With the start of a new year, it is time to take stock of the year that just passed and make plans for what is to come.
Looking back, 2015 was an eventful year in the financial sector.
We saw the launch of retail offerings such as the Singapore Savings Bonds, retail bonds and the Direct Purchase Insurance scheme where basic life insurance products are sold without financial advice.
Also, several recommendations were made for the Central Provident Fund (CPF) scheme, with more to follow this year.
The new compulsory MediShield Life, which provides universal coverage, kicked in on Nov 1.
Despite the efforts made to educate people on the scheme, many are still grappling with understanding the various subsidies, the premiums they have to pay and the coverage.
Sales of insurance products via banking channels are on an uptrend and therein lies the potential pitfall of buying unsuitable endowment plans, some of which some consumers wrongly believe are guaranteed savings products.
There are many areas for improvement and here is my 2016 wish list:
ALTERNATIVE INVESTMENT SCHEME FOR CPF MONIES
In January 2004, the CPF Board unveiled proposals for its privately managed pension plans (PPPs), aimed at CPF members looking for new ways to build a retirement nest egg, but they never took off.
The PPPs' objectives were to raise the probability of higher long-term returns on members' CPF savings, reduce members' investment costs and provide simple choices.
Back then, CPF members had been lamenting the poor investment performance of the CPF Investment Scheme (CPFIS). Fast forward to today and members' financial needs and objectives have not changed much.
For the year ended September 2014, only about 140,200 members, or 15 per cent of total CPFIS-OA investors, made net realised profits in excess of the Ordinary Account interest rate of 2.5 per cent.
About 358,000 members - 40 per cent of total CPFIS-OA investors - made realised losses.
The 2015 statistics are not available yet.
With the recent CPF enhancements, it is timely to complement them with a low-cost, simple-to-understand alternative investment scheme for Singaporeans' retirement savings, for those who want higher returns.
To balance the risks, the whole mix of funds can be rebalanced annually or automatically if they are lifestyle (age-related) funds.
MORE RETAIL INVESTMENT OFFERINGS
Last year saw the successful launch of retail bonds from companies such as Frasers Centrepoint, Perennial Real Estate Holdings, Aspial Corporation and Oxley Holdings offering yields between 3.85 per cent and 5.25 per cent, as well as the Singapore Savings Bonds, with an average yield of about 2.8 per cent.
Investors can buy the corporate bonds for as little as $2,000 a lot. With a 5 per cent yield, this means the bondholder would get $100 every year for each lot bought.
I wish for more bond options for retail investors, particularly with the upcoming framework that allows issuers to do away with the need to issue a prospectus - which requires time and effort to prepare - to offer bonds to retail investors.
Under the framework, corporate issuers could break up their bonds into denominations as low as $1,000 once they have been listed on the Singapore Exchange for six months.
This important development will definitely help to put bonds in the hands of retail investors. But, as with all other investments, an investor would have to do his homework as well as diversify his investment purchases.
PROFESSIONAL FINANCIAL ADVICE
The balanced scorecard (BSC) framework came into effect on Jan 1 this year. It involves assessing a representative's performance every quarter and assigning a grade from A to E, which in turn can affect remuneration.
For instance, if the overall grade is between B and E, the representative's commissions from the quarter's new business will be clawed back on a graduated scale, capped at 60 per cent of commissions if the representative is fully remunerated based on sales volume.
For a representative who earns a fixed salary and a variable income component that is tied to sales volume, 100 per cent of the representative's variable income could be affected by the BSC grade.
In addition, representatives with an E grade have to be accompanied by a superior when he advises customers for the next three months.
This audit process takes account of non-sales factors such as whether the representative has taken steps to understand the customer's needs, recommend suitable products and make adequate disclosures.
The BSC framework, part of the Financial Advisory Industry Review recommendations, aims to raise the quality of advice and to mitigate risks of product pushing and pressure sales tactics.
I wish that the framework would not become a box-ticking or form-filling exercise, with representatives going through the motions just to satisfy compliance.
Instead, it should reinforce a mindset change by representatives to serve the best interests of consumers.
