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09-07-2014, 01:50 AM
An honorable member of the Coffee Shop Has Just Posted the Following:
CPF issue: Retirement scheme fair and one of world's safest: DPM Tharman
Here are excerpts of DPM Tharman Shanmugaratnam's reply to parliamentary questions on CPF interest rates:
"The CPF is not a perfect retirement savings scheme, but it is among the better regarded internationally. As PM has stated, we want to improve the CPF to provide greater security in retirement, especially for those with lower wages and to help retirees cope with inflation. We also want to give those who are 'asset-rich and cash-poor' more convenient options to get cash from their homes.
"But as we seek to improve the CPF or to add any flexibility, we must retain its basic strengths and avoid the huge problems seen elsewhere:
"First, our CPF system is sustainable. There are no unfunded or sudden liabilities that will burden our children's generation;
"Second, the CPF offers some flexibility for members to withdraw savings, indeed more so than many other social security systems. In particular, by tapping on their OA savings, the vast majority of Singaporeans have been able to own their homes and service their mortgages with little or no out-of-pocket cash, which Minister Tan has just emphasised.
"Third, while the CPF scheme does not provide the highest returns, it gives fair returns and certainly one of the safest in the world. Few systems offer the guaranteed floors on interest rates - 3.5 per cent for OA and currently 5 per cent on SMRA for those with smaller balances, who comprise the majority of members, and 1 per cent less for larger balances. The interest rates are guaranteed by one of the few remaining triple-A rated governments in the world. The CPF also offers the option to members who wish to place more money in their SA account, or take higher risks through the CPF Investment Scheme (CPFIS) in the hope of higher returns;
"Fourth, on top of the guaranteed interest rates, the Government subsidises CPF members through the Budget in a targeted and sustainable manner. We provide significant help to lower income members to build up retirement assets, , by giving them housing grants in their OA and CPF contributions through the Workfare Income Supplement (WIS). Members of the Pioneer Generation also now get top-ups for life, in their Medisave accounts;
"Taken as a whole, our CPF system prepares Singaporeans well for the future. Based on current policies, a new entrant into the workforce today can expect to draw a retirement income of about two thirds of his last-drawn pay if he is a median income earner. This is around the OECD average. He gets a much higher ratio of his previous pay if he is a lower income worker, chiefly because of Government subsidies. As Minister Tan has said, our key concern is to help the current generation of older Singaporeans who have low CPF balances, due to their much lower wages in the past and the more liberal withdrawal rules then.
CPF pays fair interest rates
"Let me now address the specific questions on how CPF interest rates are determined. The current CPF interest rate structure was implemented in 2008. It was an enhancement, especially for members with smaller balances. We debated the changes in Parliament in 2007, as part of the broader package of reforms to strengthen retirement security.
"The fundamental principle is to peg CPF interest rates to returns on investments of comparable risk and duration in the market. We also structured the interest rates to provide greater benefit to members with small and medium-sized balances, by paying Extra Interest (EI) on the first $60,000 of balances. Interest rates on the Ordinary Account (OA)
"In determining the rates, we have to recognise the fundamental difference in the purpose of the OA compared to the longer-term SA, MA and RA (or SMRA). OA savings can be withdrawn at any time for home purchases and servicing mortgage loans, or education. It is a liquid account. The interest rate on OA has therefore been pegged to the 12-month fixed deposit and month-end savings rates of the major local banks. However, unlike market interest rates, it pays a guaranteed floor rate of 2.5 per cent, or 3.5 per cent for OA balances of up to $20,000. More than half of all members enjoy the full 3.5 per cent on their OA.
"Members also have options to earn more than these OA interest rates. They can transfer OA savings to the SA so that these become long term savings, earning higher returns. This is a useful option for those who have paid up their housing loans. Those who want to take on market risks in the hope of earning better returns can also invest part of their OA balances through the CPFIS.
"Furthermore, the CPF interest rates are not the only help members get to build up their savings. As I just mentioned, the Government also provides subsidies through the Budget to CPF members, targeted especially at lower and middle-income members. These subsidies in effect amount to a significant boost to what the typical low-income member earns on his balances7 . If we look at his OA in particular:
"On top of the 3.5 per cent interest rate on his OA, he gets Workfare payments and housing grants. When he sells his home to upgrade or downgrade later, the housing grant is returned to his OA as part of his savings for retirement. Based on current policies, these grants (amortised over his working life) will in effect grow his savings by at least 2.5 per cent per year over a 30-40 year working life. In effect, his savings 'earn' 6 per cent per annum through the combination of CPF interest rates and Government subsidies.
