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Singapore Budget 2014: Govt spending needs won't drive GIC and Temasek's investments

The Government's spending needs will increase over time, but that should not drive the investment strategies of GIC and Temasek Holdings or lead them to take on higher risks, Senior Minister of State for Finance Mrs Josephine Teo said on March 7, 201
The Government's spending needs will increase over time, but that should not drive the investment strategies of GIC and Temasek Holdings or lead them to take on higher risks, Senior Minister of State for Finance Mrs Josephine Teo said on March 7, 2014. -- ST FILE PHOTO: KUA CHEE SIONG

The Government's spending needs will increase over time, but that should not drive the investment strategies of GIC and Temasek Holdings or lead them to take on higher risks, Senior Minister of State for Finance Mrs Josephine Teo said on Friday.

She was responding to Ang Mo Kio GRC MP Inderjit Singh, who had raised concerns that the Government may be spending too much from its investment returns.

The Net Investment Returns (NIR) framework allows the Goverment to spend up to 50 per cent of the long-term expected real return from the net assets managed by GIC and the Monetary Authority of Singapore.

And so half of the expected real returns are retained in the reserves, Ms Teo noted.

And while government spending needs will increase over time, GIC and Temasek "must continue to invest with the aim of achieving good, risk-adjusted returns over the long term", she said, adding that they have achieved this so far.

"If the Government is in need of more revenues besides that obtainable within the NIR framework, the solution is not for our investment entities to take more risk in the hope of higher returns," said Ms Teo.

"The solution has to rest on our budgetary measures, not the investment strategies of GIC and Temasek."

Mr Singh had also asked whether giving higher Central Provident Fund (CPF) returns would be better than sharing benefits through Government transfers.

Ms Teo responded that many pension funds abroad may promise higher returns but they also expose their members to market risk. On the other hand, CPF monies are invested in risk-free Singapore Government securities. Coupled with the Government's fiscal transfers, it is a fair and equitable approach for citizens in the long run.

"In many pension funds abroad, there's the promise of higher returns, but depending on when you retire and the state of the financial markets at that time, your pension withdrawals can vary significantly," Ms Teo noted.

"In our system, with the CPF monies being invested in Government securities, it is the Government that bears the investment risk."

Unlike most pay-as-you-go pension systems, Singapore's CPF system is designed to be sustainable and also does not require intergenerational transfers.

"However, the Government systematically tops up the CPF savings of the lower-income. We do this through Workfare, housing grants and other schemes. These top ups are all borne by the Budget as explicit fiscal transfers," Ms Teo added.

Furthermore, though the interest rates on other pension funds broad may be higher, the returns on any financial instrument have to be viewed in the context of the performance of their domestic currencies over time, she said.

"Interest rates are typically higher in countries whose currencies have tended to depreciate over time, because higher interest rates compensate for weaker currencies."