[SINGAPORE] The government has been absorbing market volatility over the years and protecting Central Provident Fund (CPF) members from risks, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.
This has been the case even as GIC, the government's fund manager, has earned investment returns below what the government has paid on Special Singapore Government Securities (SSGS) in eight of the last 20 years.
SSGS are non-tradable bonds issued primarily to meet the investment needs of the CPF.
Mr Tharman, who is also Finance Minister, was responding in parliament to queries by Members of Parliament on CPF investments and interest rates.
He added that the burden of absorbing the volatility in the market was the reason no market player - the government aside - could take on the CPF's obligations.
All CPF members are guaranteed an interest rate floor of 2.5 per cent on their Ordinary Accounts, with an extra one per cent for the first $20,000.
The Special, Medisave and Retirement Accounts have a floor of 4 per cent, with an additional one per cent for balances of up to $60,000.
"The guarantor is not merely playing the role of a long-run investor. It also must have significant capital that provides a buffer when the markets are down," said Mr Tharman.
He said that while the government expected GIC to earn returns higher than what it paid on the SSGS, there was no assurance that GIC's returns would exceed SSGS interest rates over shorter periods, much less each year.
GIC has earned a "creditable return" over the long term - 6.5 per cent per year over the last 20 years in US dollar terms, which translates to 5 per cent a year in Singapore dollar terms. But Mr Tharman said this masked "wide fluctuations" in returns from year to year.
In the five years following the global financial crisis until March last year, GIC managed a return of only 2.6 per cent in US dollar terms, which translated to 0.5 per cent in Singapore dollars.
In years when the markets are weak and GIC's returns fall below what the government has to pay on its special bonds, the government has a "substantial buffer" of net assets that enable it to meet its obligations, he said.
"The net assets have helped absorb any losses and ensured that the government can meet its obligations on the SSGS as well as its market-traded SGS (Singapore Government Securities). Correspondingly, when investment returns are strong, the net assets grow."
Mr Tharman also went into detail about how CPF monies are invested, and the wider role that GIC plays as the government's fund manager.
The CPF Board invests these funds in the SSGS, which are specially issued by the government to the CPF. The payout from the SSGS is pegged to the interest rates that CPF is committed to pay its members.
The government guarantees these SSGS bonds, said Mr Tharman, which means that CPF faces "no risk" of being unable to meet its obligations to its members.
"This is a solid guarantee, from a triple-A credit-rated government," he said. "(This rating) reflects Singapore's very strong financial position, with the government's assets comfortably exceeding its liabilities."
The proceeds from SSGS issuance are pooled with the rest of the government's funds, such as the proceeds from other government securities and land sales, he said.
This combined pool is first deposited with the Monetary Authority of Singapore (MAS) as government deposits, with MAS later converting these funds into foreign assets through the foreign exchange market.
A large portion of these assets are of a longer-term nature and these are transferred over to be managed by GIC.
"What these investment arrangements mean is that CPF members bear no investment risk at all in their CPF balances. Their monies are safe, and the returns they have been promised are guaranteed," said Mr Tharman.
He also clarified that SSGS proceeds were not passed to Temasek Holdings for management, as Temasek managed its own assets and does not touch any CPF monies.
When asked why GIC does not manage CPF monies as an independent pool, he replied that this would mean GIC would need a "very conservative" portfolio that would not earn very much.
In his speech, Mr Tharman made the point that Singapore's CPF system was a sustainable one, so long as the government continued to run prudent budgets and invest the country's reserves wisely.
"Then, the government's balance sheet will remain strong and investment returns over the long term can continue to meet our debt costs," he said.
Look up http://btd.sg/cpf-how-it-works for graphic on 'CPF: How it works'