Dubious practices in respect of Terminal Bonus

Dear Mr. Tan,
The article "Salutary bonus lessons from the UK" (Straits Times, 28 May 2008) highlighted that "onerous benefit guarantees were a big factor behind the closure of Equitable Life...".

You have raised some good questions on the risks of terminal bonuses. The declaration of unsustainable annual bonuses was indeed a key factor for the collapse of Equitable Life. However, Equitable life also adopted "dubious practices" in respect of "terminal" or "final" bonuses, and failed to set aside adequate technical provisions for terminal bonuses.

These imprudent practices are highlighted in a BBC article entitled "Where Equitable Life went wrong", which provides a more comprehensive picture of the Equitable Life case. http://news.bbc.co.uk/2/hi/business/3547441.stm

SH

REPLY
The bonus rates declared by NTUC Income in the past were sustainable. In the early 1990s, they were calculated based on a long term yield of 6.5%. In the late 1990s and early 200s, there were reduced to reflect a long term yield of 5.25%. The actual yield earned during the past 10 years was 7.8%.

At any point of time, the bonus rates were adjusted (upwards or downwards) to reflect the projected long term yield of the fund. This projected yield is based on the mix of investments that is prudent for the fund.

It is possible for a life company to declare unsustainable bonus rates. For example, if the bonus rates were calculated based on a projected yield of 10% in today's environment in Singapore, it would be considered to be unsustainable.

NTUC Income did not declare unsustainable bonus rates in past years. In fact, it had been quite conservative in calculating the annual bonus. It kept 20% of the each year's bonus aside, to be declared as a special bonus payable on maturity and claim. This helped to provide a safety margin.