CPF Interest Rates for SMRA Accounts

Amendment: My apologies. SMRA floor rate of 4% is applied for 2 years from 01 Jan 08 to 31 Dec 2009 instead of 2010. Thanks B yee for highlighting

The interest rate for Special, Medisave and Retirement Accounts (SMRA) from 1st October 2008 to 31 December 2008 will be 4% as announced by CPF Board on 9th September. The SMRA interest rate is pegged to the 12 months average of the 10 Year Singapore Government Securities (10YSGS) yield + 1%. To assist CPF member adjust to the floating rate, there will be a floor rate of 4% for the next 2 years starting from 1st Jan 2008 to 31 December 2009. After that, a floor rate of 2.5% will be applied to all CPF accounts. What does this mean? For example,

Average 12 months 10YSGS yield for the period Sept 07 to Aug 08 = 2.77%

Plus 1% = 2.77% + 1% = 3.77%

This is less than the floor rate of 4%. So, the floor rate of 4% will apply. Refer to the CPF Board website for more info.

Note that 4% floor rate is only applicable up to 31 December 2009.

Lets look at the historical yield of the 10YSGS (June 1998 – Aug 2008) and the 12 month average yield.

The yield was higher when the 10YSGS was newly issued in 1998 to the year 2000. After around 2001, the yield has moved between 2% and 4%. To equal the current 4% SMRA rate, the yield must be at least be 3% (red line in the graph). This seems to have occurred most of the time. If history was any guide, this change of peg to the 10YSGS yield + 1% seems to benefited the CPF members. If the new SMRA interest rate (with floor at 2.5%)is implemented in Jan 2000, $100 in the SMRA account would have grown to $147.70, having a total return of 47.7% and an annualised return of 4.43%. If the new interest rate was instead implemented in Jan 2001 which would avoid the high yield period of 1998 to end 2000, the total return would be 40% with an annualised return of 4.29%. In both cases, the interest is better than the old SMRA interest of 4%. However, these are based on historical returns which are not indicative of future returns.

Another thing to note is that the yield is correlated to the general market conditions. This is expected as yield is the inversely related to price of the SGS. After market shocks, the price of the SGS tends to rise as investors move to safer investments which will in turn lower the yield. The following graph shows the movement of the yield with relation to major occurrences that affects the market.

With the current credit crunch due to the US sub-prime issue, the 10YSGS yield can be expected to come down as investors take flight to quality. Fortunately, the floor rate of 4% will still stand until end of 2009. What this means is that in a bear market after 2009, investors are likey to get hit in both their investments and their SMRA accounts as equities fall and risk appetite is reduced, raising the price of SGS and reducing the yield in result. However, the SMRA formula will be reviewed in 5 year’s time and other scenarios could happen.

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