Longevity Risk and Annuities in Singapore

Abstract

Compulsory annuitization is often proposed as a compelling solution under defined-contribution pension schemes to help plan participants manage their longevity risk. This paper explores the current annuity market in Singapore and discusses the pros and cons of a proposal to mandate annuitization under the Singaporean Central Provident Fund (CPF). We evaluate the pricing of various annuity policies in order to assess whether plan participants might benefit from higher annuity returns per dollar premium and lower adverse selection costs under the new annuitization mandate. Our results indicate that private annuity providers currently offer good value-formoney annuities, with money’s worth values in line with those found for other developed countries. This has implications for proposals to mandate annuitization. Joelle H.Y. Fong S.S. Huebner Foundation Fellow and PhD Candidate Department of Insurance and Risk Management The Wharton School, 3620 Locust Walk, St 3000 SHDH Philadelphia, PA 19104-6320 Email: hfong@wharton.upenn.edu Olivia S. Mitchell International Professor of Employee Benefit Plans Chair and Professor of Insurance and Risk Management Director, Pension Research Council and Boettner Center for Pensions & Retirement Research The Wharton School, 3620 Locust Walk, St 3000 SHDH Philadelphia, PA 19104-6320 T: 215-898-0424  F: 215-898-0310 Email: mitchelo@wharton.upenn.edu Benedict S. K. Koh Associate Professor of Finance Singapore Management University 50 Stamford Road, #04-01 Singapore 178899 T: 65-6828-0716  F: 65-6828-0777 Email: skkoh@smu.edu.sg Longevity Risk and Annuities in Singapore Joelle H.Y. Fong, Olivia S. Mitchell, and Benedict S. K. Koh A central concern in the debate over pension reform in defined contribution (DC) systems is how plan participants should draw down their accumulated asset balances during retirement. Annuitization is often recommended as a means to help plan participants manage their longevity risk, since otherwise they may outlive their assets in retirement. Some form of annuitization in the payout phase helps ensure that plan participants have a dependable flow of income beyond the retirement date all the way to death. For instance, in the United Kingdom, retirees have been required to use at least part of the lump sum available at retirement to purchase an annuity (Finkelstein and Poterba 2002; 2004); in Chile, the DC retirement systems give plan members the choice of taking scheduled withdrawals or buying life annuities upon retirement (Mitchell and Ruiz, 2009). This paper reviews the nature of longevity risk and annuities in Singapore, in order to draw some implications about the prospects for future annuitization under one of the world’s largest defined contribution schemes, the Central Provident Fund (CPF) of Singapore. In particular, we examine how the current life annuity market appears to be operating and assess the likely attractiveness of compulsory annuitization under proposed reforms. In what follows, we first describe the way in which the retirement system works in Singapore. Next we assess the value-for-money of existing annuity products. We conclude with a brief discussion of the issues that arise when discussing the options for a mandatory annuity model, currently in development by the CPF Board.