Some policyholders have asked me to insist that they be given the right to choose between the new and old bonus structure. I hope that this is possible and believe that it is the best option.
If NTUC Income's managment is convinced that the new bonus structure is likely to give a better return to the policyholders, they should be able to convince most policyholders to move to the new structure.
Wednesday, May 28, 2008
View from Appointed Actuary (2002-2007)
Dear Kin Lian
A high terminal bonus (which some companies suddenly reduced to zero when STI was low in 2002/3) is used by most companies to pass much of the investment risk to policyholders, without giving any significant additional return. If a policyholder wants an investment linked product, he can buy one - a policyholder who buys With Profit wants and deserves a more predictable ultimate claim value.
Stock Companies (i.e. all companies offering With Profits life insurance policies in Singapore, other than Income) are constrained in that their shareholders demand a stable dividend. The amount that can be transferred to Shareholders is limited to 1/9th of the cost of bonus - hence the annual bonus has to be sustainable with a very high degree of confidence, even in extreme financial conditions - and hence has to be low.
Income, as a Cooperative, distributes less to shareholders and is not constrained in this way - the transfer from Par Fund to Shareholders Fund has been no more than 2% of the cost of bonus - so a variable and high annual bonus can be paid, to the benefit of policyholders.
Income has managed to maintain remarkable stability in its non-guaranteed Terminal Bonus over the years - not even reducing it when STI was down at 1,300. As a result, in my opinion, the Income bonus philosophy was much better than that adopted by competitors, since the policyholder could predict with greater certainty the value of his policy as it approached maturity.
Other companies have an inferior product - and it would be unfair to policyholders for Income to unnecessarily follow "market norms".
Nicholas Rhodes,
Appointed Actuary of Income 2002-2007.
A high terminal bonus (which some companies suddenly reduced to zero when STI was low in 2002/3) is used by most companies to pass much of the investment risk to policyholders, without giving any significant additional return. If a policyholder wants an investment linked product, he can buy one - a policyholder who buys With Profit wants and deserves a more predictable ultimate claim value.
Stock Companies (i.e. all companies offering With Profits life insurance policies in Singapore, other than Income) are constrained in that their shareholders demand a stable dividend. The amount that can be transferred to Shareholders is limited to 1/9th of the cost of bonus - hence the annual bonus has to be sustainable with a very high degree of confidence, even in extreme financial conditions - and hence has to be low.
Income, as a Cooperative, distributes less to shareholders and is not constrained in this way - the transfer from Par Fund to Shareholders Fund has been no more than 2% of the cost of bonus - so a variable and high annual bonus can be paid, to the benefit of policyholders.
Income has managed to maintain remarkable stability in its non-guaranteed Terminal Bonus over the years - not even reducing it when STI was down at 1,300. As a result, in my opinion, the Income bonus philosophy was much better than that adopted by competitors, since the policyholder could predict with greater certainty the value of his policy as it approached maturity.
Other companies have an inferior product - and it would be unfair to policyholders for Income to unnecessarily follow "market norms".
Nicholas Rhodes,
Appointed Actuary of Income 2002-2007.
Life Annuity Vs CPF-Life
Dear Mr. Tan,
I am 58 and retired. Three years ago, I used my minimum sum to bought a Life Annuity.
With the recently announced CPF-Life, higher MSRA interest, D-Bonus and V-Bonus, is it better for me to:
(a) Terminate the Life Annuity and transfer the money back to CPF RA (to earn the SMRA interest rate and various bonus) or
(b) Retain the Life Annuity and instruct the insurer to postpone the pay-out age from 62 to 65 (to qualify for the V bonus)?
REPLY
The CPF pays an attractive rate of interest on the retirement account, i.e. 4% plus 1% bonus. It also pays the bonus for deferring the payment.
I know of an annuitant who decided to cancel the annuity and transfer the savings back to CPF. He received a good cash value and found the new arrangement to be finacially better.
Perhaps, you should study both options and make the decision, based on the actual figures. You can ask for the actual figures and carry out a cash flow projection over the next 5 or 10 years, to make a better decision.
I am 58 and retired. Three years ago, I used my minimum sum to bought a Life Annuity.
With the recently announced CPF-Life, higher MSRA interest, D-Bonus and V-Bonus, is it better for me to:
(a) Terminate the Life Annuity and transfer the money back to CPF RA (to earn the SMRA interest rate and various bonus) or
(b) Retain the Life Annuity and instruct the insurer to postpone the pay-out age from 62 to 65 (to qualify for the V bonus)?
REPLY
The CPF pays an attractive rate of interest on the retirement account, i.e. 4% plus 1% bonus. It also pays the bonus for deferring the payment.
