ST: What the Government's annuity scheme may look like

What the Government's annuity scheme may look like

While details of the compulsory annuity scheme are still being worked out, here's the take of four financial experts on what the scheme may look like. Lorna TanSun,

Sep 02, 2007 The Sunday Times

HAVING enough money set aside to manage late in life is a juggling act we all have to attempt - mainly because no one knows when he will die.

The Government's proposed compulsory annuity scheme aims to make that tricky task considerably easier.

The scheme means the growing number of people who live past 85 will get $250 to $300 a month for as long as they live.

The Government has assured Singaporeans that the scheme will be basic, flexible and cheap.

It is aimed at those who are currently below 50 and will ensure Singaporeans do not outlive their savings.

Details of the scheme are still being worked out.

An annuity is a bit like a whole life insurance in reverse.

You pay a lump sum to an insurer at the start and get a monthly income for as long as you live, in this case from age 85.

Under the scheme, at age 55 or later, a Singaporean uses a portion of the Central Provident Fund (CPF) Minimum Sum to fund the annuity.

The balance of the Minimum Sum will be used to buy an additional non-compulsory annuity from an insurer or left with the CPF Board to be drawn down over 20 years.

This draw-down age will rise progressively from 2012, from 62 now to 65 in 2018.

Financial experts agree that making this scheme work is something of a juggling act since it works on the principle of risk pooling.

Some CPF members who die early may not live to see the benefits as their premiums may go towards paying the annuity payouts of other members.

Here's the take of some financial experts on what the compulsory annuity scheme may look like:
Actuary Ken Ng, who works for a local insurance company Mr Ng says there are two factors that will determine how much money Singaporeans will have to pay into the scheme. These are: the interest rate that the invested funds can be assumed to attract; and, the question of life expectancy.

'What sort of interest rate are we prepared to assume for the 30-year period after the premium is deducted, from age 55 to 85?' he asks.

This is a challenge facing insurers, as there is presently no government bond over 30 years. Government bonds are considered a safe way to invest funds over a long period. Typically, they run for 10 years. This makes it difficult for insurers to find a benchmark to measure the likely return on funds invested over 30 years.

Secondly, Mr Ng says it is hard to tell how long Singaporeans will live, on average, in the years ahead, although globally the trend is towards living longer.

And, of course, the longer Singaporeans live on average, the greater the scheme's overall payouts.

'The more improvement we assume, the more we have to charge in terms of premiums. Then it becomes more expensive,' he adds.

Associate director of financial advisory firm PromiseLand Independent Patrick Lim
Mr Lim offers an example based on the assumption that half of today's retirees will live to age 85. Then, assuming the annuity holder lives to be 100, the original cost of the scheme for the policyholder is estimated to be $9,075 and $10,890 for monthly payouts of $250 and $300, respectively. The payouts are assumed to be deducted at age 55, and the interest rate is 2.5 per cent, he says.

But he is concerned the proposed $250 to $300 monthly payouts would be 'really insignificant' after the effects of inflation, for instance.

Actuary Tan Kin Lian and former chief executive of NTUC Income He estimates the cost of providing a $300 monthly payout that commences at age 85 and beyond will probably be $5,000 to $8,000 for all those aged 65.

He also expects that this monthly payout is likely to increase by 1 per cent to 2 per cent a year. This means that in 20 years, the monthly payout of $300 will probably grow to $400, says Mr Tan.

His figures assume the invested funds can attract a return of 2.5 per cent.

They are based on a participating annuity where policyholders are entitled to share in the insurer's profits, which are paid as bonuses. They are not guaranteed but, once declared, will be added to the guaranteed annuity payout. That becomes cumulative and is paid for a lifetime.
Mr Tan says to provide a more accurate figure, he will need to know the proportion of people likely to live to 85, and how much longer they will live after that, on average.

President of the Society of Financial Service Professionals Leong Sze Hian He suggests that there is no need for a compulsory annuity scheme, and that the same payouts can be achieved via existing CPF accounts.

'Instead of spending the $750 million a year to pay the additional 1 per cent interest on the first $20,000 of the CPF Ordinary Account, and $40,000 of the Special, Medisave and Retirement accounts, growing these sums at, say, 5 per cent interest will accumulate to $67.7 billion in 2042.

'This is the first year that the compulsory annuity will start at age 85, for those who are below 50 years old now,' he said.

At 5 per cent interest, the $67.7 billion could provide $300 a month from age 85 to 100, for 1.79 million Singaporeans, he said.