This Bill seeks to revise the rules for spending from investment returns. The new framework retains the 50 per cent cap on spending from investment returns. But the spending rules will be based on a new and broader definition of investment returns, with the following key features: total returns, including capital gains; long-term expected returns, instead of year-to-year actual returns; and real returns, to preserve the purchasing power of our reserves.

Capital gains and losses are part and parcel of investment outcomes. This is true not just for investments in equities, but for interest-yielding bond instruments where the value of the investment goes up and down as interest rates move. In changing the definition of investment income to include capital gains, and not just interest and dividend income, we are adopting the right basis for determining how our reserves have grown.

Furthermore, a spending rule based only on interest and dividends could lead to bias towards investments that generate income rather than capital gains. This will be inconsistent with our objective of maintaining a diversified investment portfolio aimed at achieving long-term returns. The new rules will be consistent with a strategy of asset allocation that is focused on maximising total returns - including capital gains - over the long term.

For more The Straits Times stories, click here.