CPF interest rates are pegged to the returns on market instruments of comparable risk and duration.

However, there is also a minimum interest rate on CPF savings that protects members when market returns fall to low levels, such as over the past two decades. The computation approach for the CPF Ordinary, Special, MediSave and Retirement Accounts’ interest rates and the applicable minimum interest rates are listed below.

• Ordinary Account (OA): Computed based on the 3-month average of major local banks’ interest rates, subject to the legislated minimum interest rate of 2.5% per annum. More information can be found on CPF website.

• Special, MediSave and Retirement Accounts (SMRA): Computed based on the 12-month average yield of 10-year SGS plus 1%, subject to the current floor interest rate of 4% per annum.
  The SMRA are for longer-term retirement and medical needs. To provide certainty for CPF members amidst an uncertain interest rate environment, the Government has extended the 4% floor rate for interest earned on all SMRA savings since it was first introduced in 2008.
  The interest rate on the SMRA aims to be equivalent to what a 30-year SGS would earn, as 30 years is the typical duration for which SMRA monies are held. As the 30-year SGS did not exist when the Government made changes to the interest rate structure in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1%.

• In addition, CPF members below age 55 earn an extra 1% interest on the first $60,000 of their combined CPF balances (capped at $20,000 for OA), while members aged 55 and above earn an extra 2% interest on the first $30,000 of their combined balances (capped at $20,000 for OA), and an extra 1% interest on the next $30,000.

There is no link between CPF interest rates and the returns earned by GIC. The CPF Board invests CPF savings entirely in risk-free SSGS issued by the Government.

The Government invests the SSGS proceeds together with its other assets through the GIC, which takes investment risks aimed at achieving good long-term returns. However, the consequence of taking risk as a long-term investor is that returns may be weak or even negative over shorter periods. Yet, the Government is able to guarantee CPF savings and pay the minimum interest rates on CPF savings regardless of GIC’s returns over any period, because the Government's balance sheet enables it to absorb risks. The Government has a significant buffer of net assets, i.e. assets which are well above its liabilities including its CPF commitments.

• For example, GIC experienced losses in investment value during the Global Financial Crisis, and low average returns for five years, before recovering (see GIC’s annual report).

• The Government was able to bear this investment risk because its substantial buffer of net assets ensures that it can meet its obligations.

This also means that GIC can invest without regard to the Government’s specific liabilities. This enables GIC to focus on achieving good long-term returns, in full knowledge that the portfolio will be exposed to significant risks over the shorter term as the markets experience cycles and volatility. The Government’s balance sheet would absorb these risks.