Central Provident Fund (CPF) members will continue to get an interest rate of 4 per cent on a portion of their CPF savings for another year.

This will ensure that CPF returns stay stable in the midst of a global economic crisis that has led to

unusually low interest rates, said Manpower Minister Gan Kim Yong yesterday.

Such concerns prompted the Government to extend the minimum interest rate guaranteed for the Special, Medisave and Retirement Accounts (SMRA) until the end of next year.

'Without the 4 per cent floor, the computed interest rate on

SMRA funds for the fourth quarter of 2009 would be 3.4 per cent,' he said.

'The rate is not likely to improve significantly by the first quarter of next year.'

Mr Gan also disclosed how the interest rates for the new CPF Life annuity scheme will be computed, at a CPF roadshow at West Mall in Bukit Batok.

The new method, which will be applied to all retirement savings, is aimed at ensuring more stable payouts for members.

Welcoming the changes, Holland-Bukit Timah GRC MP Liang Eng Hwa said the one-year extension of the floor rate will give Singaporeans more time to ease into the new fluctuating CPF interest rate scheme, and assuage fears that they will be getting less in this downturn.

The Government had in 2007 decided to do away with a fixed rate of 4 per cent for the SMRA. In its place, a market-based rate was introduced in January last year that is pegged to the interest rate of 10-year Singapore Government Securities (SGS) plus 1 percentage point.

But the rate has yet to kick in as the Government guaranteed a 4 per cent minimum rate for two years up to December this year.

Mr Gan said the extension of the floor rate of 4 per cent will apply to CPF Life funds as well until December next year.

MP for Marine Parade GRC, Mr Seah Kian Peng, noted that the extension of a higher rate of interest will also enhance people's CPF savings.

'While there have been some signs of improvement in the economy, most people are still cautious about a recovery, so every bit of help that the Government can give is very much appreciated,' he said.

With 3.27 million CPF members as of the end of June, observers say changes to CPF interest rates have a wide-reaching impact.

Explaining the changes in computing the interest rates for CPF Life funds, Mr Gan said that ensuring people have greater certainty about their retirement income was an important consideration.

He disclosed that the funds will be invested in special government bonds and will continue to earn an interest pegged to the yield of 10-year SGS rates plus 1 percentage point.

But the rates for the bonds will be fixed for a longer period rather than being adjusted quarterly, as is the practice now, so that they are more stable.

Mr Gan did not say how much longer this period will be.

The CPF Life funds will also earn a weighted average interest rate on a portfolio of government bonds, so that every member will enjoy the same rate.

Mr Gan said: 'For many members, CPF Life payouts could be their main source of income. It is therefore important to have more stable CPF Life payouts. To achieve this, interest rates earned by CPF Life funds must be stable too.'

He added that the same weighted average method will be adopted for the existing CPF Minimum Sum Scheme, which gives a monthly payout for 20 years from age 65.

This will result in more stable returns for the scheme as well, he said.

CPF member Lim Meng Juan, 55, told The Sunday Times that he was in favour of the new computation of interest rates for retirement funds.

'There's more certainty,' said the part-time trolley assistant at a supermarket.

'If not, people will start wondering how much they will get for their retirement years if they leave their money in CPF.'

chinlian@sph.com.sg