"This does not include the OA savings used to purchase the housing asset, which benefits separately from appreciation in housing value. As Minister Tan explained, his home is an important retirement asset, and based on its value he can withdraw monies from his CPF balances at age 55.
"The OECD highlighted this critical role of homeownership in its recent analysis of pension systems in the advanced countries. Homeownership "can make a big difference for many pensioners, both reducing the need for cash and providing a way to generate income later in life."
"Mr Lim Biow Chuan asked if CPF interest rates could be pegged to those on 10-year Singapore Government Securities (10Y SGS). The OA interest rate, pegged to market deposits that can be withdrawn at any time, is fair. However, for several years now, the OA has earned the floor rate of 2.5 per cent to 3.5 per cent, well above the market rates. The OA has in fact been earning more than what 10Y SGS pays. (The average yield on 10Y SGS over the last 10 years has been 2.4 per cent. It is currently around 2.3 per cent.)
"The SMRA on the other hand is pegged at 1 per cent above the 10Y SGS, which I will now explain. Interest rates on SMRA
"The SA and RA are as we all know held for retirement. It is long term savings. As Medisave (MA) balances are also mainly used as Singaporeans get older, we have treated them like the SA for purpose of determining interest rates.
"The returns on the SMRA have been enhanced over the years. When we set the new basis for SMRA rates in 2007, our aim was to peg it to the rates for similar long term, risk-free investment. This was what the ERC had recommended in 2002.
"The best peg would have been the 30-year government bond, because 30 years is the typical duration for which SMRA monies are held. However, as we had not started issuing a 30-year SGS in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1 per cent to approximate the 30-year rate.
"As I told the House then, the 1 per cent spread on top of 10Y government bonds was in fact a little generous, as it was higher than what has been observed for 30Y bonds in international markets. However, it was fair and reasonable, giving allowance for future economic and market uncertainties, such as if inflation picks up sharply over the long term.
"Going by the formula for SMRA rates, we would be paying about 3.4 per cent today on SMRA. (This is higher than the actual yield of 3 per cent on the 30-year SGS, which is not widely traded.) However, we have maintained a floor of 4 per cent on SMRA, or 5 per cent for balances of up to $60,000. We have renewed this floor each year since 2008. Two-thirds of CPF members in fact earn the full 5 per cent on their SMRA.
"This is a fair system of returns for the SMRA. The CPF in essence pegs SMRA returns to long term SGS, but it has also been paying a floor of 4 per cent to 5 per cent that is well above market rates in the current environment. As I explained earlier, we have shielded members from the risk of low market rates.
How CPF monies are invested
"I will next explain how CPF monies are invested, as asked by Dr Lee and Mr Gan.
"The CPF Board (CPFB) invests CPF members' monies in Special Singapore Government Securities (SSGS). These are issued specially by the Government to CPFB. The payout from the SSGS is pegged to the interest rates that the CPFB is committed to pay its members.
"The Government guarantees these SSGS bonds, so that CPFB faces no risk of being unable to meet its obligations to its members. This is a solid guarantee, from a triple-A credit-rated government. The triple-A credit rating reflects Singapore's very strong financial position, with the Government's assets comfortably exceeding its liabilities. Both Standard and Poor's and Moody's recently reaffirmed our credit rating, noting that our strong net asset position provides ample cushion against shocks.
"What does the Government do with the proceeds from SSGS issuance? It pools them with the rest of the Government's funds, such as proceeds from the tradable Singapore Government Securities (SGS), any government surpluses as well as the proceeds from land sales which under our Constitutional rules have to be accounted for as Past Reserves.
"The comingled funds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. A major portion of these assets are however of a longer term nature, and are hence transferred over to be managed by GIC.
"The SSGS proceeds are not passed to Temasek for management. Temasek manages its own assets, and does not manage any CPF monies."
Click here to view the whole thread at www.sammyboy.com (http://sammyboy.com/showthread.php?185435-More-BS-on-the-CPF&goto=newpost).
