Govt needs should not drive strategies of GIC, Temasek

SWFs must continue to invest with aim of achieving 'good, risk-adjusted returns over the long term': Josephine Teo


GIC and Temasek Holdings should not take on more risk to generate higher returns for increased government spending, said Senior Minister of State for Finance and Transport Josephine Teo yesterday. If the government is in need of more revenue, the solution must come from its budgetary strategies, and not the investment strategies of the Republic's sovereign wealth funds.

She was responding in Parliament to Ang Mo Kio MP Inderjit Singh's concern that Singapore may be digging too much into its reserves to fund big-ticket items like the $8 billion Pioneer Generation Fund.

Mr Singh had asked: "As the need for reserves spending increases, could we then rely on better rates of returns from the likes of Temasek, GIC and MAS, so that our reserves do not decline so rapidly?"

But Ms Teo said that even as government spending needs increase over time, that should not drive the investment strategies of GIC and Temasek. On the contrary, she said, they must continue to invest with the aim of achieving "good, risk-adjusted returns over the long term", and added that "so far, they have achieved this".

"If the government is in need of more revenues besides that obtainable within the NIR (net investment returns) framework, the solution is not for our investment entities to take more risk in the hope of higher returns. The solution has to rest on our budgetary measures, not the investment strategies of GIC and Temasek," said Ms Teo. She added that the NIR framework allows the government to tap the investment returns of the reserves for budgetary spending "in a sustainable way".

"Under the framework, the government can only spend up to 50 per cent of the long-term expected real return from the net assets managed by GIC and MAS. Hence, what this also means is that 50 per cent of the expected real returns are retained in our reserves, ensuring that it is not decumulated."

Ms Teo also responded to Mr Singh's query on whether the 2.5 per cent interest paid out for the CPF Ordinary Account is fair compensation for Singaporeans "who have left their savings locked up for so long".

She argued that for the purposes of long-term savings, it is not appropriate to look at the Ordinary Account rate alone since most CPF members use that account mainly for home purchases.

She noted that interest rates are higher for the special and retirement accounts; the former, which is for long-term savings, currently pays an interest rate of 4 per cent.

She also stressed the need to bear in mind that interest rates are typically higher in countries whose currencies have tended to depreciate over time, "because higher interest rates compensate for weaker currencies". Earlier, Mr Singh had referenced Malaysia's Employees Provident Fund's 6 per cent interest rate.

Ms Teo added that unlike many other pension funds, the CPF system "does not expose members to market risk".

"The CPF monies are invested in risk-free Singapore government securities. Their value is assured, as they are guaranteed by one of the few remaining triple-A credit-rated governments in the world. Regardless of when CPF members retire or the state of the financial markets when they retire, their CPF monies are safe."

As for Mr Singh's earlier musings on whether giving higher CPF returns may be better than sharing benefits through government transfers, Ms Teo disagreed.

She said that the CPF system with its "risk-free returns", together with fiscal transfers, is a fair and equitable approach for Singaporeans in the long run.

"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. And so, the main responsibility for progressivity is placed on the fiscal system."

Ms Teo rounded up her speech by saying that the government has adapted - and will continue to adapt - the system of CPF and the social transfers that are borne by the Budget, to suit Singapore's changing circumstances and needs.

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