THE Government has decided not to let Central Provident Fund (CPF) monies be managed by private pension plans, after studying the issue for five years.

This is because such plans would subject Singaporeans' retirement savings to higher risk in exchange for higher returns.

Manpower Minister Ng Eng Hen said the Government has decided to retain CPF's 'risk-free' structure for now.

But the formula for CPF interest rates will be reviewed after five years, to be fine-tuned if necessary.

The proposal for CPF to be managed by private funds came up in 2002, as part of the recommendations by the Economic Review Committee.

The issue was looked at 'from many angles' but the same unavoidable conclusion was reached: "To get higher returns, members must expose their CPF money to more market risks."

He added: "We decided that for now, it would be unwise to go the full investment route because the majority of members do not have large balances and it would be too risky for older members.

"We tried to devise many schemes to shield members from volatility yet delivering higher returns. But it was neither possible nor right. It would mean subsidising losses using other members' or taxpayers' money."

The recent turmoil in the financial market is a timely reminder of investment risks, he said.

The Government will continue to offer risk-free returns on CPF savings, but raise the rate of return.

It will pay an additional 1 percentage point on all CPF accounts for the first $60,000, up to a cap of $20,000 in the Ordinary Account.

The other change is that the interest rate on Special, Medisave and Retirement Accounts (SMRA) will no longer be fixed at 4 per cent.

Instead, it will be pegged to the  rate of 10-year-old Singapore Government bonds plus 1 percentage point.

The Government will guarantee a rate of 4 per cent for the SMRA rate in the first two years. Thereafter, the guaranteed rate for all CPF balances is 2.5 per cent.

"We have put in place a long-term framework which provides a fair return on CPF monies that compares well with any offer from private pension plans.

"More important, our CPF system minimises the financial risk to members," said Dr Ng, adding that the CPF system aims to serve lower- and middle-income earners.

As for those with more than $60,000 who prefer to be exposed to greater risk for higher returns, Dr Ng said, the Government can consider how to help them invest in future.

The changes will have to be justified to the President, be affordable and not draw on past reserves, he said.