Business Times – 30 May 2008
By GENEVIEVE CUA
IN his plainest statement yet on a controversial bonus cut, NTUC Income chief executive Tan Suee Chieh said yesterday the move is the right decision and policyholders will not be given an option to remain in the old bonus scheme.
Income announced last month that it would cut its annual bonus payouts for participating plans from 2.3 to 1.3 per cent and raise its special or terminal bonus rates from 25 per cent to between 30 and 120 per cent.
That move has raised the ire of its former chief executive Tan Kin Lian, whose postings in his blog have galvanised other policyholders.
News reports this week said Mr Tan Kin Lian was calling a truce in his protest. But a letter from him in The Straits Times yesterday said he disagreed with Income’s view that the old bonus rate was unsustainable. He said the actual yield earned by the life fund was higher than the projected yields at point of sale.
In a statement yesterday ahead of Income’s annual general meeting, Mr Tan Suee Chieh said Income’s board has ‘recognised’ that its financial position had to be strengthened since August 2006. The issue was ‘extensively discussed’ last year.
He said an appointed actuary’s opinion was that under the old structure, Income would be less likely to meet policyholders’ payouts and would end up with a weaker financial position.
‘The old structure was not sustainable and would undermine our ability to deliver total returns, which are ultimately more important to policyholders,’ Mr Tan Suee Chieh said. ‘There is now a better chance for NTUC Income to not only deliver returns as illustrated to policyholders, but to deliver even better returns.’
He also said the new bonus structure will reduce the likelihood of bonus cuts in the future.
While Income’s life fund has generated a total annualised return of about 7.8 per cent over the past 10 years, that is understood to comprise income and capital gains. The fund is understood to generate a running yield of between 2 and 3 per cent.
It is also understood that the old structure would have needed a running yield of 4.5 per cent a year to sustain the old bonus rates.
The new bonus structure is expected to release some $70 million of capital. This is expected to grow to $400 million over a few years to give Income greater flexibility in terms of investments.
Under the risk-based capital regime, high bonus rates will require high capital reserves, as bonuses once declared are guaranteed. Income has a capital adequacy ratio of about 180 per cent. And while well above requirements, it is one of the lower ratios in the industry.
Nick Dumbreck, president of the UK Institute of Actuaries, who also acted as consultant to Income, said: ‘Most policyholders’ main concern is with what they get back from the policy when it matures or is surrendered. The level of guarantee is secondary.
‘The level of guarantees has to be managed so that the exposure to equities can be sustained. That may mean cutting the annual bonuses. It is better to take action in advance of a problem arising. Once investment conditions become difficult, it can be too late to do anything.’
Mr Dumbreck said the ‘normal’ practice in the UK is to adjust the level of the final bonus and the annual bonus remains stable. ‘Normally the level of the regular bonus is set with reference to interest rates and bond yields,’ he said.
‘If bond yields remain stable, equity returns shouldn’t influence the annual bonus level. Normally you’d expect the final bonus to vary rather more from year to year to reflect the level of equities subject to smoothing.’