What Are The Reserves Used For?
Rainy-Day Fund
The reserves serve as our crisis fund. During the Global Financial Crisis and across FY2020 to FY2022 in our fight against COVID-19, our reserves helped us to weather crises without having to incur debt for future generations. The total draw on past reserves for COVID-19 response measures across FY2020 to FY2022 was about $40 billion. By tapping on the reserves, the Government was able to fund public health measures as well as economic and social support measures, to save lives and protect livelihoods.
The ability to tap our reserves in a sustainable manner is a significant financial advantage for Singapore. Our situation is quite unlike that in many countries that have to service their debts and other liabilities from their budgets on an annual basis, and hence either raise taxes for the purpose or engage in further borrowings so as to service current borrowings.
The few other countries where Governments are able to derive a revenue stream for public spending are typically those with substantial reserves of natural resources such as oil.
Watch this CNA documentary for a first-hand account of the decision-making process behind the two rare occasions that the Singapore government tapped on Past Reserves.
Endowment Fund
The reserves support Singapore’s current spending needs through its contribution to the annual Budget. About one-fifth of Government spending is funded by the investment returns of our reserves through the Net Investment Returns Contribution (NIRC).
The NIRC has provided an annual revenue stream of about 3.4% of GDP on average over the past 5 years. For the financial year which ended on 31 March 2024, the NIRC was about $22.92 billion. The investment returns from our reserves provide additional
resources for Government spending to benefit Singaporeans. This includes Government investments in education, healthcare, transport infrastructure, R&D and other areas to improve our living environment and to grow our economy.
Today, the NIRC is one of Singapore’s largest sources of revenue for annual spending. At the same time, there have been calls to increase the NIRC, above the present spending limit of 50% of the annual investment returns.
The NIRC framework is part of a larger sustainable fiscal system.
The framework balances between the needs of today and tomorrow. It underscores the Government’s commitment to continue growing our reserves, while allowing the Government to tap on part of the investment income for current spending.
If we spend more from NIRC today, we would effectively be reducing the amount of reserves available for future use, which might result in higher taxes or reduced expenditure for our future needs.
Stability Fund
The reserves also serve as a stability fund. As Singapore is a small and highly open economy, inflation and aggregate demand are more significantly influenced by the exchange rate rather than interest rates. Singapore’s monetary policy framework, conducted by MAS, is thus centred on managing the exchange rate of the Singapore Dollar against a basket of currencies within a policy band.
Understand more: Net Investment Returns Contribution (NIRC)
The annual Net Investment Returns Contribution (NIRC) amount is published in each year’s Government Budget. NIRC comprises:
- Up to 50% of the Net Investment Returns (NIR) on the net assets invested by GIC, MAS, and Temasek; and
- Up to 50% of the Net Investment Income (NII) derived from past reserves from the remaining assets.
NII refers to the actual dividends, interest and other income received from investing our reserves, as well as interest received from loans, after deducting expenses arising from raising, investing and managing the reserves.
Under the NIR framework, the Government can spend up to 50% of the expected long-term real return (including capital gains) on the relevant assets. The expected long-term real rate of return (ELTRROR) refers to the investment rate of return that can be expected to be earned over the long term, after netting off inflation.
- Long-term expected (as opposed to year-on-year actual) rates of return are used to provide some smoothness over the years in the amount of NIR that can be spent, thus avoiding a short term fluctuations. The expected rates of return are based on the judgement of experienced investment professionals in the investment entities.
- Real rates of return, i.e., net of inflation, is used to protect the purchasing power of our reserves.
- Spending up to 50% of expected returns strikes a balance between current and future needs. It allows us to take in some investment returns for spending, while continuing to grow our reserves.
- Relevant assets are defined in the Constitution as the net assets invested by GIC, MAS, and Temasek1, minus the liabilities of the Government (which include SGS and SSGS). This ensures that we set aside returns to cover the costs of servicing
our liabilities.
