atans1

Will PM, tonite, give peace of mind on CPF Life Standard?

In CPF, Financial competency on 17/08/2014 at 4:26 am

(Or “Numbers don’t lie — the CPF default plan, is awfully bad“)

I doubt it. [Update on 18 August 4.30am: He didn’t touch on it. If S’poreans bitch, bleat, kpkb maybehe’ll fix it in next yr’s NatDay Rally speech. Remember GE coming.]

Further to my non-quantative rant on CPF Life, two number-crunchers have worked out how nasty and expensive the standard CPF Life plan is. I’m surprised that Roy ngerng has not got round to calling this “criminal misappropriation” yet. Probably, he is waiting for Uncle Leong to explain the numbers to him. Roy may be gd with words, but he is worse than me when it comes to quantative finance, let alone basic maths and stats. At least he wasn’t in finance. (Btw, I would like to point out to Woody Goh that a gd parent would not have devised such a unfair default standard plan, or cPF Life in general. Btw2, since when has govt become our parents? Juz because PAP been in power since 1959, doesn’t mean it has become our parents.  Even the CCP doesn’t regard itself as the parents of China. Woody Goh, we are not living in N Korea. You’ve been reading the ST, I assume.)

 Seriously, a financial planner, who is no second hand car or life insurance salesman, in a tie,  told me, “Someone asked me, why is the default option the worse one? I told him, yah that’s precisely why its the default option” when he sent me this link showing how
bad the standard plan is: http://www.ifa.sg/cpf-life-standard-is-the-worst/ (Warning very chim).
The author concludes, I speculate that the ‘poor’ returns of CPF Life Standard is due to the fact that all of the CPF RA is being invested into the common insurance pool while only a small amount of CPF RA under CPF Life Basic goes to the insurance common pool. The seemingly poor return is probably due to the ‘penalty’ of early exit from the pool in order to help subsidise the remaining in the pool who live too long. This is how insurance works through risk pooling. Unfortunately, we do not know whether this risk pooling is efficient as there is no further benefit illustration available.

Nevertheless, the present values gap between CPF Life Standard and CPF Life Basic is too large to ignore. It is difficult to determine what are the ‘fine prints’ for such a large discrepancy between CPF Life Basic and CPF Life Standard as there is no policy contract available unlike a traditional annuity plan available from private insurance company.

(my emphasis)

In TRE, someone working in finance posted this less technical explanation, coming to the same result:

Here is a comparison between the default CPF Life Standard Plan payout for the writer meeting the minimum sum of $155,000 and the example of Mr. Tan in the CPF Life Handbook, who has $100,000, below the minimum sum, property pledge required. The writer’s payout is derived from the CPF Life Estimator. Mr. Tan’s given in the handbook. The assumed investment rate is 3.75%, the low end of the assumed investment rates for CPF LIFE.

  Chris K Mr. Tan
RA at 55 155,000 100,000
Monthly Payout from 65      1,215        822
Bequest at 65 187,263 108,505
Bequest at 75   41,829   11,909
Bequest at 85             0             0

At 55, CPF deduct half the minimum sum, $77,500 the first premium instalment from both the writer and Mr. Tan. The remainder of both RAs earned 4% with an extra 1% on first $60,000. This will be on combined balance, including the first premium which earned rate of 3.75%. At age 65, the remaining RA pays for the second premium instalment. The writer calculates the accumulated capital at age 65 and then amortised against the CPF Life estimated payout. Here are the numbers (CPF does not reveal its calculation so the writer use the default common sense approach)

  Chris K Mr. Tan
RA at 55 155,000 100,000
Monthly Payout from 65     1,215        822
Accumulated Capital at 65 225,453 147,171
Residual Capital at 65 225,453 147,171
Residual Capital at 75 149,529   93,412
Residual Capital at 85   39,689   15,638
Capital depletion age 88 years old 86.75 years old

The first thing that jumps out is the disparity between the estimated bequests and the residual capital after drawing the monthly payouts.  At age 65, without a single payout, the bequest is $187,263 against accumulated capital of $225,453. As an annuity plan, the difference can be explained as those who expired earlier providing the reserves for those who lived longer on the basis of risk pooling.

