Annuities: It's Risk-Sharing Among All

Source : TODAY, Friday, August 31, 2007

So why are Singaporeans unhappy: It’s a matter of perception, lack of knowledge and discontent : CHRISTOPHER TAN

OVER the past week, every newspaper and financial periodical in town has been talking about one thing: The changes in the Central Provident Fund (CPF) and, in particular, the introduction of the compulsory annuities scheme.

The gist of the scheme is: To ensure that payouts from the Minimum Sum last throughout the life expectancy of CPF members, the Government has recently proposed delaying the Minimum Sum draw-down age progressively from 62 to 65.

To give a stream of life-long income to those who may live beyond 85, the Government is also planning to set aside a sum of money from each individual’s minimum sum to buy into a compulsory annuity for all CPF members. If one dies before age 85, the amount goes into the pool and the payouts for those who are still living.

Then the unhappiness arrived, in all forms — articles, commentaries, forums, online chat, and so on. Singaporeans felt they have been denied the choice of deciding whether they want to buy the annuity, or leave the money in their CPF to pass on to their loved ones if they die early. It is their own money, after all.

As I read the remarks and sensed the unhappiness of fellow Singaporeans, I thought for a really long time to try and see what was wrong with this scheme.

The intentions of the scheme are clear. Singaporeans are ageing and we are living longer. A large proportion of Singaporeans, especially the poorer and less educated ones, may not know how to plan for themselves, and could invest unwisely. And although financial awareness talks are being organised to help people understand the importance of planning, many people may still not do it well. They could run out of money. The annuities scheme will at least provide them with subsistence living. Otherwise, the Government will have to take care of them with taxpayers’ money. This means less tax money for other important areas such as infrastructure, defence, education and so on. Poverty may also create social problems. The overall effect for all of us will be bad.

As chief executive of an independent private wealth management firm that serves top- end, affluent and high-net-worth individuals, as well as a trainer and consultant in retirement planning to the general masses, I meet people from all walks of life. As I speak to hundreds of retirees each month, I know that most are not financially ready for retirement. The people who are really ready are those like our clients — who are wealthy and have sufficient income, and wealth, to plan for themselves.

I scrutinised the scheme for a long while and my conclusion is that this is indeed a well thought-out programme. Based on our calculation, CPF members may only need to set aside $4,000 to $7,000 from the minimum sum for the compulsory annuity. This is a very small amount relative to the current minimum sum of $99,600 or $120,000 in 2013. Thus, the monthly drawdown from the minimum sum from age 65 will not be greatly reduced. If the CPF Board manages this annuity, it is likely to do better than an insurance company as it has the economies of scale and lower expenses.

So what exactly are we unhappy with? After much thinking, I concluded that it is due to a matter of perception, lack of knowledge and discontentment.

Singaporeans are unhappy because we feel that the Government is often high-handed. In this case, we feel that the Government has already decided on forcing everyone to participate in a scheme that does not give us flexibility to do what we want with our own money.

In Singapore, once an intention is announced, feedback sessions and consultations are perceived as mere motions — the belief is that it will be implemented anyway. Whether this is a fact or perception remains to be debated. Even good policies will be rejected once such a perception is formed.

The unhappiness is also partly caused by lack of knowledge. Many do not understand how the scheme works. As an example, many may not know that the estimated monthly payout amount at age 85 from the annuity scheme would probably have taken into consideration the number of those who may not have lived to that age, and have contributed their share into the pool. This probably explains why many doubt whether those who survive beyond age 85 will benefit.

There are comments that the Government is looking to benefit itself financially. But many do not understand that the Government is not a private enterprise. It is like a trustee to a pool of funds of which every Singaporean is a beneficiary.

Finally, the greatest cause of unhappiness is discontentment. Humans, including myself, are a discontented lot.

At a recent retirement workshop that I conducted, an interesting discussion arose. In discussing the role of life insurance in a person’s financial life, I told the participants that life insurance is for the purpose of protecting against income loss for the family, during a person’s income-producing years, should death occur. It should be an expense if nothing happens to you. As such, buying term insurance products that give nothing in return when they expire is the way to go. It is a highly affordable way for you to cover all your needs.

Then the objection came: “Won’t I lose out if nothing happens to me and I get nothing back?” I explained that an annuity is an insurance policy that will pay you an income for as long as you live. Another objection came: “Won’t I lose out if I die too early?”

I was dumbfounded for a while. In the first case, why should you feel upset if you are healthy, live a long life and do not claim any proceeds from life insurance? And if you die too soon, and benefit from life insurance but “lose out” in your annuity, you are unhappy as well. We need to understand that we can’t have the best of both worlds in many things in life.

Singaporeans must realise that a country’s retirement policies must mainly cater for people who may not be able to plan for themselves. Those of us who are fortunate enough to earn a higher income can take care of ourselves. If we are all given a choice and if many of us opt out of this scheme, the country would not have the required capital and economies of scale to start this compulsory annuities programme. Poorer Singaporeans will suffer.

This is a risk-sharing scheme among all Singaporeans. It is about Singaporeans coming together to share our ageing problem. We will never know whether it would be others who will subsidise our retirement or we subsidising theirs, because we will never know who will survive beyond age 85.

I have a spare tyre in my car. I don’t spend a lot of money buying a good spare tyre. It is a second-hand tyre but it will work in the event of an emergency. I spend more money on the four main wheels. If I never have to use the spare tyre, I won’t be upset. Annuities, like insurance, are like a spare tyre.

Christopher Tan is the CEO of Providend, Singapore’s sole fee-only independent private wealth and investment management firm.