For many young working adults in Singapore, our impression is that the CPF pays us 2.5% on our Ordinary Account (OA) balances and 4.0% on our Special Account (SA) and MediSave Account (MA) balances. While we are not wrong, this viewpoint isn’t entirely correct either.
Earning 2.5% on our OA and 4.0% on our SA and MA has simply been a result of the low interest rate environment for the last 20 to 25 years. In actuality, our CPF interest returns are “pegged to risk-free market instruments of comparable duration”.
However, if interest rates offered on such “risk-free market instruments” are too low, we enjoy a layer of protection with a floor interest rate – meant to continue paying a relatively decent interest return on our CPF balances. This is mainly to protect our retirement adequacy.
|CPF Accounts||Interest Rate Formula||Floor Interest Rate||Review Frequency|
|Ordinary Account (OA)||80% : 20% fixed deposit to savings rate of preceding 3-month average of major local banks’ interest rates||2.5% per annum||Quarterly|
|Special Account (SA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Quarterly|
|MediSave Account (MA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Quarterly|
|Retirement Account (RA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Annually|
In contrast to the past 20 years, interest rates globally have been spiking since the start of the year. Given the rising interest rate environment today, it would be interesting to consider what it would take for us to earn more than the floor interest rates on our CPF accounts.
To try to calculate this, we can reference the formula used for the calculation of the interest rates.
When Will Our Ordinary Account (OA) Pay More Than 2.5% Interest?
The CPF website states that the interest rate of our Ordinary Account is “based on the 3-month average of major local banks’ interest rates”. The exact formula uses an 80% : 20% fixed deposit to savings rate of the preceding 3-month average of major local banks’ interest rates.
CPF states that the calculated interest rate for the period from February 2022 to April 2022 is 0.09%. Hence, we continue to enjoy the floor interest rate of 2.5% on our OA balance. For our OA balance to earn more than 2.5%, we would need DBS, OCBC and UOB to pay a higher 12-month fixed deposit rate and savings rate.
Source: CPF Board
Despite interest rates spiking globally, the local banks’ prevailing savings rate has also not moved at all.
The current 12-month fixed deposit rates offered by our local major banks also looks to be severely lagging behind what should be offered in the market. This is simply because the August launch for the Singapore Savings Bonds (SSBs) is already offering a 1-year interest rate of 2.0%. This could easily be viewed as a “risk-free market instrument” too, since its “rates are based on the average SGS yields the month before”.
If we use the August SSB as a fair representation for a risk-free market instrument, and a promotional savings rate of 0.3% (paid by UOB, and chosen arbitrarily), a case can be made for the 80FD:20SD estimate to be about 1.7%. This suggests that interest rates still need to continue the upward tick in order to beat the floor interest rate of 2.5% we earn today. Of course, there is also an implicit assumption that banks’ fixed deposit rates have to rise and look sensible when compared to liquid government issued securities (such as the example we used with the Singapore Savings Bonds).
When Will Our Special Account (SA) and MediSave Account (MA) Pay More Than 4.0% Interest?
Similarly, the CPF website states that the interest rate paid on our SA and MA are “computed based on the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%”.
The CPF website states that from May 2021 to April 2022, the calculated rate is 2.72%. Therefore, all of us continue to enjoy the floor interest rate of 4.0% on our SA and MA balances. One thing that may be of interest is that the current 4.0% floor rate is a commitment provided by the Singapore government, rather than written in our legislation. In fact, the only legislated minimum floor rate is 2.5%.
Source: CPF Board
While the average yield in the past 12 months is still at 1.72%, the yield today are already much higher. We can observe this by simply looking at the MAS website – where we can see that the current yield curve depicts the 10-year yield as 2.71%.
Even this may be a lagging indicator. Again, if we want to use the August SSB rates to represent a “risk-free market instrument”, we would see that it is already yielding 3.0% if we hold on to it for the entire 10-year period.
If we add 1% to this, using the current interest rate indicated on the MAS yield curve for the 10-year tenor, we should be paid 3.71%. If we use the August 2022 SSB issue to represent current 10-year yields, we could be paid 4.0%.
This simply tells us that even if interest rates stay at its current level for the next 12 months, we should continue to earn the floor/market interest rate of 4.0% on both our SA and MA balances.
However, if interest rates continue the current trajectory to climb even slightly higher, we could very likely see higher interest payments for our Special Account and MediSave Account balances in the next 12 months.
When Will Our Retirement Account (RA) Pay More Than 4.0% Interest?
According to the CPF website, our interest rates paid on our Retirement Account (RA) balances is also “computed based on the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%”.
This is the same as our SA and MA. The only difference is that the SA and MA rates are reviewed quarterly, while the RA rates is reviewed annually.
CPF also states that for the period from November 2020 to October 2021, the RA interest rate is 2.34%. Since this is lower than the 4.0% floor rate, we continue to earn 4.0% on our RA balances.
Similar to the calculation for the SA and MA, the current interest rates calculation is already close to the floor rate. If interest rates go higher, we could see our RA balances earning more than 4.0% per annum. Again, the one difference is that it could take a slightly longer time before our RA starts earning the higher interest (if interest rates continue to rise), due to the fact that RA rates are reviewed annually rather than quarterly – like the SA and MA rates are reviewed.
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