How are CPF interest rates determined?

CPF interest rates are pegged to risk-free market instruments of comparable duration. However, there is also a minimum interest rate on CPF savings that protects members when market interest rates fall to low levels, such as in recent years. Lower and middle-income members also benefit from extra interest paid on smaller CPF balances.

Currently, monies in members Ordinary Account (OA) earn a minimum interest rate of 3.5% on the first $20,000. Those with larger balances also enjoy this 3.5% per year on their first $20,000, and 2.5% per year for the rest of their OA savings. More than half of all CPF members earn 3.5% per year on all their OA balances.

Monies in members Special, Medisave and Retirement Accounts (SMRA) earn a minimum interest rate of 5% on at least the first $40,0009. Those with large balances also enjoy this 5% per year on at least their first $40,000, and 4% per year for the rest of their SMRA savings. Around 2/3 of members earn 5% per year interest on all of their SMRA savings.

The interest rates on the OA and SMRA reflect the durations for which members savings are held. The OA is a liquid account. The monies in the OA can be withdrawn at any time for housing. Many members withdraw substantial amounts from their OA.

The SMRA are for longer-term retirement and medical needs. 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 1% spread is in fact higher than that which international bond markets have paid on 30-year bonds. 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.

The interest rates that CPF members receive are hence significantly higher than for equivalent, risk-free market instruments currently. There is also no link between CPF interest rates, and the returns earned by GIC. The CPF Board invests CPF savings entirely in risk-free SSGS issued by the Government. CPF members receive fair returns as described above, with no investment risk.

The Government invests the SSGS proceeds together with its other assets through the GIC, and takes investment risks aimed at achieving good long term returns. However, the consequence of taking risk as a long-term investor is that returns may be weak or even negative over shorter periods.

The Government is able to guarantee CPF savings and pay the minimum interest rates on CPF savings regardless of GICs returns over any period, because the Governments balance sheet enables it to absorb risks. The Government has a significant buffer of net assets, i.e. assets which are well above its liabilities including its CPF commitments. (See related question on "Is our CPF money safe?")

[9] You earn 5% per year on up to the first $60,000 of your Special and Medisave Accounts, if your Ordinary Account is less than $20,000. Also, after age 55, the first $60,000 of the Retirement Account earns 5% per year.