Pritam Singh
CPF Series
Article 4: GIC does not use CPF funds: SM Lee
23 May 2001, The Straits Times
This article refers to comments made by then Senior Minister and Chairman of the Government of Singapore Investment Corporation (GIC) Lee Kuan Yew on the occasion of the GIC’s 20th anniversary in 2001, stating:
“Seeking to correct a view that the GIC invests CPF savings overseas directly for a return higher than that which the Board pays its members, he said that the two pools of money were separate and unlikely to cross paths even in the future.”
This quote is interesting because it gives the impression that CPF monies are handled as a stand-alone pool. The article does not deal with the question of the GIC’s use of CPF monies by stopping at the CPF Board’s purchase of Singapore government bonds from the Government, without stating clearly what the Government does when it is in receipt of the proceeds of the monies received from the purchase of those very bonds by the CPF Board.
This probably explains the intentional(?) caveat – “there is no ‘direct’ link between GIC monies and CPF monies.”
Unfortunately, this arguably inadequate explanation by a major newspaper is part of the reason why there is so much misinformation, myth and confusion about the CPF monies today. For that reason, we need to be more patient and forgiving of people who come to different conclusions about their understanding of CPF policy and how the government manages CPF monies, even if their explanations incorrectly borders on conspiracy.
More education by the Government of the policies that affect Singaporeans through the course of their life is in order. From Medishield Life to HDB policies, Workfair, employment rights, and of course, CPF for retirement adequacy, amongst many others – the list is long. Maybe we should teach these things in school along with financial prudence in a bigger way! But I digress.
Any misconception of separate pools was somewhat clarified by DPM Tharman Shanmugaratnam in parliament in July 2014 when he said:
“What does the Government do with the proceeds from SSGS issuance (bonds purchased by the CPF Board with members’ monies)? It pools 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 which under our Constitutional rules have to be accounted for as Past Reserves.
The comingled funds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. A major portion of these assets are however of a longer term nature, and are hence transferred over to be managed by GIC.”
In reply to Mr Low Thia Khiang’s (MP for Aljunied GRC) question at the same session of parliament, DPM Tharman stated if it was not possible to invest CPF monies separately, even though CPF monies were in the billions, as the CPF’s obligations towards its members would be very hard to meet should it be so.
“Mr Low Thia Khiang (Aljunied): Madam, I have two clarifications. First, will the Government consider allowing CPF members to withdraw from CPF Retirement Account to redeem housing loans with a small loan balance, let say about $20,000 at age 55, so that the member can save on paying interest.
I have a second clarification for the Deputy Prime Minister. He said that if the CPF monies were managed and invested as an independent pool, it would not be able to enjoy the same investment returns as GIC. I would like to know why it is so. I understand we currently have about $300 billion CPF balance. Is the pool not big enough to be able to secure the same returns and maybe better returns?
Mr Tharman Shanmugaratnam: If I can handle Mr Low’s second question first. It is a very important question and in fact many of my grassroots leaders and others have asked that question: why not just get GIC to manage the CPF money directly?
If the GIC had to manage the CPF money and ensure that we are able to meet our full obligations in CPF every year – that the capital is guaranteed, the interest rates are guaranteed and when market interest rates go down, we do not bring the CPF interest rate down but we keep it at the floor, a high floor, 3.5% on the Ordinary Account and 5% on SMRA for most accounts – if those were the obligations that were required, first, there is no private sector fund manager that will take on that task because it is very difficult to meet.
The GIC, because it has a large diversified portfolio aims to invest for the long term and do better than the SSGS obligations imply. However, that is only possible because the GIC is not just managing SSGS obligations. It is not just managing CPF liabilities. If it is only managing CPF liabilities or SSGS obligations, where you must meet that obligation every year, it will need a very conservative portfolio. This means a portfolio that does not invest much in equities, certainly not in real estate and alternative assets. It will aim to just minimise the chance of failing to meet annual obligations, not maximised long-term returns. That is what would happen.
It would not be able to aim to invest over the long term and ride out the market cycles: take big losses when the markets go down, knowing that as a long-term investor, you are the one who ultimately stands to gain. It will instead have to be conservative, avoid losses and make sure that it can meet the obligations every year. That is what would happen and it does not matter whether it is GIC or anyone else. If you are managing this unique set of obligations – guaranteed capital with high minimum interest rates – you will need a very conservative portfolio. To begin with, it will be hard to achieve, but it will be a conservative portfolio.
That is the reason why our real strength is that the Government has net assets, including unencumbered assets – proceeds from land sales over many years, proceeds from government surpluses (especially in the earlier years) and the investment returns on those funds. Those give us unencumbered assets. By pooling the SSGS proceeds together with those unencumbered assets, we are able to invest for the long term and aim for higher returns over the long term that will beat the SSGS.
But if we are only managing SSGS by itself, this would not be possible. So basically our net assets and the strong Government balance sheet are the real strength of the system. The Government balance sheet is taking the risk, and we can absorb that risk, protect CPF members from any risks, and retain our triple – A credit rating.”
CPF Interest Rates:
http://mycpf.cpf.gov.sg/NR/rdonlyres/5C7AAE66-A2F1-4DCD-9898-D6D1F37A8FB0/0/InterestRate.pdf
DPM Tharman’s speech in parliament in July 2014:
http://www.todayonline.com/singapore/dpm-tharmans-parliament-speech-cpf?singlepage=true
GIC Does Not Use CPF Funds
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Seeking to correct a view that the GIC invests CPF savings overseas directly for a return higher than that which the Board pays its members, he said that the two pools of money were separate and unlikely to cross...
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