The new CPF Life plans as portfolios

Abstract

We examined the new CPF Life plans - the standard (default) and basic plans - as portfolios of a bond and an obligation to purchase an annuity. This perspective, in contrast to the view that these plans are just annuities, shows that the mandatory scheme does not have universal coverage even for those who are mandated into the scheme, and there are subtle cross subsidies among groups. The basic plan offers real choice for CPF members to substantially reduce further annuitisation by reducing the annuity component of the portfolio and exiting the plan because of the long vesting age. We estimated the money's worth ratio (MWR) of the plans and found that they were not sustainable at the current payouts (1.14 < MWR < 1.93) consistent with previous estimation of earlier plans replaced by the current ones. We predict the payouts will trend downwards after 2023 (the years the first cohort's annuity plans are executed) because the generous MWR are not sustainable. This paper contributes to policy debate about the coverage of the mandatory scheme and the wealth transfer between the insurer and annuitants. Policy questions about wealth transfer among annuitants, and the welfare effect of introducing the scheme, require further research.