BT: Income that stretches a lifetime, under new scheme

Business Times - 13 Feb 2008

Income that stretches a lifetime, under new scheme

Lifelong Income scheme to ensure Singaporeans have income as long as they live
By CHUANG PECK MING

(SINGAPORE) Singaporeans were yesterday given a detailed look at the scheme that could change the complexion of their retirement years. It comes with the promise that they will have a regular income, as long as they live.

For this, the annuity plan crafted by the National Longevity Insurance Committee will dovetail neatly with savings that members have in the CPF Minimum Sum scheme - their so-called Retirement Account.

On turning 65, a CPF member will first start getting a payout from his Retirement Account. Under the current scheme, this continues for 20 years. But now, at whatever age he chooses - and there is a host of options available - he can start receiving the same amount from the national Lifelong Income (LI) scheme. And this will continue for as long as he lives.

Related link:
Click here for NLIC's report

In fact, CPF members are likely to receive higher income from their Minimum Sum account without more top-ups, thanks to the extra one percentage point interest on the first $60,000 which CPF is offering and the benefit of pooling.

'The key point is (the LI scheme) will strengthen the CPF system to provide lifelong income,' the committee's chairman Lim Pin said yesterday when its report was made public.

In accepting the committee's recommendations on behalf of the government, Manpower Minister Ng Eng Hen said: 'The LI scheme will greatly enhance CPF savings for members. Under the old system, many would have depleted their savings after 20 years, with many more years to live. With the LI scheme, participants need not worry that they will outlive their CPF savings. They will receive an income for as long as they live.'

According to the committee, half of CPF members will outlive their CPF savings in the old system - and the number will rise as Singaporeans live longer.

In coming up with the LI scheme, the committee has taken in the views of a broad spectrum of Singaporeans - and addressed their main concerns. Its report says the scheme is fair and affordable; offers options and flexibility in meeting different needs and circumstances; provides a steady income for life; and will be run by a trusted administrator - the CPF Board.

The scheme also provides for refund of unused premiums (minus interest) upon early death - a 'first', according to Professor Lim, also the chairman of the National Wages Council. He said other annuity plans do not have such provisions.

CPF members may also opt for no refund in return for higher payouts. But they could lose all their money in the Minimum Sum if they die early, if they make this choice. This is particularly so if the members opt for their payouts to start at the age of 65, the payout age under the old Minimum Sum scheme. All their savings would have then been paid up in premiums to the LI fund, as premium payments start at age 55.

Members under the LI scheme could also opt for payouts at 70, 75, 80, 85 or 90, with 80 the default option. If they choose payouts beyond 65 with no refund, the portion of the Minimum Sum, or Retirement Account, still not paid up as premiums into the LI fund may return to their estate.

Where members opt for refund - and most are likely to do so - they will receive a higher income if they choose an early payout. The trade-off is they have to pay higher premiums and their refunds will be smaller than if they had opted for a later payout age.

The reverse is true if they opt for a later payout age. Actual payouts for individuals are proportional to their CPF balances in the Retirement Accounts.

The committee has ruled out inflation-indexed payouts because that would make the LI scheme expensive and require higher premiums to fund it.

'Taken together with the requirement to provide a reasonable minimum payout, it would mean that fewer members would be able to participate in the LI scheme,' its report explains.

The scheme, except for some exemptions, is compulsory and will come into effect in 2013. This means it will cover CPF members who are aged 50 and below this year. Older members will also be encouraged to join the LI scheme.

Some 35,000 CPF members will make up the first LI cohort, of which 60 per cent will have at least $67,000 in cash in their Retirement Accounts - or half of the full Minimum Sum - against a minimum requirement of $40,000 to join the scheme. They are expected to receive $600 a month for life.

The manpower minister noted that the LI scheme is 'correctly built on the foundations of self-provision and self-reliance which underpin our CPF system'. 'This is crucial to ensure the long-term sustainability of this scheme,' Dr Ng said.

The committee cautioned that operating the LI scheme involves significant mortality and investment risks over a very long time horizon. To ensure that it is financially sustainable over the long run, it said CPF 'must ensure at all times that assets can meet present and future liabilities'.

And 'premiums and payouts must be adjusted periodically to reflect actual mortality experience and investment returns'.