Is CPF Ordinary Account’s peg to banking trio’s interest rates still relevant today?

THE Central Provident Fund (CPF)’s ordinary account (OA) interest rate is pegged to the three-month average of the local banking trio’s fixed-deposit rates and savings rates, in the proportion of 80 per cent and 20 per cent, subject to the legislated floor of 2.5 per cent per annum.

It might be time to review those references. This peg has been in place since July 1999, whereas the banks’ products have evolved, and their fixed-deposit and savings-board rates may no longer reflect market rates.

The three banks each offer a high-interest savings account that does not lock in funds the way fixed-deposit accounts do, yet pays much more than a regular savings account. The interest rates on these accounts can go as high as 4.06 per cent if various other conditions are fulfilled.

A monthly credit of a salary of at least S$1,800 to OCBC’s 360 account, for example, earns 0.6 per cent per annum for the first S$50,000 – subject to a minimum average daily balance of S$3,000. This should be achievable for half the working population.

Statistics from the Ministry of Manpower released at the end of May showed the median gross monthly income from work, including employer’s CPF contribution, of full-time employed residents was S$4,680. After CPF contributions are deducted, the disposable income would be S$2,948.40 for a worker aged 55 or below.

UOB and OCBC are also dangling fixed-deposit interest rates of as much as 2.9 per cent for 12-month deposits of S$20,000. DBS still maintains 0.05 per cent for amounts of S$20,000 to less than S$50,000, but has a non-promotional rate of 1.6 per cent for funds of less than S$20,000 for the same tenor.

The CPF Board might contend that the OA is a liquid account, as members are allowed to withdraw the funds in it for housing, investments or other limited uses, which would justify its computing the interest rates using a blend of the banks’ fixed deposit and savings rates.

The high interest rates offered by the banks, on the other hand, might be promotional rates, or subject to various conditions. In other words, the argument may be that the higher rates offered by the banks are not strictly comparable.

Yet, it is clear that the interest-rate environment has changed dramatically in recent months.

Notably, the recently closed October Treasury bill (T-bill) issuances yielded 3.72 per cent per annum for the one-year tranche and 3.77 per cent for the six-month edition.

The high-interest-rate accounts that the banks are offering are a better reflection of the reality of rising interest rates. A change in the peg would ensure the CPF Board is keeping up with the times and also helping its members protect their OA funds from erosion by inflation, which is expected to average around 4 per cent for core (which excludes accommodation and private transport) and 6 per cent for headline figures.

Should the OA interest rate rise, Housing Development Board loans pegged at 0.1 per cent above the OA rate will also rise.

CPF members might want to invest their OA funds in T-bills, if the OA rate continues to be lower than the yields on the T-bills.

Note the banks’ charges, though, to ensure that they do not eat into your interest to the extent that they negate the efforts of investing into the equally risk-free T-bills. Investors should also be sure they do not need the funds for the invested period, and that the funds invested are transferred promptly from the investment account under the CPF Investment Scheme back into the OA at maturity.

Unlike investments by cash or through the Supplementary Retirement Scheme, an investor using OA savings has to place a bid for a T-bill physically at any branch of the banking trio.