I know of an annuitant who decided to cancel the annuity and transfer the savings back to CPF. He received a good cash value and found the new arrangement to be finacially better.
Perhaps, you should study both options and make the decision, based on the actual figures. You can ask for the actual figures and carry out a cash flow projection over the next 5 or 10 years, to make a better decision.
Tuesday, May 27, 2008
Buy a life annuity with cash or CPF
Dear Mr. Tan,
I am 58 years old still and is still working. I have a retirement account in my CPF. Should I purchase an annuity using cash or should I use my retirement account?
REPLY
It is better to keep your minimum sum in the CPF as it earns a better return. You can buy the life annuity using cash. Read this FAQ:
http://www.tankinlian.com/faq/seniors.html
I am 58 years old still and is still working. I have a retirement account in my CPF. Should I purchase an annuity using cash or should I use my retirement account?
REPLY
It is better to keep your minimum sum in the CPF as it earns a better return. You can buy the life annuity using cash. Read this FAQ:
http://www.tankinlian.com/faq/seniors.html
Dubious practices in respect of Terminal Bonus
Dear Mr. Tan,
The article "Salutary bonus lessons from the UK" (Straits Times, 28 May 2008) highlighted that "onerous benefit guarantees were a big factor behind the closure of Equitable Life...".
You have raised some good questions on the risks of terminal bonuses. The declaration of unsustainable annual bonuses was indeed a key factor for the collapse of Equitable Life. However, Equitable life also adopted "dubious practices" in respect of "terminal" or "final" bonuses, and failed to set aside adequate technical provisions for terminal bonuses.
These imprudent practices are highlighted in a BBC article entitled "Where Equitable Life went wrong", which provides a more comprehensive picture of the Equitable Life case. http://news.bbc.co.uk/2/hi/business/3547441.stm
SH
REPLY
The bonus rates declared by NTUC Income in the past were sustainable. In the early 1990s, they were calculated based on a long term yield of 6.5%. In the late 1990s and early 200s, there were reduced to reflect a long term yield of 5.25%. The actual yield earned during the past 10 years was 7.8%.
At any point of time, the bonus rates were adjusted (upwards or downwards) to reflect the projected long term yield of the fund. This projected yield is based on the mix of investments that is prudent for the fund.
It is possible for a life company to declare unsustainable bonus rates. For example, if the bonus rates were calculated based on a projected yield of 10% in today's environment in Singapore, it would be considered to be unsustainable.
NTUC Income did not declare unsustainable bonus rates in past years. In fact, it had been quite conservative in calculating the annual bonus. It kept 20% of the each year's bonus aside, to be declared as a special bonus payable on maturity and claim. This helped to provide a safety margin.
The article "Salutary bonus lessons from the UK" (Straits Times, 28 May 2008) highlighted that "onerous benefit guarantees were a big factor behind the closure of Equitable Life...".
You have raised some good questions on the risks of terminal bonuses. The declaration of unsustainable annual bonuses was indeed a key factor for the collapse of Equitable Life. However, Equitable life also adopted "dubious practices" in respect of "terminal" or "final" bonuses, and failed to set aside adequate technical provisions for terminal bonuses.
These imprudent practices are highlighted in a BBC article entitled "Where Equitable Life went wrong", which provides a more comprehensive picture of the Equitable Life case. http://news.bbc.co.uk/2/hi/business/3547441.stm
SH
REPLY
The bonus rates declared by NTUC Income in the past were sustainable. In the early 1990s, they were calculated based on a long term yield of 6.5%. In the late 1990s and early 200s, there were reduced to reflect a long term yield of 5.25%. The actual yield earned during the past 10 years was 7.8%.
At any point of time, the bonus rates were adjusted (upwards or downwards) to reflect the projected long term yield of the fund. This projected yield is based on the mix of investments that is prudent for the fund.
It is possible for a life company to declare unsustainable bonus rates. For example, if the bonus rates were calculated based on a projected yield of 10% in today's environment in Singapore, it would be considered to be unsustainable.
NTUC Income did not declare unsustainable bonus rates in past years. In fact, it had been quite conservative in calculating the annual bonus. It kept 20% of the each year's bonus aside, to be declared as a special bonus payable on maturity and claim. This helped to provide a safety margin.
Collective Protest - set aside for the time being
I discussed with NTUC Income's management to seek an amicable solution that will be in the best interest of policyholders and the reputation of NTUC Income. I communicated two concerns on behalf of the policyholders:
1. The restucture of the bonus system results in a lower annual bonus distributed yearly to policyholders, to be compensated by a higher rate of special bonus (which is not guaranteed). I ask that there should be satisfactory assurance on the payment of the special bonus on surrenders and claims, so that the policyholders will not lose out on the restructuring of the bonus.