CPF issue: Retirement scheme fair and one of world's safest: DPM Tharman
Here are excerpts of DPM Tharman Shanmugaratnam's reply to parliamentary questions on CPF interest rates:
"The CPF is not a perfect retirement savings scheme, but it is among the better regarded internationally. As PM has stated, we want to improve the CPF to provide greater security in retirement, especially for those with lower wages and to help retirees cope with inflation. We also want to give those who are 'asset-rich and cash-poor' more convenient options to get cash from their homes.
"But as we seek to improve the CPF or to add any flexibility, we must retain its basic strengths and avoid the huge problems seen elsewhere:
"First, our CPF system is sustainable. There are no unfunded or sudden liabilities that will burden our children's generation;
"Second, the CPF offers some flexibility for members to withdraw savings, indeed more so than many other social security systems. In particular, by tapping on their OA savings, the vast majority of Singaporeans have been able to own their homes and service their mortgages with little or no out-of-pocket cash, which Minister Tan has just emphasised.
"Third, while the CPF scheme does not provide the highest returns, it gives fair returns and certainly one of the safest in the world. Few systems offer the guaranteed floors on interest rates - 3.5 per cent for OA and currently 5 per cent on SMRA for those with smaller balances, who comprise the majority of members, and 1 per cent less for larger balances. The interest rates are guaranteed by one of the few remaining triple-A rated governments in the world. The CPF also offers the option to members who wish to place more money in their SA account, or take higher risks through the CPF Investment Scheme (CPFIS) in the hope of higher returns;
"Fourth, on top of the guaranteed interest rates, the Government subsidises CPF members through the Budget in a targeted and sustainable manner. We provide significant help to lower income members to build up retirement assets, , by giving them housing grants in their OA and CPF contributions through the Workfare Income Supplement (WIS). Members of the Pioneer Generation also now get top-ups for life, in their Medisave accounts;
"Taken as a whole, our CPF system prepares Singaporeans well for the future. Based on current policies, a new entrant into the workforce today can expect to draw a retirement income of about two thirds of his last-drawn pay if he is a median income earner. This is around the OECD average. He gets a much higher ratio of his previous pay if he is a lower income worker, chiefly because of Government subsidies. As Minister Tan has said, our key concern is to help the current generation of older Singaporeans who have low CPF balances, due to their much lower wages in the past and the more liberal withdrawal rules then.
CPF pays fair interest rates
"Let me now address the specific questions on how CPF interest rates are determined. The current CPF interest rate structure was implemented in 2008. It was an enhancement, especially for members with smaller balances. We debated the changes in Parliament in 2007, as part of the broader package of reforms to strengthen retirement security.
"The fundamental principle is to peg CPF interest rates to returns on investments of comparable risk and duration in the market. We also structured the interest rates to provide greater benefit to members with small and medium-sized balances, by paying Extra Interest (EI) on the first $60,000 of balances. Interest rates on the Ordinary Account (OA)
"In determining the rates, we have to recognise the fundamental difference in the purpose of the OA compared to the longer-term SA, MA and RA (or SMRA). OA savings can be withdrawn at any time for home purchases and servicing mortgage loans, or education. It is a liquid account. The interest rate on OA has therefore been pegged to the 12-month fixed deposit and month-end savings rates of the major local banks. However, unlike market interest rates, it pays a guaranteed floor rate of 2.5 per cent, or 3.5 per cent for OA balances of up to $20,000. More than half of all members enjoy the full 3.5 per cent on their OA.
"Members also have options to earn more than these OA interest rates. They can transfer OA savings to the SA so that these become long term savings, earning higher returns. This is a useful option for those who have paid up their housing loans. Those who want to take on market risks in the hope of earning better returns can also invest part of their OA balances through the CPFIS.
"Furthermore, the CPF interest rates are not the only help members get to build up their savings. As I just mentioned, the Government also provides subsidies through the Budget to CPF members, targeted especially at lower and middle-income members. These subsidies in effect amount to a significant boost to what the typical low-income member earns on his balances7 . If we look at his OA in particular:
"On top of the 3.5 per cent interest rate on his OA, he gets Workfare payments and housing grants. When he sells his home to upgrade or downgrade later, the housing grant is returned to his OA as part of his savings for retirement. Based on current policies, these grants (amortised over his working life) will in effect grow his savings by at least 2.5 per cent per year over a 30-40 year working life. In effect, his savings 'earn' 6 per cent per annum through the combination of CPF interest rates and Government subsidies.
