Calculation of CPF Ordinary Account (OA) Interest Rate
Ministry of ManpowerSpeakers
Summary
This question concerns whether the CPF Ordinary Account (OA) interest rate computation reflects actual market rates given banks' bonus interest schemes and if alternative calculation methods should be considered. Minister for Manpower Josephine Teo clarified that the OA rate is pegged to either the major local banks' average rates or the legislated 2.5% minimum. She noted that bank bonus rates are not comparable because they require fulfilling specific criteria and are capped, whereas the OA rate is more broadly applicable. Minister for Manpower Josephine Teo stated the OA rate remains at 2.5% as the bank average was only 0.4%, ensuring returns above current market savings rates. She added that members can transfer OA savings to the Special Account to earn higher interest of 4% to 6% for retirement adequacy.
Transcript
79 Assoc Prof Walter Theseira asked the Minister for Manpower (a) whether computation of the CPF Ordinary Account (OA) interest rate, based on indicative Singapore bank fixed deposit and savings rates, reflects the actual market interest rate for deposit accounts, given banks' widespread use of bonus interest rates linked to salary credits, etc; and (b) whether the Ministry will study alternative methods of CPF OA interest rate computation to reflect the actual average weighted interest rates earned on deposit accounts with Singapore banks and the implications thereof for retirement adequacy.
Mrs Josephine Teo: CPF interest rates are pegged to returns on investments of comparable risk and duration in the market.
The Ordinary Account (OA) is a liquid account as the savings can be withdrawn at any time for home purchases. This is why the OA interest rate is pegged to the higher of (i) the three-month average of major local banks' interest rates or (ii) the legislated minimum interest of 2.5% per annum.
As the computed rate based on the three-month average of major local banks' interest rates is 0.4% per annum, the current OA interest rate is 2.5% per annum for Q1 2019.
Bonus rates given by banks are not comparable with CPF interest rates. The bonus rates are typically contingent on customers fulfilling other criteria such as minimum spending on credit cards, crediting of salary, or making bill payments through an account. The effective interest rate may be much lower because the bonus rates are usually capped to a certain amount. In other words, they are not uniformly applicable to all balances of all depositors.
Members may consider transferring their OA savings to the Special Account (SA) to earn a higher interest rate. Balances in the SA currently earn 4 – 6% per annum. In 2017, over 20,000 members transferred nearly $470 million into their SA.