A few tweaks could be all it takes to make annuity scheme more accepted
THE largely negative feedback to the proposed compulsory annuity and longevity insurance scheme is not surprising given that it’s long on logic but short on marketing savvy.
For sure, a lot of effort and research has been put into studying the mortality trends, the actual investment performance of CPF members and the ability of the market and the Government to guarantee a long-term risk-free rate of return.
Over time, the Government has acted to ensure that the retirement accounts will not be frittered away by exorbitant sales charges and fund management fees.
The Government has worked out its sums to offer CPF contributors the most logical deals. But to critics of the plan, this logic does not add up. Why?
For the answer, we should turn to the field of Behavioural Finance. Just think of why 4-D and Toto are so popular even though basic mathematical logic clearly shows that the players, as a group, lose big time. Similarly, consider why people happily flock to casinos to leave loads of money behind.
In short:
• You need big prizes to encourage participation
• You need to maintain interest by having small payouts frequently
• Most players don’t like to lose big, even if the probability is very small
Let me explain the last point. If a person has a monthly income of $1,000, he will not mind wagering $1 to win $1, in an even game of chance.
With 4-D, we know he is actually prepared to wager $1 for a very small chance of winning the top three prizes even though the overall return is about half the money wagered.
However, he will avoid risking $1,000 in only one bet, even if the odds are improved to 1:1. Basically the thought of losing $1,000 at one go is perceived to be more painful than losing $1 a thousand times. This is termed risk aversion.
To my mind, a revised Government proposal needs to address several issues for the scheme to gain broader acceptance.
By making annuities compulsory, the Government imposes a very small probability of losing your whole Minimum Sum (or most of it) on each retiree. Even though the Government will not benefit from those who die early, the very thought that there could be a huge loss is highly unacceptable to many.
By stretching the payouts to one’s dying days, the monthly payouts become smaller —
there is no “Jackpot” element. After a life of struggle and toil, workers do not have a chance to celebrate before settling down to a mundane life of subsistence retirement.
However, the scheme can be repackaged to widen its appeal.
The 1-per-cent bonus interest could be scrapped. Instead, keep the money in a separate pool and dish it out, in the form of a Retirement Bonus, to those reaching their CPF withdrawal age. This would be similar to the Terminal Bonus feature in Endowment Insurance plans.
Since the money is meant for retirement, the Retirement Bonus should only be added to the Minimum Sum if the member agrees to opt for the Compulsory Annuity (with a guaranteed minimum benefit of five years payment) cum Longevity Insurance Package.
Let me take the liberty of naming this package the “New Annuity”. Members who opt out of the scheme for no valid reason, would have to forego the Retirement Bonus. That is their choice, harsh as it may seem.
Furthermore, those who migrate will not get a cent of the Retirement Bonus, unlike the present proposal. This money would be saved for the pool.
While it may seem that members who pass away before their retirement lose out, it is actually their dependents who lose out. This issue could be addressed by enhancing the Dependants’ Protection Scheme.
Since the money for each cohort cannot be touched for many years, there is scope to invest in a broader range of assets.
There is certainly room to invest in good properties and international blue chips, similar to what life insurance companies practise, to give better returns for their Endowment Policy holders.
Every year, all annuitants will also be eligible for a lucky draw to win cash or other prizes. Perhaps the older ones can have more draw chances since they are likely to have smaller annuity receipts. Many older members will recall the POSB’s televised lucky draws fondly.
The Government, major corporations, religious and charitable organisations, rich individuals and foundations could sponsor the prizes.
It would make for a truly festive occasion. Residents’ Committees could organise Senior Citizens’ Dinners for their constituents to enjoy a nice meal and watch the televised draw.
To increase the size of the New Annuity pool, the well-off could be encouraged to buy additional annuities with cash. These should be tax-deductible. Any return of premium, due to early death, should be exempt from estate duty.
This is also an incentive for the better-off to buy annuities for their spouses and poorer relatives.
The additional cash purchases can be a powerful signal to CPF members who have doubts about the New Annuity.
All the cost of running the system should come from the Government’s general budget.
This will show that the Government really cares for retirees. It is better for the Government to absorb the cost of running the scheme as better payouts will result in a lighter burden on the welfare system.
Our workers toil and dream of the day they retire.
We can learn from the 4-D and Toto experiences to redesign the retirement system to help them live their dreams when they retire.
With the Retirement Bonus and the Annual Draw to look forward to, they may even gamble less with Singapore Pools!
The writer was the first CEO of the Radio Corporation of Singapore. He may be contacted at chia.anthony@gmail.com
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