Better Gains, But With More Investment Risks

While GIC, Temasek earnings exceeded CPF interest rates, these returns are volatile

In "Free CPF Board to take risks" (Oct 10), Tan Keng Tat asked that CPF be allowed to invest directly in Temasek Holdings or in the Government of Singapore Investment Corporation (GIC), in order to deliver better returns to CPF members.

GIC and Temasek Holdings have earned returns that have exceeded CPF interest rates by taking on more investment risks. These returns are, however, volatile - they can and will be low or even negative in some years. For example, in the three years from the bursting of the IT bubble in 2000, the value of global equities fell by 48 per cent. Temasek's portfolio fell by 38 per cent in value.

Most CPF members have small balances and will not welcome such risks. Neither will older members who may have to withdraw their retirement funds at a time when the markets are down.

Further, there is no assurance that global markets will do as well in the future as they have in the past. The past two decades have been exceptional, for both equities and bonds. Returns in the 1970s were much weaker.

Taken over the last 30 years, the average return on a balanced portfolio of global bonds and equities (5.9 per cent in Singapore dollars) was lower than what the new SMRA (Special, Medisave and Retirement Accounts) formula would have yielded (6.5 per cent).

Singaporeans benefit when GIC and Temasek investments do well. Every year, the Government draws part of these investment returns to fund the annual Budget.

Over the past five years, the Government spent an average of $2.8 billion a year from the Net Investment Income on these funds. This has paid for worthwhile investments and social needs, including subsidies for housing, education and healthcare.

And from time to time, the Government distributes accumulated budget surpluses back to citizens through CPF top-ups and other schemes.

Mr Tan also commented that the new higher interest rates will not make a significant difference because inflation will mean lower real returns. From January next year, the SMRA interest rates will be pegged to long-term (that is, 10-year) Singapore Government bonds.

While it is not assured, long-term bond yields do tend to rise and fall in tandem with inflation. Furthermore, the Government is committed to maintaining a low inflation environment in Singapore through its monetary and fiscal policies.

CPF members with larger balances and the capacity to take higher investment risks can already take out their funds to invest through the CPF Investment Scheme.

The Government has also said that it will study other investment options on an aggregated basis for CPF members with larger balances.

JACQUELINE POH
DIRECTOR (SPECIAL DUTIES)
MINISTRY OF FINANCE