- POSTED: 08 Jul 2014 14:55
- UPDATED: 09 Jul 2014 12:59
Risk on GIC investments are wholly borne by the Government, said Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam in Parliament.
SINGAPORE: Deputy Prime Minister Tharman Shanmugaratnam, speaking in Parliament on Tuesday (July 8), reiterated that CPF members’ investments are guaranteed, regardless of the returns on investments made by GIC, the Government's investment arm.
He also clarified that Temasek Holdings does not manage any CPF monies.
"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," he said in response to questions from Members of Parliament. "Neither does the CPF Board 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."
HOW CPF MONIES ARE INVESTED
Mr Tharman said that the CPF Board invests CPF members’ monies in Special Singapore Government Securities (SSGS), issued specially by the Government to the Board. The payout from the SSGS is pegged to the interest rates that the the Board is committed to pay its members.
"The Government guarantees these SSGS bonds, so that the CPF Board faces no risk of being unable to meet its obligations to its members. This is a solid guarantee, from a triple-A credit-rated government. The triple-A credit rating reflects Singapore’s very strong financial position, with the Government’s assets comfortably exceeding its liabilities," said Mr Tharman, who is also Minister of Finance.
SSGS proceeds are then pooled them with the rest of the Government’s funds, such as proceeds from the tradable Singapore Government Securities (SGS), any government surpluses as well as the proceeds from land sales. These comingled funds are first deposited with Monetary Authority of Singapore as Government deposits, which the MAS then converts into foreign assets through the foreign exchange market.
A major portion of these assets - those of a longer term nature - are transferred over to be managed by GIC.
GIC 'A FUND MANAGER'
"The GIC does not in fact manage SSGS monies on their own, separate from the Government’s other assets," Mr Tharman said. "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 past 20 years, there were eight years in which GIC's investment returns were below what the Government pays on SSGS. However, the Government has a "substantial buffer of net assets" which ensures it can meet its obligations, said Mr Tharman. As a result, "no extraordinary measures" have been necessary to enable the Government to meet its SSGS obligations in the years when GIC’s returns fall short.
"The Government has been absorbing that volatility, and protecting CPF members," he added. "Our CPF system is hence sustainable, so long as the Government continues to run prudent budgets, and invest the reserves wisely."
MANAGING CPF INDEPENDENTLY
Following Mr Tharman's speech, The Workers' Party Chief Low Thia Khiang asked about the management of CPF monies as an independent pool. Said Mr Low: "He said that if CPF money is managed and invested as an independent pool. It will not be able to enjoy the same investment returns as the GIC. I would like to know why this is so? And I understand we currently have about S$300 billion in CPF balance. Is this pool not big enough to secure the same or maybe better returns?"
"If the GIC had to manage the CPF money and ensure that they are able to meet our full obligations under the CPF, that the capital is guaranteed, that the interest rate is guaranteed and when market interest rates go down, we do not take the CPF interest rate down, but we keep it at the floor, a high floor - 3.5 per cent on the Ordinary Account and 5 per cent on the SMRA - if those were the obligations required, first, there is no private sector fund manager that would take on that task, because it is very difficult to meet," said Mr Tharman.
"The GIC, because it has a large diversified portfolio, does aim to invest for the long term, and aims to do better than the SSGS obligations. But that is only because the GIC is not just managing SSGS obligations, it's not just managing CPF liabilities. If it was managing CPF liabilities and SSGS obligations, where you must meet that obligation every year, it will need a very conservative portfolio. Meaning, not much equity, certainly no real estate, alternative assets," he continued. "It will aim to just minimise the failure to meet obligations, not maximise long-term returns.
"Our strength is that the Government has net assets, including unencumbered assets - proceeds from land sales over the many years, proceeds from the Government surpluses, especially in the earlier years, and the investment returns on those proceeds. Those give us unencumbered assets and by pooling the SSGS monies together with those unencumbered assets in one pool, we have been able to invest for the long term, aim for high returns over the long term, that will beat the SSGS, we hope."