However, the next thing that jumps out is the capital depletion age which is when the accumulated capital is completely drawn down: 88 years for the writer and 86.75 years for Mr Tan, both well in excess of the 82-83 years life expectancy. The government in effect made triple provisions for those who lived beyond the life expectancy:

1) the excess over the bequests of those who expired earlier

2) stretch the monthly payout well beyond life expectancy and

3) to a smaller extent having those who met the minimum sum compensate those who did not, which then begs the question why should anyone want to meet the minimum sum.

If that is not enough, legislation has been provided to wind up CPF LIFE in case the Plans are insolvent.

The Basic Plan

To avoid a long article, the writer provides a brief summary of the Basic Plan which is predicated on drawing most of the monthly payout from the RA while the annuity only kicks in at age 90. As such, the Basic Plan provides a larger bequest from the RA and over a longer time frame but with lower monthly payout compared to the Standard Plan.

At age 55, the first CPF Life premium instalment equal to 10% of the respective RA is deducted. At age 65, the second instalment equal of 10% of the accumulated RA balance is deducted. The writer draws $1,098 per month from his RA as the payout under the Basic Plan while Mr. Tan draws $737. At the age of 90, the remaining balances in the RAs will be completely depleted. Then, the CPF Life annuities start providing their respective payouts. If both expire before age 90, here is the unused accumulated capital in their respective CPF LIFE annuities and if they live, the capital depletion age.

  Chris K Mr. Tan
Annuity accumulated capital at 90 86,384 61,896
Annuity capital depletion age 96.75 years old 95.5 years old

When the government said a third of Singaporeans who are 65 today will live beyond 90, then two thirds of them will not see a single cent paid from the CPF LIFE annuity. Again the government has built in triple provisions 1) the payout from the RA is stretched well over life expectancy 2) annuities kicking in well beyond life expectancy, guaranteeing massive reserves to pay for those who live beyond 95 3) to a smaller extend, those who meet the minimum sum mitigating those who do not.

Conclusion

The writer does not accuse the government of deliberately profiting from the financial risks of longevity.  However, the triple provision, triple redundancy or in the strictly local parlance “kiasu, kiasi, kiabo” of absolutely ensuring not a single cent is spent on retirement funding, can only mean that there will be excess money left from CPF LIFE which reverts back to the government.

Some may call this conservative financial management but there is a very thin line between such conservative financial management and indolent financial management which arises from coercion and monopoly over retirement savings. Undoubtedly, the usual price of not getting more from their retirement funds is paid by you and me.

(My emphasis)

Chris K

* Chris K holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.

Fyi, I was lucky enough to be under the old system and I didn’t opt for any of these plans. If I live too long, I’d die financially if the CPF was all I had. The good concept but as usual messed up by the PAP govt in its meanness: The Standard plan offers an annuity scheme similar to what retirees in Britain opt for. The Basic plan is commonly adopted by US retirees.

Reminder, the Basic plan is closer to the Minimum Sum scheme that is no longer available.

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  1. You forgot to mention that the “higher” monthly payout from the Standard plan is only $50 higher than the Basic plan.

    Also for the Standard plan, the bequest goes to $0 at around 79 yrs old (the age when half of all Sinkies will die). For the Basic plan, the bequest goes down to $0 only at age 91 (difference of 12 yrs).

    CPF charges an arm and a leg for that extra $50 per month. Anybody has to be nuts or fcuking desperate to choose the Standard plan. That’s why it’s the default plan.

    You will only gain from the Standard plan only if you can live to at least 100 yrs old. Maybe this was the assumed Sinkie lifespan when CPF calculated the premiums and charges for CPF Life. No free lunch for old fcukers except for old fart.

  2. […] – My Little Corner: Freezing minimum sum for CPF? – Thoughts of a Cynical Investor: Will PM, tonite, give peace of mind on CPF Life Standard? – ♥ Honest © Honorable ® Holistic ♥ Humbly Unexplainable Irresistible ♥ ™: 50 […]

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