Revealed for the first time: How GIC invests State funds

The following info have been extracted from DPM Tharman’s speech in Parliament on the 8th of July 2014

 

Notice the title of this article says “State funds” and not “CPF funds”?  Because what GIC is investing in, is money coming from the State and not from the CPF. Here’s why:

CPF money is guaranteed by the Government and must be made payable to the member on several conditions. Examples of these conditions include:

  • Buying of a house
  • Medical expenses
  • Retirement
  • Closure of CPF account due to death or migration

In order to guarantee the money, the Government acts as a buffer and assumes the risk of investment on your behalf. So as far as you’re concerned, you’re getting paid interest at zero risk.

If you’re happy with this arrangement, you may stop reading now :) But if you’re curious what happens to the money after it passes the Government’s hands, read on.

The CPF Board invests your money in this thing called a “Special Singapore Government Security”. The interest paid by this Security is where your interest comes from. It is risk free, it is a solid guarantee from a triple-A credit-rated Government. The triple-A rating provided by Moody’s and it is a rating that even the United States doesn’t have.

 

What does the Government do with the money after that?

This money is then pooled together with the rest of national funds (including proceeds from land sales). This pool of money is then deposited with the Monetary Authority of Singapore (our central bank). Some of this money is then transferred to be managed by the Government Investment Corporation, yes… the famous GIC.

 

What is GIC?
GIC is a fund manager for the Government. Put simply, it is nothing more than an Aberdeen, a DBS or a Prudential. It has only one client – the Ministry of Finance.

If you put your money into DBS for investment, DBS doesn’t own your money. You own your money. Likewise, GIC doesn’t own the hundreds of billions of dollars. The Government does.

Over the last 20 years, GIC earned 6.5% per annum (in USD). This is a lot of money considering GIC manages well over S$200b of funds.

Sure, it is also revealed that there were 8 years out of 20 (probably recession periods) where GIC’s investment returns was below the interest paid on SGSS… but in the greater scheme of things, they have been in profit and continue to be (as published in their Annual Reports).

 

Ok, so there is risk of losing money, how does the Government bear this risk?
The CPF Board does not bear the risk. You do not bear the risk. The Government alone is wholly responsible for the funds.

The Government has substantial buffer of net assets, which ensures that it can meet its obligations. This is why it is important that the Government be prudent with its spending, and not put unnecessary strain on the budget through careless spending.

This is the reason why it is taking so long, with so much debate on how to create welfare for the country. It is not that the administration does not want welfare, it is how to best do it so that future generations do not suffer.

It is useful to note at this point that this money is not passed to Temasek Holdings.

 

So if GIC is making so much money, why not pay more to CPF members?
But it is! You see, the money is not simply hoarded away into national reserves. 50% of the returns are paid into the annual Budget. This amount is about S$8b each year – or the equivalent of an entire year’s worth of GST collections.

This is where you get your free money from. This is where you get your utility bills paid off from. This is the reason why income tax is so low, yet the quality of public service is rather decent.

Whatever new means or suggestions to improve the CPF system, must ensure that CPF remains sustainable over a long, long time. It must provide fair returns for Singaporeans and not subject the CPF member to take on too much risk.

 

 

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About the author

Benjamin Chiang

Benjamin Chiang is an enthusiast of good advertising, deep thinking, labour issues and chocolate. He writes also at www.rangosteen.com and occasionally on Yahoo!

The views expressed are his own.

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