Sunday, August 13, 2006

CPF and GIC

MM Lee clarifies GIC's earnings not linked to CPF interest rates
By May Wong, Channel NewsAsia

Minister Mentor Lee Kuan Yew has clarified that GIC's earnings are not connected to the interest paid on CPF accounts. He was speaking at GIC's 25th anniversary dinner at the Ritz Carlton.
The Government of Singapore Investment Corporation (GIC) is a global investment management company established to manage Singapore's foreign reserves.

MM Lee said that the GIC invests the government's reserves abroad in assets which carry higher risks like equities, bonds, real estate. Therefore these are expected to earn higher returns on average over the long term.

The returns are not related to CPF investments. "The CPF invests members' savings only in absolutely risk-free Singapore government bonds," MM Lee said.

"CPF members are paid market-related interest rates based on the 12-month fixed deposit rates and the savings account interest rates of the major Singapore banks, subject to a floor," he said.

"CPF members who are willing to accept higher risks for higher returns have many channels to do so on their own through the CPFIS scheme," he added.
Mr Lee said that the GIC has significantly enhanced the value of Singapore's savings.

But the growth of China and India will present more opportunities in the future. So he feels that the GIC needs to continue to build up the quality of people as one of its success factors. But it is not just about retaining home-grown talent.

"We need to create an environment where professionals can be deployed where they can best exercise their skills and maximise their contribution," MM Lee said. "As a global investor operating in many asset classes across 40 countries, GIC can offer abundant opportunities for exceptional professional growth and experience," he added.

Mr Lee also said that the training opportunity and exposure at GIC are probably unmatched among large investment firms in Asia. He hopes that the professionals will view their work at GIC as a long-term career.

Over 25 years, GIC has grown to an outfit that invests in over 40 countries through nine asset classes, handling over a hundred billion dollars. And its track record has been good.

Over a period of 25 years to March 2006, the annual rate of return on the foreign reserves managed by GIC averaged 9.5 percent in US dollar terms, and 8.2 percent in Singapore dollar terms.

The average rate of return over global inflation was 5.3 percent per annum.
The CPF Board invests our CPF funds in Singapore Government Securities (SGS) issued by the Government. The Government then passes this money over to GIC to invest on its behalf.

When MM said that our CPF money is invested in 'risk-free' instruments, he meant that our CPF money will definitely be refunded, because SGS are 'guaranteed' by the Government.

However, when the GIC loses money on its investments, where would the Government find the money to repay us our CPF?
It can do so through several means. For example, it could increase taxes, eg GST. It could devise new sources of government revenue, like the COE did for the Government when it was first introduced.

"There is no free lunch.", Mr Mah Bow Tan once said.Any loss made by the GIC has to be made good elsewhere. I fear Singaporeans would ultimately have to cough up this difference. And it would be those working who would be 'paying' for the CPF of the retirees.

Of course, the Government could cut down on Government expenditures (eg salaries for civil servants and politicians). It could also consider deferring or cancelling projects like HDB or school upgrading projects. Given the kind of candidates (please see blog entry below) that the PAP had been getting these days, I do not think salary cuts woud rank high on their list.

Which brings me to the other point in the article. The GIC had been making an annual return of 9.5% in US dollar terms over the last 25 years. Is this a good or bad return?

If you look at the S&P 500 index over the past 25 years, it had been making an annual return of about 10.5%. This means that if we had just parked the entire sum of US$100 billion in the S&P 500 shares and left it there for 25 years, we would have done better than the GIC.

Of course, the GIC could have done worse. Temasek recently had to quickly 'off-load' its investments in ShinCorp and Southern Bank Bhd when it found that these investments went above the limits specified by the respective local authorities governing foreign investments.
What puzzled me when I read MM's announcement is : The GIC had always been operating under a climate of secrecy, why did MM talk about its returns all of a sudden? I hope it's not the Chinese proverb – 'There are no 300 taels of gold here'.

Could it be that what happened at Temasek had also been happening at GIC and that had prompted the Government to 'pre-emptively' assure Singaporeans of the security of their CPF?

Perhaps I had been too cynical. It could very well be the start of a 'more transparent' era as far as our investment decisions go.
That would be good news. For most Singaporeans, the CPF is their main, if not only, asset. God forbid if anything were to happen to it.
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