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Use GIC returns as component in calculating CPF OA returns: academic

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THE government can consider partially pegging returns on the Central Provident Fund (CPF) Ordinary Account (OA) to returns generated by sovereign wealth fund GIC, suggested an academic.

THE government can consider partially pegging returns on the Central Provident Fund (CPF) Ordinary Account (OA) to returns generated by sovereign wealth fund GIC, suggested an academic.

National University of Singapore (NUS) economics professor Chia Ngee Choon acknowledged that GIC returns are already distributed to Singaporeans indirectly through, for example, Budget top-ups to CPF accounts.

But linking GIC to the CPF OA interest rate allows for a more direct channel for Singaporeans to enjoy GIC returns should it do well, she noted. "We don't want to miss the opportunity of having a higher rate."

Assoc Prof Chia made the suggestion at an academic symposium on social security at NUS on Tuesday. Currently, OA monies earn either the legislated minimum interest of 2.5 per cent per annum, or the three-month average of major local banks' interest rates, whichever is higher. The legislated floor rate is currently paid out as bank interest rates have been low, with the relevant three-month average at 0.21 per cent from August to October 2015.

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An extra one per cent is payable on the first S$60,000 of a member's combined balances, with up to S$20,000 from the OA able to attract the extra interest.

GIC achieved a 20-year annualised real rate of return of 4.9 per cent for the financial year ended March 31, 2015. In US dollar terms, including the effect of inflation, GIC's portfolio generated an annualised return of 6.1 per cent over the 20 years ended March 31, 2015.

To get higher returns on CPF, Assoc Prof Chia also suggested that Singaporeans can transfer excess money from the OA, which is used for housing, to the Special Account (SA), which is used for retirement and which generally pays a higher interest rate of 4-5 per cent a year. The CPF Board can encourage Singaporeans to monitor their OA and SA account balances more actively through sending text message or e-mail reminders, she pointed out.

However, people might be wary of transferring OA monies to SA, because the transfer is irreversible. Those who transferred might want to use the money to purchase a more expensive house, she added. She suggested an option to transfer money from the SA back to the OA, perhaps with a penalty or administrative fee.

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