What the Govt does with the money that goes into the CPF

The Ministry of Finance responded to queries from The Straits Times on what the Government does with the money that goes into the Central Provident Fund (CPF) and how it determines CPF interest rates, These topics have been hotly debated online following speculation that CPF monies are invested by Temasek Holdings and GIC as well as comparisons between their returns and CPF returns.

Here is MOF’s reply in full.

Q: 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 (SSGS)[1] that are issued and guaranteed by the Singapore Government. This 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.

As the Singapore Government is one of the few remaining triple-A credit-rated governments in the world, this is a solid guarantee.

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.

When government securities are issued, the proceeds are first deposited with MAS as Government deposits. MAS converts these funds into foreign assets through the foreign exchange market. However, as 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, such assets are 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 SSGS proceeds are not passed to Temasek for management. Temasek hence does not manage any CPF monies. (See also FAQ 8 on the Temasek website). Temasek manages its own assets, which have accrued mainly from divestment 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 on the MOF website.

[1] Special Singapore Government Securities (SSGS) are non-tradeable Government bonds issued to the CPF Board.

Q: How are CPF interest rates determined?

CPF interest rates are pegged to risk-free market instruments of comparable duration, with a current floor of 2.5% for OA and 4% for SMRA.

a. 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.

b. 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 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 what 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%.

The OA and SMRA currently earn interest of 2.5% and 4% respectively. However, many members in fact earn higher interest rates on their OA and SMRA accounts, because they benefit from the extra 1% on the first $60,000 of CPF balances. Many earn 3.5% on their OA account. The majority of SMRA balances earn 5%.

The returns that CPF members receive are risk-free, and significantly higher than for equivalent market instruments.

There is no link between CPF interest rates, and the returns earned by GIC, as the CPF monies are invested entirely in risk-free assets.

It is the Government that takes the investment risk in managing SSGS proceeds.

GIC has delivered creditable results on Government assets over the long-term. However over the short-term, returns can fluctuate widely, depending on global market cycles and shocks. This is indeed what happened during the Global Financial Crisis and its aftermath. GIC’s returns over the last 5 years were affected by the sharp market downturns during the crisis, and the lagged recovery in illiquid assets such as real estate and infrastructure (See GIC’s annual report).

Ultimately, the investment returns 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.

a. 50% of the returns from our reserves flow back to our annual Budget through the Net Investment Returns Contribution (NIRC).

b. The long-term returns therefore help to fund spending which benefit our citizens.

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