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The truth about the interest rate paid by Central Provident Fund
26 May 2017 (372 views)

For many years, the Central Provident Fund has been paying an interest rate of 2.5% on the ordinary account and 4% on the special account. Many commentators pointed out that the CPF savings are invested by GIC which was able to earn a much higher return than the interest rate paid by CPF. They asked for transparency in the investment of CPF.

There is already transparency. The CPF savings are used to buy government bonds that pay an interest rate of around 2.5% and 4%. The government passes the money to GIC to invest and keeps the difference. They justify it by saying that the government bears the risk and guarantees the return of 2.5% and 4% paid by CPF to its members. 

The CPF members then ask the question - why should the government give a poor deal to CPF members. They are able to earn a higher return (averaged over the long run) and they keep the difference. They are just "milking" the CPF members.

The government is in a dilemma. They don't know how to address this criticism. Here is my suggestion. 

The government can get Temasek Holdings and GIC to set up a separate investment fund for CPF members to invest in. The return on the fund will depend on the return earned on the underlying assets less the management fee that is used to pay the fund managers and administrators of the fund. 

They can provide CPF members with the option to transfer some of their savings to invest in the TH or GIC funds. These members are told that the value of the fund can fluctuate wildly from one year to the next. The return is volatile. They have to take the risk.

If the government provides this option to CPF members, many of them will probably stay with the security of the guaranteed return of 2.5% and 4%. The criticism will disappear.

I hope that the government considers this suggestion. It is best to remove the distrust caused by the current system, which is deemed to be non-transparent by many CPF members.


The truth about the interest rate paid by Central Provident Fund
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For many years, the Central Provident Fund has been paying an interest rate of 2.5% on the ordinary account and 4% on the special account. Many commentators pointed out that the CPF savings are invested by GIC which was able to earn a much higher return than the interest rate paid by CPF. They asked for transparency in the investment of CPF.

There is already transparency. The CPF savings are used to buy government bonds that pay an interest rate of around 2.5% and 4%. The government passes the money to GIC to invest and keeps the difference. They justify it by saying that the government bears the risk and guarantees the return of 2.5% and 4% paid by CPF to its members. 

The CPF members then ask the question - why should the government give a poor deal to CPF members. They are able to earn a higher return (averaged over the long run) and they keep the difference. They are just "milking" the CPF members.

The government is in a dilemma. They don't know how to address this criticism. Here is my suggestion. 

The government can get Temasek Holdings and GIC to set up a separate investment fund for CPF members to invest in. The return on the fund will depend on the return earned on the underlying assets less the management fee that is used to pay the fund managers and administrators of the fund. 

They can provide CPF members with the option to transfer some of their savings to invest in the TH or GIC funds. These members are told that the value of the fund can fluctuate wildly from one year to the next. The return is volatile. They have to take the risk.

If the government provides this option to CPF members, many of them will probably stay with the security of the guaranteed return of 2.5% and 4%. The criticism will disappear.

I hope that the government considers this suggestion. It is best to remove the distrust caused by the current system, which is deemed to be non-transparent by many CPF members.