2. In some past years, policyholders received a bonus cut (compared to what was illustrated at the point of sale) when the investment yield was low. As NTUC Income had earned a good yield of 7.8% earned during the past 10 years, I suggest that the shortfall in the bonus for the poor years be restored as early as possible, subject to financial solvency. I pointed out that the actual yield is higher than the projected yield at the point of sale.
To allow more time to find a settlement, I indicated that I will set aside the Collective Protest for the time being. I hope that an amicable solution can be found, so that the protest will not be necessary.
The Straits Times reported that Income had issued a statement that the old bonus structure is unsustainable. I disagree. For policies taken in the earlier years, they were based on a projected yield of 6.5%. For policies issued in the later years, they were based on a projected yield of 5.25%. These were realistic estimates of the future yield made at that time. The actual yield earned over the last 10 years turned out to be higher, at 7.8%.
Under the old bonus system adopted by NTUC Income, the sustainable rate of bonus is not a rate that is fixed. It is a rate that is adjusted from time to time, to reflect any change in the projected yield. If the yield goes up, the rate of bonus is adjusted upwards. If it comes down, it is adjusted downwards.
During the 1970s and 1980s, the bonus rates were adjusted upwards very few years. During the late 1990s, in the low interest rate environment, the bonus rates were adjusted downwards. In recent years, there is a case for the bonus to be adjusted upwards.
I believe that this system is fairer to policyholders and allows them to enjoy a higher vested bonus each year. This increases their cash value and reduces their loss, if they have to terminate the policies in the earlier years.
Tan Suee Chieh said that my change of tone was probably due to a better appreciation of issues behind the bonus structure. This is not the case - and I had told Tan Suee Chieh about it earlier. I had understood the issues earlier and had concerns about the change. My wish now is to find a solution that is in the best interests of the policyholders and the reputation of NTUC Income.
Some policyholders have asked me to insist that they be given the right to choose between the new and old bonus structure. I hope that this is possible and believe that it is the best option.
If NTUC Income's managment is convinced that the new bonus structure is likely to give a better return to the policyholders, they should be able to convince most policyholders to move to the new structure.
1. The restucture of the bonus system results in a lower annual bonus distributed yearly to policyholders, to be compensated by a higher rate of special bonus (which is not guaranteed). I ask that there should be satisfactory assurance on the payment of the special bonus on surrenders and claims, so that the policyholders will not lose out on the restructuring of the bonus.
2. In some past years, policyholders received a bonus cut (compared to what was illustrated at the point of sale) when the investment yield was low. As NTUC Income had earned a good yield of 7.8% earned during the past 10 years, I suggest that the shortfall in the bonus for the poor years be restored as early as possible, subject to financial solvency. I pointed out that the actual yield is higher than the projected yield at the point of sale.
To allow more time to find a settlement, I indicated that I will set aside the Collective Protest for the time being. I hope that an amicable solution can be found, so that the protest will not be necessary.
The Straits Times reported that Income had issued a statement that the old bonus structure is unsustainable. I disagree. For policies taken in the earlier years, they were based on a projected yield of 6.5%. For policies issued in the later years, they were based on a projected yield of 5.25%. These were realistic estimates of the future yield made at that time. The actual yield earned over the last 10 years turned out to be higher, at 7.8%.
Under the old bonus system adopted by NTUC Income, the sustainable rate of bonus is not a rate that is fixed. It is a rate that is adjusted from time to time, to reflect any change in the projected yield. If the yield goes up, the rate of bonus is adjusted upwards. If it comes down, it is adjusted downwards.
During the 1970s and 1980s, the bonus rates were adjusted upwards very few years. During the late 1990s, in the low interest rate environment, the bonus rates were adjusted downwards. In recent years, there is a case for the bonus to be adjusted upwards.
I believe that this system is fairer to policyholders and allows them to enjoy a higher vested bonus each year. This increases their cash value and reduces their loss, if they have to terminate the policies in the earlier years.
Tan Suee Chieh said that my change of tone was probably due to a better appreciation of issues behind the bonus structure. This is not the case - and I had told Tan Suee Chieh about it earlier. I had understood the issues earlier and had concerns about the change. My wish now is to find a solution that is in the best interests of the policyholders and the reputation of NTUC Income.
Some policyholders have asked me to insist that they be given the right to choose between the new and old bonus structure. I hope that this is possible and believe that it is the best option.
If NTUC Income's managment is convinced that the new bonus structure is likely to give a better return to the policyholders, they should be able to convince most policyholders to move to the new structure.
Risk of high terminal bonus
Many insurance companies introduce life insurance policies with low annual bonus and high terminal bonus.
