Section IV. Is our CPF money safe? Can the Government pay all its debt obligations?
There have been recent discussions on the CPF system, and the Government has provided further explanation on some of the issues. Please refer to the following links to find out more about how the CPF interest rates are determined, how CPF monies are invested, and how the Government is able to meet its obligations to the CPF.
Q26. How are CPF monies invested? What does the Government do with the monies?
CPF monies are invested by the CPF Board (CPFB) in Special Singapore Government Securities (SSGS7) that are issued and guaranteed by the Singapore Government. This arrangement assures that the CPF Board will be able to pay its members all their monies when due, and the interest that it commits to pay on CPF accounts.
This is a solid guarantee. The Singapore Government is one of the few remaining triple-A credit-rated governments in the world. .
The proceeds from SSGS issuance are invested by the Government via MAS and GIC, just as it invests the proceeds from the market-based Singapore Government Securities (SGS).
No CPF monies go towards government spending. Government borrowings, whether via SGS or SSGS, cannot be used to fund expenditures. Under the reserves protection framework enacted in 1990 in the Constitution and the Government Securities Act (enacted in 1992), the monies raised from government borrowings cannot be spent.
The proceeds from SSGS issuance are pooled with the rest of the Government's funds, such as proceeds from issuing Singapore Government Securities (SGS) in the markets, government surpluses, as well as the receipts from land sales which under our Constitutional rules are 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 of a long-term nature, such as those that provide backing for long-term Government liabilities like SSGS as well as unencumbered assets such as government surpluses and land sales receipts. These assets are ultimately transferred to GIC to be managed over a long investment horizon.
The Government's assets are therefore mainly managed by GIC. GIC is a fund manager, not an owner of the assets. It merely receives funds from Government for long-term management, without regard to the sources of Government funds, e.g. SGS, SSGS, government surpluses. The Government's mandate to GIC is to manage the assets in a single pool, on an unencumbered basis, with the aim of achieving good long-term returns. The Government does not specify to GIC the sources of the assets that are placed with it. The Government also does not specify whether the assets are encumbered or unencumbered, nor state the proportions. (See Q28)
Prior to the formation of GIC, it was the MAS as central bank that managed these assets. The investment of the assets was in keeping with the traditional approach of central banks, with large allocations to liquid, low-risk instruments. After GIC was formed in 1981, the assets were progressively transferred from MAS to GIC for management. This was to enable the assets to be invested in higher risk instruments that could be expected to earn higher returns over the long term.
The SSGS proceeds have not been passed to Temasek for management. Temasek hence does not manage any CPF monies. Temasek manages its own assets, which have accrued mainly from proceeds from sale of its investments and reinvestments of dividends and other cash distributions it receives from its portfolio companies and other investments. Temasek also has its own borrowings and debt financing sources. The Government's relationship with Temasek is that of its sole equity shareholder.
The information above elaborates on that provided at Q2.
Q27. How are CPF interest rates determined?
CPF interest rates are pegged to risk-free market instruments of comparable duration. However, there is also a minimum interest rate on CPF savings that protects members when market interest rates fall to low levels, such as in recent years. Lower and middle-income members also benefit from extra interest paid on smaller CPF balances.
Currently, monies in members' OA earn a minimum interest rate of 3.5% on the first $20,000. Those with larger balances also enjoy this 3.5% per year on their first $20,000, and 2.5% per year for the rest of their OA savings. More than half of all CPF members earn 3.5% per year on all their Ordinary Account (OA) balances.
Monies in members' Special, Medisave and Retirement Accounts (SMRA) earn a minimum interest rate of 5% on at least the first $40,0008. Those with large balances also enjoy this 5% per year on at least their first $40,000, and 4% per year for the rest of their SMRA savings. Around 2/3 of members earn 5% per year interest on all of their SMRA savings.
The interest rates on the OA and SMRA reflect the durations for which members' savings are held. The OA is a liquid account. The monies in the OA can be withdrawn at any time for housing. Many members withdraw substantial amounts from their OA.