The Government introduced the NIR component in 2008, in addition to the NII component. Together, the NIRC enhances revenues and ensures a fair balance between current and future needs. The NIR component is an enhancement in the following ways:
- Expanded the definition of investment returns to total returns, including capital gains (both realised and unrealised). This was more aligned with our asset allocation that is focused on maximising total returns over the long term. A spending rule based only on interest and dividends could have led to a bias toward investments that generate income rather than capital gains. This would be inconsistent with our objective of maintaining a diversified investment portfolio aimed at achieving long-term returns.
- Allowed the Government to spend based on long-term expected returns, rather than only year-to-year actual investment income, comprising dividends and interest, under the NII component. This enabled the Government to smooth out the volatility of spending. For example, it ensures that the Government does not overspend in a bull market, and end up finding itself short of resources in a bear market.
- Allowed the Government to spend based on real returns, rather than nominal returns, so that we continue to maintain the international purchasing power of our reserves. Otherwise, in a scenario of sustained high inflation globally, even if we were to earn reasonable nominal investment returns, our past reserves would be gradually eroded in real terms.
Process to Determine the ELTRROR
There is a rigorous process in place for determining the ELTRROR of the investment entities.
- Before the start of each financial year, the rates are proposed by the Boards of the investment entities, based on detailed study and assessments by investment professionals in the three entities, who also draw on a range of external expert views.
- The Ministry of Finance undertakes a thorough review of the methodologies used by the investment entities to be assured that their approach is sound and the estimated long-term rates of return are reasonable. MOF will then propose the expected long-term real rates of return to be applied to the net assets invested by the investment entities for the President's concurrence.
- The President consults with the Council of Presidential Advisers (CPA) before deciding on whether to agree with the Government's proposal.
- In the event that the Government and President do not agree to any of the expected rates of return, the respective 20-year historical average rates of return will be used to compute how much the Government can spend. The 20-year historical rate of return provides a neutral and pragmatic basis for resolving any dispute between the President and the Government, and avoids paralysing the Government of the day.
- After the close of the financial year, the Minister for Finance will certify to the President the amount of NIR that the Government has actually taken into the Budget, within the caps specified in the Constitution.
Are we over-saving?
We do not know how much reserves are enough since we cannot tell the scale and complexity of the problems we will face in the future.
- For example, the Government drew $4 billion from Past Reserves in 2009 during the Global Financial Crisis.
- To protect lives and livelihoods, the Government had to draw $40 billion from Past Reserves between FY20-FY22 during the COVID-19 pandemic.
- We cannot tell how much more we will need as worse crises may come our way.
The Government is not over-saving. While our reserves are growing, the size of our economy, the challenges facing our economy and complexity of our needs are growing even faster. In fact, the growth of the reserves is already expected to slow.
- Our investment returns are subject to significant headwinds in the global investment environment – increasing geopolitical tensions, climate change, ageing populations, low productivity growth.
- Furthermore, investments do not have guaranteed outcomes, and we cannot choose at will when to slow down or increase the pace of returns.
Understand more about the Net Investment Return Contribution (NIRC) in the annual Budget.
SM Lee Hsien Loong in a CNA interview shares the inside story of the reserves.
How can we relate this to personal savings? The Woke Salaryman explains.
Holds our Land Bank
Land is scarce in Singapore, and it is our main natural resource. It is thus protected as part of the reserves.
Past Reserves are used to fund land-related projects such as land reclamation and the creation of underground space2 like the Jurong Rock Cavern as well as land acquisition projects like Selective En-bloc Redevelopment Scheme (SERS)3. This is a conversion of Past Reserves from one form (financial assets) to another (State land). The land and space that is created or acquired forms part of our State land holdings and is protected as Past Reserves. Further, when such land or space is subsequently sold, the proceeds accrue fully to Past Reserves. There is thus no draw on Past Reserves.
Spending from Land Sale Proceeds
When the Government sells land, it does not create new wealth – it merely converts the physical asset into a financial asset. When land is converted into a financial asset, the financial asset remains part of Past Reserves and cannot be used for expenditure.