If the policyholder surrender the policies before the terminal bonus is payable, usually during the first 20 years, they will get a low cash value. The insurance company makes a big profit.
The policyholder is likely to get a cash value (on surrender) that is lower than the total premiums that was paid. The policyholder usually gets a poor deal and has to bear a high cost for the insurance protection, compared to the alternative of buying a low cost term insurance.
Even if the policyholder is able to wait a long time (say, 20 years or longer) for the terminal bonus to become payable, the policyholder still faces the risk that the terminal bonus (which is not guaranteed) may be reduced in the future. Policyholders of insurance companies have suffered a big loss in payout due to a severe reduction in terminal bonus on a few occasions in past years.
NTUC Income used to declare a high rate of annual bonus from its annual surplus, consistent with the long term yield of the fund. This allows the policy to accumulate a high cash value and reach a breakeven point (i.e. the cash value equals the premiums paid) as early as possible.
As the long term yield changes, the rate of annual bonus is adjusted (usually upwards, but sometimes downwards).
NTUC Income has now decided to change the bonus structure to declare a lower rate of annual bonus and to increase the rate of special bonus. This affects 310,000 policies and is stated to be in line with "industry practice". The bad aspect of this industry practice is that the insurance company can to pay out a lower cash value and make a bigger profit on a surrendered policy - although NTUC Income has stated that this is not their intent.
NTUC Income has said that they will increase the terminal bonus for surrenders and claims, so that the payout to the policyholder will be not less than the old bonus structure.
It is important for each policyholder to know the answers to the following questions:
1. What is the rate of terminal bonus payable on each of their policy for each year from now until the maturity date or for the whole of life. Under this new system, a different rate of terminal bonus will apply for each type of policy, each year of entry, each year of termination and the type of termination (i.e. surrender or claim).
2. Will the rates of terminal bonus be published for all policies, so that each policyholder is able to see not only the rates that will apply to each of his policy but to all other policies as well?
3. How will the rates of terminal bonus be changed in the future, to reflect the change in the long term yield of the fund and to ensure that all the policyholders are treated fairly?
It is important for each policyholder to get sufficient assurance that their interest will be protected by the change in bonus structure. This requires full disclosure of the new rates of terminal bonus and the principles guiding the changes in these rates in the future.
It is best for each policyholder to be given an individual choice of staying with the old bonus structure or move to the new structure.
If the policyholder surrender the policies before the terminal bonus is payable, usually during the first 20 years, they will get a low cash value. The insurance company makes a big profit.
The policyholder is likely to get a cash value (on surrender) that is lower than the total premiums that was paid. The policyholder usually gets a poor deal and has to bear a high cost for the insurance protection, compared to the alternative of buying a low cost term insurance.
Even if the policyholder is able to wait a long time (say, 20 years or longer) for the terminal bonus to become payable, the policyholder still faces the risk that the terminal bonus (which is not guaranteed) may be reduced in the future. Policyholders of insurance companies have suffered a big loss in payout due to a severe reduction in terminal bonus on a few occasions in past years.
NTUC Income used to declare a high rate of annual bonus from its annual surplus, consistent with the long term yield of the fund. This allows the policy to accumulate a high cash value and reach a breakeven point (i.e. the cash value equals the premiums paid) as early as possible.
As the long term yield changes, the rate of annual bonus is adjusted (usually upwards, but sometimes downwards).
NTUC Income has now decided to change the bonus structure to declare a lower rate of annual bonus and to increase the rate of special bonus. This affects 310,000 policies and is stated to be in line with "industry practice". The bad aspect of this industry practice is that the insurance company can to pay out a lower cash value and make a bigger profit on a surrendered policy - although NTUC Income has stated that this is not their intent.
NTUC Income has said that they will increase the terminal bonus for surrenders and claims, so that the payout to the policyholder will be not less than the old bonus structure.
It is important for each policyholder to know the answers to the following questions:
1. What is the rate of terminal bonus payable on each of their policy for each year from now until the maturity date or for the whole of life. Under this new system, a different rate of terminal bonus will apply for each type of policy, each year of entry, each year of termination and the type of termination (i.e. surrender or claim).
2. Will the rates of terminal bonus be published for all policies, so that each policyholder is able to see not only the rates that will apply to each of his policy but to all other policies as well?
3. How will the rates of terminal bonus be changed in the future, to reflect the change in the long term yield of the fund and to ensure that all the policyholders are treated fairly?
It is important for each policyholder to get sufficient assurance that their interest will be protected by the change in bonus structure. This requires full disclosure of the new rates of terminal bonus and the principles guiding the changes in these rates in the future.
It is best for each policyholder to be given an individual choice of staying with the old bonus structure or move to the new structure.
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