BT Explains: CPF interest payout hits record S$21 billion. How is it funded?
SINGAPORE’S Central Provident Fund (CPF) paid out a record S$21 billion in interest to its members in 2023, 6 per cent more than in 2022, according to figures from the latest annual report of the mandatory social security savings scheme.
The interest payout has enabled CPF members’ balances to grow collectively by 4.8 per cent to S$571 billion.
The Business Times takes a closer look at where the money comes from.
How are CPF returns generated?
The CPF Board invests CPF monies in Special Singapore Government Securities (SSGS), which are issued and guaranteed by the Singapore government.
SSGS are non-marketable bonds primarily issued to the CPF Board. The CPF monies that go into them cannot be used for government spending, as stipulated in the Government Securities Act.
The proceeds from the SSGS issuance are invested by the government through the Monetary Authority of Singapore (MAS) and sovereign wealth fund GIC, just as it invests the proceeds from the market-based Singapore Government Securities (SGS).
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How is the risk managed?
While the CPF is exposed to interest-rate risk as a result of investments in debt securities, it manages this risk by pegging the interest rates that it pays members to the interest rates of its investments in SSGS and advance deposits. Advance deposits are those placed with the Accountant-General through MAS to purchase special issues of SGS.
The interest rate floor of the Ordinary Account of members is set at 2.5 per cent per annum, while that for the Special Account, MediSave Account and Retirement Account is 4 per cent per annum.
All other investments are in fixed-rate debt securities, such as Singapore government securities and statutory board bonds. Here, interest-rate risks are mitigated by diversifying the portfolio to include high-quality credits as well as by managing portfolio duration, says its annual report.
This keeps savings safe, says CPF, since the guaranteed floor on CPF interest rates shields members from the risk of low interest rates when markets are weak.
How have CPF interest rates been doing?
In 2023, the average interest rate amounted to 3.68 per cent, as derived from the interest amount and total members’ balance.
This is marginally higher than the average rate of 3.63 per cent in 2022, as interest rates on the balances in the SA and MediSave Account (collectively, SMA) rose above the floor rate of 4 per cent for the first time last year.
The SMA interest rate was at 4.04 per cent in the fourth quarter.
This was due to the increase in the 12-month average yield of 10-year Singapore Government Securities, to which the SMA interest rate is pegged.
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