The SMRA are for longer-term retirement and medical needs. The interest rate on the SMRA aim to be equivalent to what a 30-year SGS would earn, as 30 years is the typical duration for which SMRA monies are held. As the 30-year SGS did not exist when the Government made changes to the interest rate structure in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1%. The 1% spread is in fact higher than that which international bond markets have paid on 30-year bonds. The current yield on the 30-year SGS, which is not widely traded, is around 3%. This is well below the minimum interest rates of 4-5% that are currently paid on SMRA accounts.
The interest rates that CPF members receive are hence significantly higher than for equivalent, risk-free market instruments currently. There is also no link between CPF interest rates, and the returns earned by GIC. The CPF Board invests CPF savings are entirely in risk-free SSGS issued by the Government. CPF members receive fair returns as described above, with no investment risk.
The Government invests the SSGS proceeds together with its other assets through the GIC, and takes investment risks aimed at achieving good long term returns. However, the consequence of taking risk as a long-term investor is that returns may be weak or even negative over shorter periods. As explained in Q27 , the Government is able to guarantee CPF savings and pay the minimum interest rates on CPF savings regardless of GIC's returns over any period, because the Government's balance sheet enables it to absorb risks. The Government has a significant buffer of net assets, i.e. assets which are well above its liabilities including its CPF commitments.
Q28. Why are the SSGS monies invested by Government as part of a combined pool of funds managed by GIC, rather than managed in a separate, dedicated fund?
The Government has significant net assets, i.e. its assets are well above its liabilities. This is because the Government has large unencumbered assets, which are not matched to liabilities. These assets were accumulated through past government surpluses, land sales receipts and the investment income earned on those assets over the years.
The relatively large size of net assets enables the Government to take investment risk on its balance sheet, without impairing its ability to meet its liabilities. The Government therefore invests the proceeds from the issuance of SSGS together with other Government's funds, in a combined pool. The GIC is tasked to invest the pool of assets for the long term, and to take calculated investment risks aimed at achieving good long term returns, without regard to the Government's specific liabilities. The GIC's investment mandate is to invest the funds on an unencumbered basis. (See Q26).
GIC has delivered creditable results from investing the Government assets over the long term. However, the Government bears the risk of GIC's investment returns over any particular period falling below the interest rates it is committed to pay on SSGS. Investment returns can fluctuate widely, depending on global market cycles and shocks. This is, for example, what happened during the Global Financial Crisis (GFC) and its aftermath. The GIC experienced losses in investment value during the GFC, and low average returns for five years, before recovering (see GIC's annual report).
The Government is able to bear this investment risk because its substantial buffer of net assets ensures that it can meet its obligations. This enables it to give GIC the mandate of investing to achieve good long-term returns, in full knowledge that the portfolio will be exposed to significant risks over the shorter term as the markets experience cycles and volatility. The Government's balance sheet absorbs these risks.
GIC's long term returns are thus not earned by managing only SSGS proceeds, but the combined pool of Government funds that it is tasked with managing for long-term returns. It would be quite different if the GIC were to manage SSGS proceeds directly through a separate, standalone fund, without the backing of the Government's net assets. A standalone fund would have to be managed much more conservatively, to avoid the risk of failing to meet obligations to CPF members – including not only a capital guarantee but the commitment to pay the minimum interest rates on CPF funds, regardless of market conditions. The fund would not be aimed at accepting risks that enable good long-term returns, but at avoiding any short-term shortfalls. The returns that such a fund would earn over the long term will be lower than what the GIC can expect to achieve with its mandate of managing the Government's pooled assets on an unencumbered basis.
The investment returns in excess of the SSGS rates that the Government expects to make over the long term by taking the risks of long-term investments are not hoarded away in the reserves.
Under the Constitution, up to 50% of the returns from our reserves flow back to the Government's annual Budget through the Net Investment Returns Contribution (NIRC). This has been explained in MOF's 2014 COS speech.
The NIRC has provided the Government valuable resources that have allowed us to embark on new priorities for Singapore, including the strengthening of our social safety nets.
Q29. Is our CPF money safe?
Yes, your CPF monies are safe as all CPF monies are invested in securities (SSGS) that are issued and guaranteed by the Singapore Government. The full resources of the Government back this guarantee that CPF monies will be paid back. As the Singapore Government is one of the few remaining triple-A credit-rated governments in the world, this is a solid guarantee.
