Tuesday, June 03, 2014

CPF interest rate has to be reviewed

One major source of unhappiness is the low rate of interest, i.e. 2.5% and 4%, payable on the CPF savings.

It is a wrong policy to invest the CPF savings in long term government bonds, which gives a low yield. As the savings are being invested for a long term, say more than 40 years, it is more appropriate to invest them in good quality shares which can give a better return compared to than government bonds.

The yield on good quality shares has averaged more than 8% per annum over the past three decades.

While the values of the shares may fluctuate from one year to the next, this fluctuation is immaterial for a long term investor. While some shares may turn bad, they can be compensated by the good performance of other shares. It is the average yield of the portfolio over the long term that matters to the CPF members.

The CPF members do not expect a yield of more than 8% per annum. But 2.5% and 4% is too low. A yield of 6% would be more appropriate and fair to the people, whose savings have been locked up for a long time.

There is a negative point about raising the yield or interest rate on CPF savings. This will also affect the interest rate charged on loans to buy HDB flats and other properties. The impact has to be considered when making a change. This issue may be difficult, even problematic, but it can be overcome.

It is time for the interest rate policy of the CPF to be reviewed. A higher return will ensure that the members will have more adequate savings for their retirement.

Tan Kin Lian



1 comment:

Cystic said...

Dear TKH,

What do you think about allowing contributors to choose between different underlying CPF investment schemes and their corresponding returns?

Our current system could be "CPF Standard" while a one with more aggressive returns could be an opt-in scheme. Of course, the more aggressive scheme would not be able to offer guaranteed returns, unlike the standard scheme. However, it should aim for achieving a higher overall average yield throughout the many years.

Those starting to accumulate funds in their CPF started late (newly minted PRs, returning overseas expatriates) or people that have a low risk tolerance (nearing retirement) might still want returns which are stable and less volatile.

Perhaps there could be a choice, maybe every 5 year milestone, to opt between being aggressive and being conservative.

Having 2 schemes would still allow home loan interest rates to be pegged to the lower "Standard" rate, removing the problem that housing loan rates will fluctuate wildly based on recent market performance.

Regards

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