Jump to ContentJump to Main Navigation
Show Summary Details
More options …

Asia-Pacific Journal of Risk and Insurance

The Official Journal of the Asia-Pacific Risk and Insurance Association

Editor-in-Chief: Kwon, W. Jean

2 Issues per year

Online
ISSN
2153-3792
See all formats and pricing
More options …

Improving Money’s Worth Ratio Calculations: The Case of Singapore’s Pension Annuities

Joelle H. Fong / Jean Lemaire
  • Corresponding author
  • Department of Statistics, Wharton School, 400 JMHH 3730 Walnut Street, Philadelphia, PA 19194-6340, USA
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Yiu K. Tse
Published Online: 2014-03-04 | DOI: https://doi.org/10.1515/apjri-2013-0027

Abstract

This paper contributes to a better understanding of the risks involved in a life annuity investment. We study the full distribution of weighted annuity benefits and quantify risk measures such as dispersion and skewness, thereby extending the usefulness of the popular money’s worth valuation framework for life annuities. Using data from pension annuities in Singapore, we also introduce several risk measures that might appeal to less financially sophisticated retirees. A more detailed and accurate picture of the risk of investing in life annuities emerges, enabling prospective annuitants to differentiate among products that may appear seemingly uniform in terms of money’s worth, but vary widely in terms of their risk attributes.

Keywords: annuities; money’s worth ratio; risk measures

References

  • AON. 2009. “AON Insurance Risk Study: Risk Quantification in a Connected World.” http://www.aon.com/attachments/insurance-risk-study-aon-benfield.pdf.

  • Boardman, T. 2006. “Annuitization Lessons from the UK: Money-Back Annuities and Other Developments.” The Journal of Risk and Insurance 73:633–46.CrossrefGoogle Scholar

  • Bowers, N., H. Gerber, J. Hickman, D. Jones, and C. Nesbitt. 1997. Actuarial Mathematics. Itasca, MN: Society of Actuaries.Google Scholar

  • Bühlmann, H., and A. Gisler. 2005. A Course in Credibility Theory and Its Applications. Berlin: Springer-Verlag.Google Scholar

  • Cannon, E. S., and I. Tonks. 2002. “Annuity Prices, Money’s Worth and Replacement Ratios: UK Experience 1972–2002.” CMPO Working Paper Series No. 02/051.Google Scholar

  • Central Intelligence Agency. 2013. The World Factbook 2013–14. Washington, DC: Central Intelligence Agency. https://www.cia.gov/library/publications/the-world-factbook/index.html.

  • Central Provident Fund (CPF). 2007. “CPF Minimum Sum Scheme: Table of Monthly Payment Rates for the Minimum Sum of $99,600 Placed with a Participating Insurance Company.” mycpf.cpf.gov.sg/NR/rdonlyres/883DD6D3-D1EC-48DD-8B09-811C0D24ECE8/0/Annuity Comparison.pdf.Google Scholar

  • Christelis, D., T. Jappelli, and M. Padula. 2010. “Cognitive Abilities and Portfolio Choice.” European Economic Review 54:18–38.Web of ScienceCrossrefGoogle Scholar

  • CPF. 2008.. “Report by the National Longevity Insurance Committee (NLIC).” http://mycpf.cpf.gov.sg/Members/Gen-Info/CPF_LIFE/NLIC.htm.

  • CPF. 2009a. CPF LIFE Information Booklets. Singapore: CPF Board.Google Scholar

  • CPF. 2009b. “CPF LIFE Payout Estimator.” https://www.cpf.gov.sg/cpf_trans/ssl/financial_model/lifecal/index.html.

  • CPF. 2011. “CPF Annual Report 2010.” http://mycpf.cpf.gov.sg/CPF/About-Us/Ann-Rpt.