"This does not include the OA savings used to purchase the housing asset, which benefits separately from appreciation in housing value. As Minister Tan explained, his home is an important retirement asset, and based on its value he can withdraw monies from his CPF balances at age 55.
"The OECD highlighted this critical role of homeownership in its recent analysis of pension systems in the advanced countries. Homeownership "can make a big difference for many pensioners, both reducing the need for cash and providing a way to generate income later in life."
"Mr Lim Biow Chuan asked if CPF interest rates could be pegged to those on 10-year Singapore Government Securities (10Y SGS). The OA interest rate, pegged to market deposits that can be withdrawn at any time, is fair. However, for several years now, the OA has earned the floor rate of 2.5 per cent to 3.5 per cent, well above the market rates. The OA has in fact been earning more than what 10Y SGS pays. (The average yield on 10Y SGS over the last 10 years has been 2.4 per cent. It is currently around 2.3 per cent.)
"The SMRA on the other hand is pegged at 1 per cent above the 10Y SGS, which I will now explain. Interest rates on SMRA
"The SA and RA are as we all know held for retirement. It is long term savings. As Medisave (MA) balances are also mainly used as Singaporeans get older, we have treated them like the SA for purpose of determining interest rates.
"The returns on the SMRA have been enhanced over the years. When we set the new basis for SMRA rates in 2007, our aim was to peg it to the rates for similar long term, risk-free investment. This was what the ERC had recommended in 2002.
"The best peg would have been the 30-year government bond, because 30 years is the typical duration for which SMRA monies are held. However, as we had not started issuing a 30-year SGS in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1 per cent to approximate the 30-year rate.
"As I told the House then, the 1 per cent spread on top of 10Y government bonds was in fact a little generous, as it was higher than what has been observed for 30Y bonds in international markets. However, it was fair and reasonable, giving allowance for future economic and market uncertainties, such as if inflation picks up sharply over the long term.
"Going by the formula for SMRA rates, we would be paying about 3.4 per cent today on SMRA. (This is higher than the actual yield of 3 per cent on the 30-year SGS, which is not widely traded.) However, we have maintained a floor of 4 per cent on SMRA, or 5 per cent for balances of up to $60,000. We have renewed this floor each year since 2008. Two-thirds of CPF members in fact earn the full 5 per cent on their SMRA.
"This is a fair system of returns for the SMRA. The CPF in essence pegs SMRA returns to long term SGS, but it has also been paying a floor of 4 per cent to 5 per cent that is well above market rates in the current environment. As I explained earlier, we have shielded members from the risk of low market rates.
How CPF monies are invested
"I will next explain how CPF monies are invested, as asked by Dr Lee and Mr Gan.
"The CPF Board (CPFB) invests CPF members' monies in Special Singapore Government Securities (SSGS). These are issued specially by the Government to CPFB. The payout from the SSGS is pegged to the interest rates that the CPFB is committed to pay its members.
"The Government guarantees these SSGS bonds, so that CPFB faces no risk of being unable to meet its obligations to its members. This is a solid guarantee, from a triple-A credit-rated government. The triple-A credit rating reflects Singapore's very strong financial position, with the Government's assets comfortably exceeding its liabilities. Both Standard and Poor's and Moody's recently reaffirmed our credit rating, noting that our strong net asset position provides ample cushion against shocks.
"What does the Government do with the proceeds from SSGS issuance? It pools them with the rest of the Government's funds, such as proceeds from the tradable Singapore Government Securities (SGS), any government surpluses as well as the proceeds from land sales which under our Constitutional rules have to be accounted for as Past Reserves.
"The comingled funds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. A major portion of these assets are however of a longer term nature, and are hence transferred over to be managed by GIC.
"The SSGS proceeds are not passed to Temasek for management. Temasek manages its own assets, and does not manage any CPF monies."
Click here to view the whole thread at www.sammyboy.com (http://sammyboy.com/showthread.php?185435-More-BS-on-the-CPF&goto=newpost).