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WP MP Louis Chua calls for balanced CPF OA rates to safeguard Singaporeans’ retirement funds againts inflation

Mr Louis Chua, a Workers’ Party Member of Parliament for Seng Kang GRC, has urged the government to review the Central Provident Fund (CPF)’s Ordinary Account (OA) formula.

He believes that the formula should be adjusted in a timely manner to ensure that Singaporeans’ retirement savings can keep up with inflation or at least reflect market interest rates.

On Monday (29 May), HDB and the Housing and Development Board (HDB) in a joint statement had announced that the interest rate for the CPF’s Special and MediSave Account (SMA) will increase to 4.01% per annum for Q3 2023.

The previous SMA interest rate was 4%, which means the increase will be merely 0.01%. HDB stated that this is due to “increase in the 12-month average yield of 10-year Singapore Government Securities (10YSGS), which the SMA interest rate is pegged to.”

Commenting on the recent SMA’s interest rate adjustment, Louis Chua said while it is “not much to shout about”, but at the very least, it is pegged to 10YSGS’s yields with a floor rate to ensure a minimal level of interest returns for Singaporeans long term retirement savings needs.

Loius Chua who is also a CFA® Charterholder (Chartered Financial Analyst), highlighted that the OA interest rate remains unchanged at 2.5% for the same period, as major local banks’ interest rates over the last 3 months are computed to be at 0.66 percent (for the period from February to April 2023).

“Whether it’s fixed deposit rates or savings accounts across the 3 local banks such as the UOB One, OCBC 360 or DBS Multiplier accounts, it’s quite clear that interest rates are significantly higher than the 0.66% which the CPF computed.”

Moreover,  Mr Chua pointed out that rising inflation rate, which was 5.7% in April last month, with core inflation at 5%, “even if inflation rates come down…it could well settle at higher levels vs. recent history.”

Therefore, he asserts that it is crucial to reevaluate the OA formula, which has remained unchanged since 1999, to at least better take into account the current nature of fixed deposit and savings rates from the three local banks, even if the “CPF’s preference is not to consider inflation in the formula”.

Louis Chua advocates for balanced CPF OA rates to protect retirement funds from inflation

During the Budget 2023 debate, Louis Chua emphasized the significant allocation of CPF contributions to the OA Account throughout Singaporeans’ working lives.

He stressed that Singapore must balance CPF OA rates against the goal of preserving the purchasing power of our retirement funds and guarding against inflation over time.

“While our CPF monies are invested in Special Singapore Government Securities (SGS) fully guaranteed by the Government, GIC’s portfolio has been able to beat inflation both nominally and in real terms at 7.0% and 4.2% returns respectively over the past 20 years.”

Mr Chua also highlighted the intense competition among banks to attract deposits at the time, with UOB raising its maximum bonus rates from 3.6% to 7.8% and many offering fixed deposit rates ranging from 3% to 4%.

“Despite this, the CPF Board’s assessment of major local banks interest rates to be at 0.52% for the period from November 2022 to January 2023, and one cannot help but feel as though these are unrealistically suppressed given the realities of the deposit environment of the local banks today.”

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