Former GIC chief economist Yeoh Lam Keong voiced his disagreement in a Facebook post to an Aug 2 (Tuesday) speech in Parliament by Manpower Minister Tan See Leng regarding Central Provident Fund (CPF) interest rates.

The minister said that CPF members earn higher interest rates on their savings than local banks and securities since the CPF Board places a greater emphasis on the long term.

Mr Yeoh expressed concern that the policy regarding CPF interest rates would “cause our current and future especially lower income pensioners considerable long term hardship from inadequate pensions that could have been quite easily avoided with a higher and more equitable CPF interest rate with which to grow their compulsory savings.”

He wrote that “CPF interest rates should be returns on very long term compulsory defined contribution pension contributions. They are effectively invested globally by GIC in long term assets yielding over 4% in real terms over global inflation or over 6% in nominal terms over 20 plus years. This is a fairly normal long term return for most decent big superannuation or pension funds. Well done GIC for building this valuable capability over the decades.” 

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Along with many others, Mr Lee Hsien Yang, the younger brother of Prime Minister Lee Hsien Loong, shared the ex-GIC chief economist’s post on Wednesday (Aug 3).

“I agree with Lam Keong. It is a very sensible suggestion. It would help to resolve the inadequate retirement savings problem that many Singaporeans face despite a very high savings rate during our working years.”

What Manpower Minister Tan See Leng said

Mr Louis Chua (WP-Sengkang GRC) and Mr Henry Kwek (PAP-Kebun Baru) posed questions in Parliament about whether the CPF interest rate paid on members’ funds will be increased, given the present high inflation rate.

Mr Chua also asked if CPF Board would review its interest rate formula, which is pegged to the interest rates of DBS, OCBC and United Overseas Bank. These top three banks in the country recently increased their interest rates.

Dr Tan said that in spite of the high rate of inflation, there are no plans at the moment to raise interest rates for CPF accounts.

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He called the interest rates the government pays “generous”.

“We will continue to review CPF interest rates periodically. The interest rates on the Ordinary Account, Special Account, and MediSave Account are reviewed quarterly, while the interest rate on the Retirement Account is reviewed annually,” the minister added.

Mr Yeoh disagrees…

In his Facebook post, the former GIC economist pointed out that “only the SMRA (Special and MediSave, and Retirement Accounts) accounts enjoy a roughly 3% return, which is still over 3% below GICs long term nominal return of around 6.2%.”

And while CPF interest returns are guaranteed, GIC returns are not, Mr Yeoh added that CPF contributors should have the right to choose between current CPF guaranteed rates and actual long-term returns, since their contributions are compulsory and owned only by them.

“With all due respect to the earnest Manpower Minister… no other modern pension fund in the world could get away with this discrepancy which means that pension savings over a 40 year working life compound at effectively several percentage points less than what pension funds are actually returning.”

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He added that members’ final pension “is only half what it could be if the actual returns were given to CPF holders” and that their “retirement adequacy can also often be severely compromised.”

“CPF members are thus incentivized and end up having to rely disproportionately on real estate investments in housing which, for the vast majority of the population, will also eventually end up as deprecating assets due to HDB lease decay in their twilight years when they need it most. 

Is this fair or wise ? As policy currently stands will it not cause our current and future especially lower income pensioners considerable long term hardship from inadequate pensions that could have been quite easily avoided with a higher and more equitable CPF interest rate with which to grow their compulsory savings? 

Yet another poorly designed and defended policy for the ordinary citizen badly in need of reform imho.”

/TISG

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