The annual Net Investment Returns Contribution (NIRC) amount is published in the Government's annual 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.

The NII Framework was introduced in 2001 to protect at least 50% of actual net investment income. 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.

The NIR framework was subsequently introduced in 2008, which allowed the Government to 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. The expected rates of return are based on the judgement of experienced investment professionals in the investment entities.

• a) Spending up to 50% of the 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.

• b) Relevant assets are defined in the Constitution as the net assets invested by GIC, MAS, and Temasek[1], minus the liabilities of the Government (which include Singapore Government Securities and Special Singapore Government Securities). This ensures that we set aside returns to cover the costs of servicing our liabilities.

The NIR component was an enhancement in the following ways:

• Expanded the definition of investment returns to total returns, including capital gains (both realised and unrealised). This is 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.

• Long-term expected rates of return (rather than year-on-year actual returns, comprising dividends and interest, under the NII component) rates of return are used used to smooth out the volatility of Government 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.

• Real rates of return, i.e., net of inflation, (rather than nominal returns), are used to protect the 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 ensure that their approaches are sound and the estimated long-term rates of return for the financial year are reasonable. MOF will then seek President's concurrence on the proposed ELTRROR to be applied to the net assets invested by the investment entities.

• The President consults 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 fail to agree on any of the ELTRRORs despite discussions, the respective 20-year historical average real rates of return will be used to determine the NIR to be taken into the Budget for the financial year. 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.

Find out more about the NIRC.