Report of the National Longevity Insurance Committe (aka Annuity Scheme) : What it means to you

The National Longevity Insurance Committee (NLIC) comprising esteemed individuals in Singapore have released their report on the Lifelong Income scheme (previously known by the unpalatable "Annuity scheme" that was so famously launched by PM Lee Hsien Loong during the National Day Rally in 2007 to public consternation and concern.

The scheme in its present form was so poorly conceived that Minister for Manpower Ng Eng Hen had to throw it back to the drawing board to a committee led by Prof. Lim Pin to take into consideration public feedback. I wonder what MOM or PMO's office were doing prior to the public consultation. Perhaps "public" refers to organisations affiliated with a political party that runs Singapore Inc? But I digress... Let's examine the issue on hand, i.e. how the new Lifelong Income (LI) scheme affects us.

Dissecting the LI Scheme Conclusion by Conclusion, Recommendation by Recommendation
The NLIC's full report can be found in the Ministry of Manpower website. News reports in Channelnewsasia, Straits Times also feature write-ups on the recommendations (read: commandments) for you the CPF member. Panzer now attempts to translate the report into human-readable format and to raise a few questions for you to think about in planning your own financial freedom.




Key Conclusion #1: [Paraphrased by Panzer] You will live longer

Panzer's take on Key Conclusion #1
What the NLIC is saying is, "You WILL (on average!) live longer, I told you so! Gahmen told you so, Deloitte Trowbridge tells you so!" Of course the caveat is that it is on average and even the Department of Statistics is very careful to say for those born in 2006, the projected life expectancy is 78 for males and 82.8 for females. That is for those born in 2006. That does not mean you who were born in the 50s, 60s, 70s, 80s or 90s can tahan so long. This is mainly to address those of us who were incredulous when told more than half of us will live beyond 85.

You can't do much about this except to keep healthy so that the quality of life is there when you reach your ripe old projected age.

Key Conclusion #2: More than half of you can fund your own long life

Panzer's take on Key Conclusion #2
60% of active CPF members (as opposed to inactive members who went to heaven) are expected to have half of full minimum sum of $67,000. Based on current assumptions of interest rates at 4% for SMRA account is enough to last you $600 for lifetime if LI starts at 80. What NLIC is saying is that, don't worry, if you have at least 50% of minimum sum of $134,000, CPF can earmark $16,080 for Refundable Premium at age 55 from your CPF Retirement Account and use it to invest for you to support your income from aged 80 onwards. Indirectly saying, I told you oredi, minimum sum is GOOD FOR YOU!



Key Recommendation #1: CPF system not working so well if you live long, so we come up with this LI Scheme

Panzer's take on Key Recommendation #1
The CPF system as it is doesn't work very well because we have to come up with a new scheme using YOUR money to fund it. Of course, the current CPF system also uses YOUR money (and your employers' contributions with a teeny-weeny top-up by Gahmen before elections) to fund your income until 85. Gahmen wants citizens to be self-sufficient and not have a "crutch" mentality so save for your own retirement! Of course, Ministers with their pensions are exempted from such principles.


Key Recommendation #2: Seamless integrate - Don't worry about choosing insurers, no need to crack your brains

Panzer's take on Key Recommendation #2
No need to worry, we choose insurer for you. Do what we say and you'll be fine appears to be the key message here.

Key Recommendation #3: Told you already, we chose CPF for you lah!

Panzer's take on Key Recommendation #3
Pretty self-explanatory.




Key Recommendation #4: You want choices, okay lah, we give you choices on refunding of premium, varying age of payouts and other flavours

Panzer's take on Key Recommendation #4
Different strokes for different folks is the message here. The NLIC committee has done what the Gahmen didn't do in the first place. Consult people and ask what type of choices they would like with THEIR MONEY. I don't know about the Ministers but most of the time people actually APPRECIATE having a say IN THEIR MONIES.


Key Recommendation #5: Give people choice to opt-in, especially those who are unable to pay private annuity schemes

Panzer's take on Key Recommendation #5
Similar to recommendation 4 in that people should be given an option to opt-in.


Panzer's overall comments
The annuity scheme in its re-packaged Lifelong Income scheme basically addresses many of the concerns people had which was about being forced into a compulsory non-refundable annuity scheme. While many accept the concept that we are responsible for our own retirement, many refuse to be forced to buy a product they may not need or want and to have no option for the remaining lump-sum premium paid to be bequeathed to our next-of-kin in the event of earlier transition to the next world.

Choice of LI Payout Age
However, certain concerns are still not fully addressed. For one, the LI scheme requires you at age 55 to make a bet on how long you can live. I.e. To determine the payout age of LI. You can opt for payouts to start from 65 up to 90 at 5 year increments. Default is 80 years.

The way the NLIC has structured the scheme is that earlier payouts in fact yield more income because a larger amount of your minimum sum is earmarked for the Refundable Premium. I.e. the future value (FV) of a larger lump sum payment now will yield more money than a small lump sum payment assuming same interest rates due to compound interest working on a bigger lump sum. Sounds confusing? Maybe I will put in some math later to explain this. Intuitively, this doesn't seem to make sense because typically if you defer your CPF withdrawal age, you should be receiving more money but later. This feature may actually result in more people opting for RP65 since you get more for a longer period of time! The catch is that you lose the interest on the RP earmarked from your minimum sum. If you had opted for RP80, you get a lower payout than RP65 but you forgo interest at 4% on $50,920 (i.e. 76% of half Minimum Sum of $67,000) for your lifetime.

No Refunds
Also, you are expected to make a decision on whether to opt for a higher payout if you forgo the refund of your Refundable Premium. If you think you will have a long and healthy life, you may want to bet that you can outwit and outlast the RP and opt for no refunds but to have a higher payout. This appeals to those who want to make their RP stretch.

At the end of the day, the LI scheme is useful for those who are not rich enough to buy their own private annuity plans and would have a long life. The economies of scale by the CPF make it possible for them to offer this scheme on a relatively more cost-effective manner and CPF is not profit-driven (at least on paper) and should look out for CPF members' interest.

However, the payouts and premiums are dependent on many assumptions, one which is that the CPF continues to pay 4% of Special/Medisave/Retirement Accounts (SMRA) and the additional 1% of first $60,000 of the SMRA. This really depends on the performance of the 10YSGS whose 2007 performance of 2.9% may be unable to support the reality to be faced in the future.

My suggestion is for you to consider keeping yourself healthy and think carefully about the implications of your choice when you hit 55. Also, the scheme will kick off in 2013 and include all who are aged 55 and below. Those who are aged 55 and above with at least $40,000 in their Minimum Sum would also be included.

Be well and prosper.