  • Davidoff, T., J. R. Brown, and P. A. Diamond. 2005. “Annuities and Individual Welfare.” American Economic Review 95(5):1573–90.CrossrefGoogle Scholar

  • Doyle, S., O. S. Mitchell, and J. Piggott. 2004. “Annuity Values in Defined Contribution Retirement Systems: Australia and Singapore Compared.” Australian Economic Review 37:402–16.CrossrefGoogle Scholar

  • Duxbury, D., B. Summers, R. Hudson, and K. Keasey. 2013. “How People Evaluate Defined Contribution, Annuity-Based Pension Arrangements: A Behavioral Exploration.” Journal of Economic Psychology 34:256–69.CrossrefWeb of ScienceGoogle Scholar

  • Finkelstein, A., and J. Poterba. 2002. “Selection Effects in the United Kingdom Individual Annuities Market.” Economic Journal 112:28–50.CrossrefGoogle Scholar

  • Finkelstein, A., and J. Poterba. 2004. “Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market.” Journal of Political Economy 112:183–208.Web of ScienceCrossrefGoogle Scholar

  • Fong, W. M. 2002. “On the Cost of Adverse Selection in Individual Annuity Markets: Evidence from Singapore.” The Journal of Risk and Insurance 69:193–207.CrossrefGoogle Scholar

  • Fong, J. H., O. S. Mitchell, and B. S. Koh. 2011. “Longevity Risk Management in Singapore’s National Pension System.” The Journal of Risk and Insurance 78(4):961–81.CrossrefWeb of ScienceGoogle Scholar

  • Hu, W., and J. S. Scott. 2007. “Behavioral Obstacles in the Annuity Market.” Financial Analysts Journal 63(6):71–82.CrossrefGoogle Scholar

  • James, E., and X. Song. 2004. Annuities Markets Around the World: Money’s Worth and Risk Intermediation. SSRN Working Paper. Chicago, IL: Social Science Research Network.Google Scholar

  • Kaschützke, B., and R. Maurer. 2011. “The Private Life Annuity Market in Germany: Products and Money’s Worth Ratios.” In Securing Lifelong Retirement Income: Global Annuity Markets and Policy, edited by O. S. Mitchell, J. Piggott, and N. Takayama. New York: Oxford University Press.Google Scholar

  • Lusardi, A., and O. S. Mitchell. 2008. “Planning and Financial Literacy: How Do Women Fare?” American Economic Review 98(2):413–17.Web of ScienceCrossrefGoogle Scholar

  • Mitchell, O. S., J. Poterba, M. Warshawsky, and J. Brown. 1999. “New Evidence on the Money’s Worth of Individual Annuities.” American Economic Review 89:1299–318.CrossrefGoogle Scholar

  • Mitchell, O. S., and S. P. Utkus. 2004. “Lessons from Behavioral Finance.” In Pension Design and Structure: New Lessons from Behavioral Finance, edited by O. S. Mitchell and S. P. Utkus. New York: Oxford University Press.Google Scholar

  • Monetary Authority of Singapore. 2008. “Statistics Room: Daily SGS Prices.” http://www.mas.gov.sg/statistics/other-statistics.aspx.

  • NTUC Income. 2009. “Annuity Plans.” http://income.com.sg/insurance/Annuity/index.asp.

  • Singapore Department of Statistics. 2013. “Complete Life Tables 2003–2012 for Singapore Resident Population.” http://www.singstat.gov.sg/Publications/publications_and_papers/births_and_deaths/life table03-12.xls.

  • Society of Actuaries. 2004. “Retirement Plan Preferences Survey Report of Findings.” soa.org/files/research/projects/preferencesreport2-5-final-v2.pdf‎.Google Scholar

  • Thorburn, C., R. Rocha, and M. Morales. 2005. “An Analysis of Money’s Worth Ratios in Chile.” Journal of Pension Economics and Finance 6:287–312.Web of ScienceGoogle Scholar

  • Warshawsky, M. J. 1988. “Private Annuity Markets in the United States.” The Journal of Risk and Insurance 55:518–28.CrossrefGoogle Scholar

About the article

Published Online: 2014-03-04


Details on the term and annuity component of the LIFE plans are discussed extensively in the Report by the National Longevity Insurance Committee (CPF 2008).

