SINGAPORE - Central Provident Fund (CPF) monies are not managed as a separate entity by the Government of Singapore Investment Corporation (GIC), they are pooled and invested with the rest of the Government's funds, said Deputy Prime Minister Tharman Shanmugaratnam on Tuesday.
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Here are excerpts of DPM Tharman Shanmugaratnam’s reply to parliamentary questions on CPF and GIC:
How the Government is able to meet its SSGS obligations
What these investment arrangements mean is that CPF members bear no investment risk at all in their CPF balances. Their monies are safe, and the returns they have been promised are guaranteed. Neither does CPFB bear any risk, regardless of whether GIC's investments earn or lose money in any particular year. The risk is wholly borne by the Government, on its own balance sheet.
The Government pools the proceeds from SSGS with its other assets, and invests long-term funds through the GIC. The GIC does not in fact manage SSGS monies on their own, separate from the Government's other assets. This is an important distinction, which I will come to later. GIC is fund manager for the Government, not owner of the assets and liabilities. It seeks to achieve the Government's mandate of achieving good long-term returns, without regard to the sources of the funds that the Government places with it - for example, whether they are proceeds from SGS, SSGS or government surpluses.
Over the long term, our investments in GIC have earned a creditable return. For example, over the last 20 years, GIC earned 6.5 per cent per annum in USD terms, which translates to 5.0 per cent per annum when expressed in SGD.
But that is not the whole story. This average long term return masks wide fluctuations in returns from year to year. To answer Mr Gerald Giam's question, over the last 20 years, there were 8 years where GIC's investment returns were below what the Government pays on SSGS.
A good example was the Global Financial Crisis (GFC). As I stated in Parliament at the time, GIC's portfolio value in USD terms declined by about 25 per cent during the 14 months from October 2007. GIC's performance was similar to that of other funds with a similar mix of asset classes, but it illustrated the market volatilities faced by every long-term investor.
Even over the 5-years following the crisis, ending 31 March 2013, GIC earned an annualised return of just 2.6 per cent in USD terms, which translates into a mere 0.5 per cent in SGD terms. GIC's Annual Report explains the reasons for this weak recovery from the crisis, especially in illiquid asset classes like real estate. Its 5-year annualised returns are expected to improve significantly going forward.
Hence while the Government expects to earn returns through the GIC over the long term that exceed what it pays on SSGS, and has done so in the past, there is no assurance of GIC's returns exceeding SSGS interest rates over shorter periods, much less every year. This is also because of the guaranteed floor on CPF interest rates, which do not follow declines in market interest rates.
How then is the Government able to meet its SSGS obligations in the years when the markets are weak and GIC's returns fall below what the Government has to pay SSGS? The reason is that the Government has a substantial buffer of net assets, which ensure that it can meet its obligations. In years when investment returns are poor, the net assets have helped to absorb any losses and ensure that the Government can meet its obligations on the SSGS as well as its market-traded SGS. Correspondingly, when investment returns are strong, the net assets grow.
To address Mr Gerald Giam's further question, therefore, no extraordinary measures have been necessary to enable the Government to meet its SSGS obligations in the years when GIC's returns fall short.