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

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 Shanmugarat
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, July 8, 2014. -- PHOTO: ST FILE

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.

This allows GIC to invest for the long term, including investing in riskier assets like equities, real estate and private equity, he said, shedding light on how the Government invests CPF monies, and the role that GIC plays as the Government's fund manager.

Having the GIC manage CPF monies as a standalone fund would require it to be more conservative, and thus make it harder for it to earn as good returns as it currently does.

"It would not be aimed at accepting risks that enable good long-term returns, but at avoiding any short-term shortfalls," he said, responding to questions from four MPs on how CPF monies are invested.

CPF members also bear no investment risk at all, he assured members of the House, and the Government has been absorbing market volatility and shielding CPF members.

Explaining this, Mr Tharman, also Finance Minister, said that CPF monies are first invested into special government bonds issued to the CPF Board by the Government.

The proceeds from these Special Singapore Government Securities (SSGS) are then pooled with the rest of the Government's funds, such as proceeds from other government securities and land sales.

These funds are then deposited with the Monetary Authority of Singapore (MAS), which converts them into foreign assets through the foreign exchange market. And as a majority of these assets are long-term in nature, these are then transferred over to the GIC to be managed.

"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," said Mr Tharman.

But he noted that while the Government expects GIC to earn returns higher than what it pays on the special government bonds over the long term, there is also no guarantee that GIC's returns will exceed the special government bonds' interest rates over shorter periods, let alone each year.

The GIC has earned a "creditable" return over the long term, but this "masks wide fluctuations in returns from year to year", he said.

For the last 20 years the GIC has earned a 6.5 per cent return per year in US dollar terms. This translates to 5.2 per cent in Singapore dollar terms.

But over the five years following the 2008 global financial crisis, GIC earned just a 2.5 per cent return per year in US dollar terms, which translates to 0.6 per cent in Singapore dollar terms.

In such years, when the financial markets are weak and when the GIC's returns fall below what the Government pays on its special bonds, the Government's net assets is what allows it to meet its interest obligations to the CPF Board.

These net assets, which are assets in excess of liabilities, are what has helped absorb losses and ensure the Government can continue to pay the interest on the SSGS, he said. It is also because of this that no commercial players are able to take on the CPF obligations.

"The guarantor is not merely playing the role of a long-term investor. It also must have significant capital that provides a buffer when the markets are down," he said.

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