The lump-sum annuity premium varies from year to year and is based on the so-called prevailing “Minimum Sum” which is the minimum amount that must be set aside in a CPF member’s retirement account before any CPF balances can be withdrawn at age 55. For instance, the Minimum Sum is S$70,000 in 2000, S$99,600 in 2008, S$117,000 in 2009, and S$148,000 in 2013.

“Annual Value” is the property value used to calculate the property tax of the CPF member’s home. “Assessable Income” is the full income in a calendar year (sum of employment, dividends, interest, and other income) less allowable expenses, applicable capital allowances, charitable donations, and any loss incurred in trade and business.

We use a projected 2% bonus with a projected rate of return of 5.25% per annum. This is in line with the benefit illustrations in NTUC Income prospectus (NTUC 2009). NTUC Income is a home-grown co-operative formed in 1970 and is one of the Singapore’s leading composite insurers offering life, health, general insurance, and investment-linked products.

Prior to 2000, some of the commercial pension annuities offer period-certain guarantees instead of dollar guarantees.

In the United Kingdom, capital-protected or value-protected annuities feature a partial money-back option where the taxable lump-sum death benefit is permitted only up to age 75 (Boardman 2006).

The death benefit Gt+1 is equal to max{0,premium+accrued interest from guaranteetotal annuity payouts received prior to time t+1}.

The first year rate is derived from the 1-year Singapore Government Treasury bill; thereafter, the 2-, 5-, 7-, 10-, 15- and 20-year Treasury bond rates as of 2007 are used to estimate the riskless spot rates (MAS 2008). The 20-year rate is applied for periods after year 20; annual spot rates range from 1.4% to 3.44%.

The a(1990) tables are constructed based on UK annuitants’ mortality experience from 1967–70 with mortality improvements projected to 1990. Note that annuitant life tables are not available in Singapore due to limited annuitant mortality experience.

Some MWR values may not be exactly identical because of different assumptions regarding the potential bonus payouts from the participating annuities and minor corrections.

The jagged portions between ages 55 and 62 in Figure 2 are due to stepped increases in the guarantee amount accruing from accrued interest of 0.75% per annum (up to age 62), as well as the non-monotonicity of the discount rates. Accrued interest on the guarantee does not exceed 2.5% for the rest of the annuities; three insurers do not pay such interest. Over time, the guarantee starts to wear off due to discounting and the commencement of payouts.

The death benefit wears down as monthly payouts accumulate.

This generalization is made possible because the nine annuities (provided by eight different insurers) offered largely similar specifications: a S$99,600 premium and low variation in sex-specific payouts/benefits across insurers.

A recent cross-check shows that illustrative payouts (based on the CPF web calculator) have not altered much since September 2009; only small decreases in the range of S$5–10 were noted.

The Income plan channels 100% of the premium into the annuity component. Also, any unused balance (premium less payouts made) is non-refundable. Hence, this product offers no death benefit offering the most attractive monthly payouts as a trade-off. LIFE Plus is similar, except that any unused balance is refundable to one’s estate. This explains why its NPV profile does not dip into the negative region as much as the Income plan in early years.

This study extends to 17 countries comprising over 75% of the world’s global premium; it defines risk as the CV of the loss ratio of each book of business.

Bowers et al. (1997, 143) provide proof for the following mathematical equivalence: Actuarial present value of an annuity = t=0pta vt =t=0(a¨t+1|¯ptaqa+t).


Citation Information: Asia-Pacific Journal of Risk and Insurance, ISSN (Online) 2153-3792, ISSN (Print) 2194-606X, DOI: https://doi.org/10.1515/apjri-2013-0027.

Export Citation

©2014 by Walter de Gruyter Berlin / Boston. Copyright Clearance Center

Comments (0)

Please log in or register to comment.
Log in