- Land returns to the State at the end of a lease, as the State holds ultimate title to the land. It then becomes State land once again and is protected as part of the reserves.
- When that happens, there is no “profit” or net increase in the reserves. This is because the value of the “reversionary interest” in land (i.e. the right to resume ownership of the land at the end of a lease) forms part of the reserves. In other words, when land is sold, the financial proceeds that the State receives make up for the State's loss of use of the land for the lease period, and not for the State giving the land away forever.
Spending the proceeds from selling land is simply akin to using up more of the reserves. Instead, the Government invests the land sales proceeds with the rest of the reserves, and spends up to 50% of the returns through the NIR framework.
This provides a more stable and sustainable stream of income over time than directly spending the land sales proceeds.
- First, land prices move in cycles and can be volatile. This would cause Government revenues to fluctuate with the market, creating too much uncertainty for the Government to plan for the long term.
- Second, if the Government relies on land sales to fund spending, it could develop a vested interest in keeping land prices high to maximise revenues.
Fair Market Value of Land
When the Government takes land out of the reserves for development, including for public housing, it must put the value of the land back into the reserves, to preserve the value of the reserves. Selling land below fair market value, or for no cost,
would erode our reserves.
The fair market value of land is the price that a willing buyer and willing seller, would transact at arm’s length. This can be determined by open tender, or by professional valuation. In the case of public housing, the value of land is determined professionally and independently by the Chief Valuer, using established valuation principles.
For more information on land valuation and public housing policies, please refer to MND’s resources.
- MND’s Aug 2023 Factually Clarification
- HDB’s resource on how BTO flats are priced
Financing Climate Action
The Government is still studying long-term adaptation solutions to protect our coastline and land mass4 and how to best to fund them in a way that is fiscally sustainable and equitable across generations.
Back CPF Interest Rates
CPF monies are invested by the CPF Board (CPFB) in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Singapore Government. This arrangement assures that CPFB will be able to pay its members all their monies when due, and the interest that it commits to pay on CPF accounts.
This is a solid guarantee. The Singapore Government is one of the few remaining triple-A credit-rated governments in the world. To elaborate:
- The Government is in a strong net asset position, i.e. its assets far exceed its liabilities (CPF liabilities in the form of SSGS are a part of these liabilities). The strong net asset position can be seen from the NIRC that is available for spending on the Government Budget. Over the past five years, the NIRC provided on average a revenue stream of around $17 billion or about 3.5% of GDP per annum.
- What this means is that even after deducting all the Government's liabilities, the remaining net assets produce significant returns. The NIRC is drawn from returns on assets in excess of the liabilities, and is not the returns on gross assets. Further, as stipulated in the Constitution, the NIRC recorded in the Government Budget only comprises up to 50% of the expected returns on the reserves. The NIRC figures are submitted to the President's Office and audited by the Auditor-General's Office.
- If the Government's assets had not been adequate to meet its liabilities, there would have been no contribution from the investment returns on reserves in the Government Budget.
No CPF monies go towards government spending. Government borrowings from Singapore Government Securities (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.
These funds are comingled together with other sources of government funds (e.g., unencumbered assets5 such as government surpluses and land sales receipts) and deposited with MAS as government deposits.
In the process of conducting monetary policy, MAS may convert these funds into foreign assets through the foreign exchange market, accumulating foreign assets in the form of official foreign reserves (OFR), in order to moderate the appreciation of the Singapore dollar exchange rate. Excess OFR above what MAS requires to conduct monetary policy and ensure financial stability are ultimately transferred to GIC to be managed over a longer investment horizon, providing backing for longer-term Government liabilities like SSGS.
This CNA documentary explains how Singapore’s reserves guarantee CPF interest rates.
Understand more: Which investment entity invests CPF monies?
The Government’s assets are mainly managed by GIC. GIC is a fund manager, not the owner of the assets. It receives funds from Government for long-term management, without regard to the sources of Government funds, e.g. SGS, SSGS, government surpluses. The Government’s mandate to GIC is to manage the assets in a single pool, on an unencumbered basis5, with the aim of achieving good long-term returns. This allows GIC to take calculated investment risks aimed at achieving good long-term returns, without regard to the Government’s specific liabilities.
