Level 7·Medicine at National University Of Singapore

Firstly if ordinary account interest is raised, hdb housing loan interest will be raised too.
Secondly if ordinary account interest is raised, special account will have to be raised too
Thirdly there may not be sufficient bonds to buy
Fourthly the risks may be too high for cpf

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