NO EQUIVALENT financial product in the market today offers assured rates of returns with no risks like the Central Provident Fund system does, Manpower Minister Ng Eng Hen said yesterday.

The new CPF interest rate structure is 'more than fair' and can stand up to market scrutiny, he told the House.

'It is easy to claim that our investments should do better, but who dares to promise you this? And how are they accountable?' he said, addressing calls by MPs for higher returns.

To underline why he was confident that what the CPF system offered members was the best available, he explained it this way:

'There are no suitors asking to take over our funds and guaranteeing equivalent returns. No one is willing to underwrite this system because simply, it is more than fair. That's the market test ...'

Under the new CPF system, members get 1 percentage point more interest for the first $60,000 in their combined accounts, with a cap of $20,000 for the Ordinary Account (OA).

This would work out to 3.5 per cent interest for the OA, and at least 5 per cent interest for the Special, Medisave and Retirement Accounts (SMRA) for the next two years.

The SMRA will also no longer offer a fixed interest rate. It would be pegged to the 10-year Singapore Government Securities plus 1 percentage point.

But MPs such as Mr Inderjit Singh (Ang Mo Kio GRC), Mr Ong Kian Min (Tampines GRC) and Nominated MP Siew Kum Hong believed the Government could offer better rates. They said so during the three-day debate.

Yesterday, Dr Ng disclosed that the Government hired consultants and studied many options to enhance returns:

'We (were) trying to find a way to insulate members, to smoothen it and we said, look, can you study and do your simulations? And they ran about a thousand simulations of different market conditions...and finally, they gave us an answer.

'They said, there was no approach to funding a 2.5 per cent guarantee through members' contributions that will completely eliminate the risk of a shortfall arising.

'You can't completely guarantee this system that you are providing now. This is because there isn't any risk-free asset that can be certain to achieve the 2.5 per annum minimum return.'

He also recounted a conversation he had with a fund manager who laughed when asked for a 4 per cent guaranteed rate of return. The fund manager countered with a 3.3 per cent rate instead.

Dr Ng also addressed a point raised by Mr Siew on Tuesday that insurance firm Aviva's Big e Fund guarantees CPF members higher returns than the OA's current rate of 2.5 per cent.

'When I saw the advertisement, I, like him, was very excited. I said: 'Well, if this is a product, perhaps we, CPF Board, might even put some money with them',' said Dr Ng who asked his staff to check it out.

'The reality is that should this Big e return fall below 2.5 per cent, Aviva returns the money back to you. Aviva does not provide the guarantee.'

The Government does not have this option, he said.

'If their returns fall below, (Aviva) says I'll give you your money back, thank you very much. You don't sue me, I don't sue you. Can government do that?'

The Government will have to bear the risk of providing the guarantees it promises and has to deliver, he said.

To a question by opposition MP Low Thia Khiang (Hougang) on whether the Government of Singapore Investment Corporation (GIC) uses funds from the CPF funds to invest, Dr Ng said: 'The answer is no.'

Later, he rose to add: 'The relationship is not so simple.'

Using a banking analogy, Dr Ng said: 'You put money in a bank and you agree that you put it there and you get 2 per cent. The bank publishes a report and says of all its earnings, it earned 8 per cent. You go to the bank and say, I want 8 per cent. It doesn't work.'

He explained that the Government bears the liabilities in the same way that the bank does.

'The Ministry of Finance has taken our liabilities. What the Ministry of Finance does with its money is (its) consideration. But ... the CPF Board ... promises a risk-free rate to (CPF) members. And that is how it works.

'As I said, the market test is, if anybody else thinks he can take on that liability, please line up. But no one will take on that liability because they can't deliver.'

Mr Low pressed further. He asked if the Government was shortchanging Singaporeans by giving CPF members a lower interest rate than what the GIC makes - and pocketing the rest.

He also asked if the motive in delaying the CPF Minimum Sum draw-down age was to let GIC have 'readily available cheap source of funds to invest'.

Dr Ng's comeback: 'If it was that cheap, we'll have a line of suitors waiting for that money. There are none.'