Why Singapore remains a role model for managing national savings

RECENT news about Middle Eastern governments redesigning the institutional architecture of their sovereign wealth funds (SWFs) has prompted much debate about best practices in sovereign asset management. For example, a number of governments created separate vehicles for direct investments, due to distinct governance requirements. While this is a helpful operational improvement, assets are best managed against specific liabilities of their owners, and the biggest long-term liabilities of most governments are pensions. Some developed economies with mature pension systems, such as Australia or New Zealand, have deliberately built government-run pension reserves to address them. But in the context of emerging markets, the holistic model built by Singapore in the 1970s is clearly winning out.

On a per capita basis, Singapore has the largest official reserves of any country in the world. More importantly, it also has a few of the most established sovereign wealth vehicles as well as one of the oldest public pension funds in Asia. Given that the majority of the world's SWFs were founded in the 21st century, Temasek's founding in 1974 and Government Investment Corporation's (GIC) launch in 1981 make them veritable classic institutions. Since that time, these institutions have travelled a long path, but the fundamental architecture of Singapore's national savings has remained the same. The lessons from Singapore's success carry implications not only for resource-wealthy countries, but also for any developing countries accumulating significant reserves.

The defining principle of Singapore's model and the main driver of its success is the creation of an effective group of state institutions that pursue carefully delineated tasks that are complementary to each other. An appropriate analogy is an orchestra with different instruments coming together to create a harmonious sound. In this mix, there are four institutions: a) Monetary Authority of Singapore (MAS) - the guardian of core official foreign reserves; b) Temasek - the development-focused SWF; c) GIC - the classic long-term diversified savings vehicle and d) Central Provident Fund (CPF) - the public pension fund. On their own, as solo artistes, these institutions are formidable investors, but viewing them individually would provide a distorted picture.