CPF issue: GIC manages CPF monies along with other govt funds: DPM Tharman

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.

It is this role of the Government, with its significant net assets, that ultimately allows the CPFB and CPF members to be shielded from risk. The Government, through GIC, expects to earn good returns over the long term, but the volatility can be substantial from year to year. The Government has been absorbing that volatility, and protecting CPF members.

This is also the reason why no market player, other than the Government, is able to take on the CPF obligations. The guarantor is not merely playing the role of a long run investor. It also must have significant capital that provides a buffer when the markets are down.

Our CPF system is hence sustainable, so long as the Government continues to run prudent budgets, and invest the reserves wisely. Then the Government's balance sheet will remain strong and investment returns over the long term can continue to meet our debt costs.

However the GIC's good long-term returns also reflect the fact that it is managing the Government's assets as a pool, which includes the Government's unencumbered assets - i.e. assets that are not matched by liabilities. This is a key feature of our system. It allows the GIC to invest for the long term, including investing in riskier assets like equities, real estate and private equity.

It would be different if the GIC, instead of managing the Government's pooled assets, were to manage a separate, standalone fund to provide backing for CPF liabilities. A standalone fund would have to be managed much more conservatively, to avoid the risk of failing to meet CPF obligations. It would not be aimed at accepting risks that enable good long-term returns, but at avoiding any short-term shortfalls. Consequently, the returns it would earn over time will be lower than what the GIC can achieve in its current role.

Finally, I should emphasise that the investment returns in excess of the SSGS rates that the GIC expects to make as a long term investor are not simply hoarded away in our reserves. 50 per cent of the returns from our reserves flow back to our annual Budget through the Net Investment Returns Contribution (NIRC). This currently adds about $8 billion to the Budget annually. The NIRC has provided the Government valuable resources that have allowed us to embark on new priorities for Singapore, including enhancing our social safety nets.

Investments are audited

Mr Gan Thiam Poh asked about independent audits and other measures to safeguard CPF investments and funds. As I have explained, CPF monies are invested in SSGS that are guaranteed by the Singapore Government. The Singapore Government's guarantee is a key safeguard.

CPFB, besides its own internal auditors, is externally audited by professional audit firms approved by the Auditor-General.

As for Government's investments, I can assure Members that GIC is audited on a regular basis.

a. GIC's financial statements are independently audited by the Auditor-General every year.

b. Its audited financial statements are submitted to the President and the Council of Presidential advisors annually. The President also has full information about the size of the reserves and the performance of GIC's investments.

c. GIC's investment performance over 5, 10 and 20 years is also made public through its Annual Reports.