CENTRAL PROVIDENT FUND SAVINGS (Computation of interest)

Mr Lau Ping Sum asked the Minister for Labour (a) whether the Central Provident Fund (CPF) Board will consider computing the monthly interest on CPF savings in the members' accounts based on the average daily account balance instead of the minimum account balance for the month; and (b) whether the monthly interest on CPF savings will be credited into members' accounts monthly.

The Minister for Labour (Dr Lee Boon Yang): Mr Speaker, Sir, the interest paid by the CPF Board for savings in the Ordinary and Medisave Accounts is computed on a monthly basis and the rate is pegged to the average of the savings and 12-month fixed deposit rates of the Big Four local banks. Although the CPF savings are readily withdrawable by CPF members for housing, medical and investment needs, not unlike deposits in savings accounts, the CPF interest rate has been consistently higher than the banks' savings rates. Furthermore, while banks may pay daily interest rates on savings deposits, they do not guarantee a minimum interest rate of 2.5%. Hence, during periods when the average of the savings and 12-month fixed deposit rates dips below 2.5%, CPF Board continues to pay members the guaranteed interest of 2.5%. This was the situation between July 1993 and December 1994. It is therefore not appropriate to compare the CPF Board's practice with that of banks.

Sir, as the CPF Board's present interest formula and computation provide a guaranteed and reasonable rate of return to its members, it is unnecessary to review the basis for computing and crediting interest rates for CPF balances.

Mr Lau Ping Sum (Ang Mo Kio GRC): Sir, does the Minister agree with the present method of computation under which any amount withdrawn on the last day of the month would not earn any interest between the first day of the month and the date of withdrawal? In other words, if the withdrawal is made on the 30th, then no interest will be earned even for the first 29 days of the month?

Dr Lee Boon Yang: Mr Speaker, Sir, I think we should look at the system in totality rather than on individual cases. The CPF Board's interest rate is already higher than what the banks normally pay out for savings in the savings accounts. On top of that, for the participants of the CPF investment scheme, they can always programme their withdrawal so that it is after the monthly interest computation period. In fact, the CPF Board notes that many of its members participating in the investment scheme tend to withdraw more money than they actually need to purchase shares. As a result, the Board had to institute a mechanism since last year to sweep back all the unused CPF savings that are deposited in the members' investment accounts and hence earning less interest than what they would earn if they had been left with the members' CPF accounts. On balance, I think the present system is fair. The CPF Board offers its members an interest rate which is already higher than what they would earn in the savings accounts in the commercial banks.