GIC Fees are More than a Hedge Fund?

The important thing about Singaporean public finances and sovereign wealth funds that even most Singaporeans fail to grasp is their absolute centrality to most any economic and even many social issues.  You simply cannot discuss most any major issue in Singapore today without weighing the importance of Temasek, GIC, and Singaporean public finances.

It was with great interest that I recently saw an article entitled “Why Our Saving Rates are Among Highest in the World but We Have No Money for Retirement?”.  The well intentioned author lays the blame primarily at the feet Singapore’s “transformation into an open economy” and “heavy reliance on large multinationals and imported workforce…” but overlooks the most important factor, the role of Singaporean financial policy and specifically GIC and Temasek.  Let me explain.

Let’s take a very simple example to illustrate the point.  Let’s assume that a Singaporean worker started earning an average Singaporean wage in 1980 and earned an average wage every year through 2011 according to IMF and Singapore Ministry of Finance data.  Every year the employee and the employer paid the mandated CPF contributions.  To further simplify, and be generous to the Singaporean government, let’s assume that the savings are earning the highest rate of return of the CPF contributions.  For instance, I assume that current CPF savings are earning 4% rather than 2.5%.  This saves the difficulty of estimating the weighted return percentage and is very generous to the Singaporean government. (I want to emphasize that I am fully aware that 4% is not the primary rate but rather 2.5%.  I want to be extremely generous to the government as the numbers are still quite different).

Making an average Singaporean wage, an average worker would have earned a total of $898,227 SGD in wages over that period and contributed $318,871 SGD between employee and employer contributions to a CPF account.  Interest growth would total $218,241 bringing the accumulated savings of the average employee to $537,112 SGD, assuming that the money has not been withdrawn for something such as the purchase of a flat.  This is not an insignificant amount of money by any means but it fails to tell you the whole story.

GIC, Temasek, and government linked companies have depended heavily on the low priced capital they could obtain.  This was mandated by the government who required savers to save their money with the government and “guaranteed” savers a low rate of return.  According to current data, the inflated assumption of a 4% guaranteed return does not even keep pace with inflation.  Consequently, the Singaporean saver who is forced to save with the government is implicitly losing money and subsidizing government investments and government linked companies.

How much then has the low interest rates mandated by the government in the CPF cost the “average” Singaporean?  Let’s assume instead of receiving the “guaranteed” CPF rate of return that savers instead earned the GIC long term average of 7%. (I am aware that GIC reports in USD but this is only for illustrative purposes and 7-8% is the long term return on equities in virtually all stock markets).  The “average” Singaporean would now have saved $798,806 SGD.  In other words, if CPF savers only earned the GIC rate of 7% rather than the CPF rate, the “average” Singaporean would be $261,694 wealthier.  Furthermore, if we took the unrealistic assumption that the “average” Singaporean earned a Temasek rate of return, they would be sitting on $4.5 million SGD a difference of $3,984,258 SGD from the current balance.

Most disturbingly are the implicitly high costs associated with the GIC and Temasek financial industrial complex.  Let’s again take a simple example.  Let’s assume that the difference between what a saver earns with CPF and 7% is the GIC “fee”.  In other words, if GIC earns 7% and CPF pays out 4%, again a simple example, then the GIC “fee” is equal to 3%.  The GIC “fee” is $261,694 SGD but this again only partially tells the story.  In the CPF system, the saver, along with employer contributions, has contributed $318,871 SGD and received $218,241 SGD in “guaranteed” interest.  However, this is $43,452 SGD less than the GIC “fee”.  In other words, the CPF saver has paid more to GIC than they have received in “guaranteed” interest.

There is one more way to think about the GIC fee relative to other asset managers.  Hedge fund managers are generally the most expensive asset managers in the financial services world.  Though not all hedge fund managers charge the same fee, it is pretty standard for hedge fund managers to charge what is called “2 and 20”.  That means there is a 2% of assets under management yearly fee and 20% of all profits earned.  To use a simple example, let’s assume you give a hedge fund manager $100 million SGD and he doubles your money to $200 million in one year.  If the 2% assets under management fee was taken at the beginning, the hedge fund manager would earn roughly $22 million ($2 million + $20 million.  Again, this is using very simple numbers and calculations).

Now let’s apply that same compensation structure a CPF saver.  An average hedge fund manager who earned the GIC rate of returned for our “average” Singaporean would have charged $233,111 SGD or $28,582 SGD less than GIC.  In other words, Singaporeans are paying more for GIC than the average hedge fund manager.  Finally, many hedge funds have something called a “hurdle rate”.  A “hurdle rate” is the rate of return the manager must exceed before earning the 20% of profits incentive.  For instance, a common hurdle rate is 5% so that any rate of return less than 5% is not subject to the 20% of profits fee.  Singaporean CPF savers are paying more than the average hedge fund manager to earn a “guaranteed” 2.5-4%.

While the concern over the lack of savings as many Singaporean approach old age is understandable, it is important to understand how this fits together with the already noted concerns about investment returns from Temasek and GIC.  On top of the extremely low rates of return Singaporeans are by law required to earn, they are paying exorbitant implicit fees even if we assume that the rates of return declared by GIC and Temasek are accurate.

Singaporeans have every right to be interested in GIC and Temasek financial management as it is your money.

Note: You can find a spreadsheet detailing the calculations here.  This should not be taken as financial or investment advice in anyway.  Finally, this of course does not account for all the details of life and is a simple calculation based upon public data about Singaporean wages, savings, and rates of returns and is not intended to account for every possible detail or variable one may encounter in the course of their life such as using CPF money to purchase a flat.

6 thoughts on “GIC Fees are More than a Hedge Fund?

  1. I don’t understand one thing..why should the Govt borrow from CPF at a high cost (ignoring if it is low or high in relation to inflation from depositor perspective, that is different matter) when it can borrow at practically zero cost through bonds and other means, given its high ratings and blue chip credentials?

    Also, what is CPF borrowing of Govt. in proportion to total funds used for Temasek/GIC, I presume a low % because tax surplus must be a big portion.

    • Concerning question #1, difficult to say specifically but I strongly suspect it is because through CPF they name pass laws requiring people to lend them money. They cannot do that with the market. Also, CPF funds are much lower cost than market funds. It is highly unlikely left to market forces that interest rates would be 2.5% when inflation is 5%.

      Concerning question #2, they do not say specifically but they have said that all borrowing is invested. As you note, why else would you need to borrow when you have a near constant surplus. However, they do not release what portion of funds in GIC/Temasek are from borrowed funds. I have never thought of trying calculate it out either.

      • Cpf holders who have sufficient fund in their accounts could withdraw part of their balances for approved investments, including professionally managed funds, gold.

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