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. If GIC were to manage SSGS proceeds directly through a separate, standalone fund, without the backing of the Government’s net assets, it would invest 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 monies, 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 current mandate of managing the Government’s pooled assets on an unencumbered basis.
Read more about how CPF interest rates are determined.
Are MAS and Temasek involved?
Prior to the formation of GIC, it was the MAS as central bank that managed these assets. The investment of the assets was in keeping with the traditional approach of central banks, with large allocations to liquid, low-risk instruments. After GIC was formed in 1981, the assets were progressively transferred from MAS to GIC for management. This was to enable the assets to be invested in higher risk instruments that could be expected to earn higher returns over the long term.
The SSGS proceeds have not been passed to Temasek for management. Temasek hence does not manage any CPF monies. Temasek manages its own assets, which have accrued mainly from 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.
CPF interest rates are pegged to the returns on market instruments of comparable risk and duration.
However, there is also a minimum interest rate on CPF savings that protects members when market returns fall to low levels, such as over the past two decades. The computation approach for the CPF Ordinary, Special, MediSave and Retirement Accounts’ interest rates and the applicable minimum interest rates are listed below.
- Ordinary Account (OA): Computed based on the 3-month average of major local banks’ interest rates, subject to the legislated minimum interest rate of 2.5% per annum. More information can be found on CPF website.
- Special, MediSave and Retirement Accounts (SMRA): Computed based on the 12-month average yield of 10-year SGS plus 1%, subject to the current floor interest rate of 4% per annum.
The SMRA are for longer-term retirement and medical needs. To help provide certainty for CPF members amidst the uncertain interest rate environmen t, the Government has extended the 4% floor rate for interest earned on all SMRA savings since it was first introduced in 2008.
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 the 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%. - In addition, CPF members below age 55 earn an extra 1% interest on the first $60,000 of their combined CPF balances (capped at $20,000 for OA), while members aged 55 and above earn an extra 2% interest on the first $30,000 of their combined balances (capped at $20,000 for OA), and an extra 1% interest on the next $30,000.
There is no link between CPF interest rates and the returns earned by GIC. The CPF Board invests CPF savings entirely in risk-free SSGS issued by the Government.
The Government invests the SSGS proceeds together with its other assets through the GIC, which takes investment risks aimed at achieving good long-term returns. However, the consequence of taking risk as a long-term investor is that returns may be weak or even negative over shorter periods. Yet, the Government is able to guarantee CPF savings and pay the minimum interest rates on CPF savings regardless of GIC’s returns over any period, because the Government's balance sheet enables it to absorb risks. The Government has a significant buffer of net assets, i.e. assets which are well above its liabilities including its CPF commitments.
- For example, 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 also means that GIC can invest without regard to the Government’s specific liabilities. This enables GIC to focus on achieving 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 would absorb these risks.
More Resources:
- DPM Tharman's reply to Parliamentary Questions on CPF interest rates and investment of CPF funds, 8 July 2014
- Minister Tan Chuan-Jin's reply to Parliamentary Questions on CPF Minimum Sum and other CPF issues, 8 July 2014
- DPM Tharman's opening remarks at the "IPS Forum on CPF and Retirement Adequacy", 22 July 2014
- DPM Tharman's reply to a Parliamentary Question on how the Government's strong balance sheet enables it to weather market volatility and meet full obligations to CPF, 4 August 2014
Footnotes
[2] Past Reserves are used to fund only expenditure directly related to the creation of land, but not for the construction of infrastructure on the land.
[3] Past Reserves are used to fund only the land component of the total compensation of the acquisition costs.
[4] These include land reclamation projects, building of infrastructure such as polders and
seawalls, and the installation of equipment like pumps and localised flood barriers.
[5] Unencumbered assets refer to assets which are not matched to any liabilities. 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.