To elaborate further:
- The Government is in a strong reserves position, i.e. its assets far exceed its liabilities (CPF liabilities in the form of SSGS are a part of these liabilities). The strong reserves position can be seen from the investment returns that are made available for spending on the Government Budget ‒ or Net Investment Returns Contribution (NIRC). The NIRC is currently about S$14 billion a year.
- What this means is that even after deducting all the Government's liabilities (including CPF monies), the remaining net assets produce significant returns. The NIRC of about S$14 billion is drawn from returns on assets in excess of the liabilities, not gross assets. (For more information, see summary under 'Our Nation's Reserves', Section II.) It should be further noted that, as stipulated in the Constitution, the NIRC recorded in the Government Budget only comprises up to 50% of the expected returns on the reserves. The NIRC figures are submitted to the President's Office and audited by the Auditor-General's Office.
- If the Government's assets had not been adequate to meet its liabilities, there would have been no contribution from the investment returns on reserves in the Government Budget.
Q30. Singapore has high levels of Government debt as reported in the CIA Public Debt Factbook. Do we have enough assets to cover our liabilities?
Yes, our assets are much larger than our liabilities. There is no net Government debt. Singapore is in fact a net creditor country, not a debtor country.
This is why international credit rating agencies give the Singapore Government the highest short and long-term credit ratings of AAA.
Our top credit ratings reflect the following:
a. No Government borrowings are for spending. Under the Reserves protection framework in the Constitution and the Government Securities Act, the Singapore Government cannot spend the monies raised from Singapore Government Securities (SGS) and Special Singapore Government Securities (SSGS). SGS are issued to develop the domestic debt market and SSGS are bonds issued to the Central Provident Fund (CPF) Board with full Government guarantee.
b. All borrowing proceeds are therefore invested. The investment returns are more than sufficient to cover the debt servicing costs.
c. The Singapore Government has a strong balance sheet that has assets well in excess of its liabilities. This is why it is able to earn significant investment income on its net assets (see Q29).
A key principle underlying Singapore's long-term budgetary objectives is to maintain a balanced budget over the course of a term of Government. This is a prudent approach to fiscal policy that some other countries are seeking to adopt.
Looking only at the liabilities (i.e. debts) alone does not discriminate between two countries with the same level of debt but with very different levels of assets.
More details of Singapore Government Borrowings are found here.
Q31. If the Government runs balanced budgets or has budget surpluses in some years, why do we still need to borrow money?
The Singapore Government operates on a balanced budget over each term of Government. It also has a strong balance sheet that has assets well in excess of its liabilities.
The Government does not borrow to fund its budget. Under the Reserves protection framework in the Constitution and the Government Securities Act, the Singapore Government cannot spend the monies raised from the two existing domestic debt securities it issues: Singapore Government Securities (SGS) and Special Singapore Government Securities (SSGS).
SGS are marketable debt instruments issued for purposes of developing Singapore's debt markets. They provide a risk-free benchmark against which other risky market instruments are priced off.
SSGS are non-tradable bonds issued specifically to the Central Provident Fund (CPF) Board, Singapore's national pension fund. Singaporeans' CPF monies are invested in these special securities which are fully guaranteed by the Government. The securities earn for the CPF Board a coupon rate that is pegged to CPF interest rates that members receive.
All borrowing proceeds from the issuance of SGS and SSGS are invested. These investment returns are more than sufficient to cover the debt servicing costs.
Singapore therefore does not have any net Government debt, and instead has a strong net asset position (see Q29). This is recognised by international credit ratings who give the Singapore Government the highest short- and long-term credit ratings of AAA.
More details of Singapore Government Borrowings are found here.
7. Special Singapore Government Securities (SSGS) are non-tradeable Government bonds issued to the CPF Board. The securities earn for the CPF Board a coupon rate that is pegged to CPF interest rates that members receive.
8. You earn 5% per year on up to the first $60,000 of your Special and Medisave Accounts, if your Ordinary Account is less than $20,000. Also, after age 55, the first $60,000 of the Retirement Account earns 5% per year.
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