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.