Ever since I started working, I’ve got a love-hate relationship with the Central Provident Fund (CPF).

Hating how my paycheck looked significantly smaller due to these compulsory contributions, but loving it whenever I received my yearly CPF statements.

After acknowledging the fact that it’ll be part of my entire working life, I started joining the others in looking for ways to stretch my CPF dollars.

I also dug through little CPF hacks that were suggested, attempting to ace my retirement game.

Along with many other Singaporeans, we gotta admit our little obsession over CPF.

We got excited over the 1M65 movement, and also recently were interested to see how CPF scored as a pension system.

But before we dive deep into the many methods of managing our CPF monies, have you ever wondered…

What happens to our money that goes into CPF?

And how are they actually invested to generate us stable and consistent returns? 

What does the government do with the CPF monies?

CPF monies are invested by the CPF Board (CPFB) in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Singapore Government.

The Singapore Government is an AAA credit-rated government according to international credit rating agencies, such as Moody’s and S&P.

This makes Singapore Government Securities (SGS) one of the safest investments to hold.

The proceeds from the SSGS issuance would then be invested by the Government via the Monetary Authority of Singapore (MAS) and the Government of Singapore Investment Corporation (GIC).

This would be pooled with the rest of the Government’s funds, such as government surpluses, land sales and Past Reserves.

They will first be deposited with MAS as government deposits.

And then be converted into foreign assets through the foreign exchange market.

But with the majority of these assets being long-term in nature, they are transferred to GIC to be managed over a long investment horizon.

Therefore, the Government’s assets are mainly managed by GIC.

Who is the government of Singapore Investment Corporation (GIC)?

GIC is a private company wholly owned by the Singapore Government and is one of the three reserves management entities in Singapore (alongside MAS and Temasek).

Before GIC was set up, MAS was the entity that managed these assets.

At that time, the investment of the assets was primarily large allocations to liquid, low-risk instruments.

After GIC’s formation in 1981, these assets were transferred from MAS to GIC for management.

This allowed the assets to be invested in higher-risk instruments, where higher returns could be expected in the long run.

GIC does not own the assets that are invested by the Government and merely acts as a fund manager, operating similarly to any global fund management company.

The Government also does not interfere with the investment decisions made by GIC.

Are CPF monies managed as a standalone fund by GIC?

Our CPF monies are not managed as a standalone fund by GIC.

Instead, they are pooled and invested with the rest of the Government’s funds.

If the CPF monies are managed as a separate entity, there would be a need to be more conservative.

As with all other investment types, a conservative approach would make it harder to earn good returns.

Having it comingled with the rest of the funds would create relatively large size of net assets , which would allow it to take calculated investment risk to achieve good long-term returns.

This means investing in assets such as equities , private equity and real estate for the long term.

In a speech given by then Deputy Prime Minister Tharman Shanmugaratnam, it was mentioned that CPF members would not bear any investment risk , as the Government has been absorbing market volatility.

While the Government does expect GIC to earn returns higher than that of the SGS, there is no guarantee that this will also occur, especially over shorter periods.

This is especially for years when financial markets are weak, such as the economic situation we are going through right now.

However, when GIC’s returns do fall below what the Government pays for its special bonds, the Government’s net assets would allow it to meet the interest obligations to the CPF Board.

Does Temasek manage these funds too?

We commonly associate Temasek with the Government.

So do they manage these funds too?

Nope, Temasek does not manage any CPF monies.

Temasek has assets that are mainly accrued from proceeds from the sale of its investments and reinvestments, and other cash distributions that are received from its portfolio companies, as well as other investments.

Temasek owns the assets it manages, is credit rated and issues international bonds.

The Government’s relationship with Temasek is that of its sole equity shareholder.

Do CPF monies go towards government spending?

No CPF monies go towards government spending.

Government borrowings from SGS and SSGS cannot be used to fund expenditures.

Under the Government Securities Act (enacted in 1992), the monies raised from SGS and SSGS cannot be spent.

This means that it is prohibited by law for the Government to use any government borrowings to fund its spending.

So… is our CPF money safe?

As mentioned above, CPF monies are are invested in securities that are issued and guaranteed by the Singapore Government.

Besides that, the Government is in a strong reserves position, where its assets far exceed its liabilities.

This strong reserves position can be seen from the Net Investment Returns Contribution (NIRC) , which is the investment returns that is available for spending on the Government Budget.

The NIRC is currently about $17 billion a year.

Also, the NIRC recorded in the Government Budget only comprises up to 50 per cent of the expected returns on the reserves as stipulated in the Constitution.

For transparency and credibility, the NIRC figures are also submitted to the President’s Office and audited by the Auditor-General’s Office.

This article was first published in Seedly.