Some insurance plans come with guaranteed and non-guaranteed benefits. The latter depend on bonuses declared each year that take into account various factors, including the performance of the life fund.
Now, there is no accountability if an insurer fails to deliver over and above the guaranteed benefits.
Policyholders are still kept in the dark about how annual bonuses are declared and revised.
So if your policy matures in a "bad" year when the economy is down, the result is likely to be a low or zero terminal bonus.
With the increasingly volatile economic environment marked by declining investment returns, there is growing concern among consumers that the projected rates of returns used by insurers to illustrate benefits and costs of participating policies are no longer realistic.
These projected rates have been on a downward trend in the past two decades.
It is about time the insurers revise them downwards again to depict more realistic benefits and costs.
The current illustrated rates of return are 4.75 per cent and 3.25 per cent, and they have remained unchanged since July 2013.
These rates are used regardless of the individual insurer's past performance or the performance of a specific product line of an insurer.
In fact, it was a much higher 7 per cent in 1994 before it was revised to 6 per cent in 1997 and cut to 5.25 per cent in 2002.
The assumed higher rate of 4.75 per cent - or the maximum best estimate long-term investment rate of return - is deemed by the Life Insurance Association Singapore (LIA) as achievable by insurers' life funds over a horizon of at least 10 years
However, according to LIA's recent compilation of life funds' returns, only insurers Manulife, Prudential, AIA and Tokio Marine have achieved average returns of just above 4 per cent a year over a seven-year period ending 2014. But they are not even close to achieving 4.75 per cent per year.
Consumers who wise up will avoid products with low guaranteed and high non-guaranteed benefits. They will then buy only term insurance and invest in other non-insurance investment products, unless the insurers redress such issues.
AFFORDABLE HOUSING LOAN PACKAGES
Now that the United States Federal Reserve has finally hiked interest rates, it is time to bid goodbye to the super low home loan rates which most of us have enjoyed the past several years.
If you are paying more than 2 per cent a year on your mortgage, talk to your housing loan officer or a mortgage broker to see if it makes sense to refinance.
Experts are expecting the three-month Singapore Interbank Offered Rate (Sibor) - the key benchmark rate used to price home loans - to rise to 2 per cent by the end of this year.
As at Thursday, it was 1.18513 per cent a year, up from 1.0009 per cent in mid-October and nearly three times higher than it was a year ago.
It is a similar story with the three-month swap offer rate (SOR), which is used for commercial loans and some home loans.
The three-month SOR rate could climb to 2.55 per cent in2017 from Wednesday's rate of 1.67617 per cent.
After monitoring the rise in Sibor in the past year, I recently made a partial payment for my variable-rate housing loan to pare down the monthly instalment amount. In addition, I refinanced my package to one that is pegged to a fixed deposit rate plus a spread.
The bank is offering me a one-time free conversion to another loan package if the fixed deposit rate rises.
If you plan to pay down your mortgage with your bonus, do weigh the benefits of reducing your household debt against the need for sufficient cash flow and taking advantage of investment opportunities in the volatile year.
AFFORDABLE HEALTH INSURANCE
About 64 per cent of Singaporeans and permanent residents have private Integrated Shield Plans (IPs), which build on what MediShield Life has to offer.
Premiums are typically higher for such plans to match the better coverage they provide, such as stays in Class A/B1 wards in public or private hospitals.
However, there are growing concerns over escalating health costs and higher premiums of IPs.
To recap, the five private IP insurers have promised to freeze premiums (not applicable to riders) for a year following the launch of MediShield Life.
According to LIA, premiums are expected to go up after the first year. This is partly because IP claims have escalated by an average of 12 per cent (involving public hospital Class B1 and A wards) to 17 per cent (involving private hospitals) a year in the past few years, with private hospital claims rising the fastest.
As such, some may wish to have an option of enhanced coverage beyond MediShield Life, but in a standardised, affordable and easy-to-understand package.
This is why the Ministry of Health is working with insurers to develop a standard IP with benefits pegged at Class B1 wards in public hospitals. To be launched in the first half of this year, it will allow those concerned about premiums to buy or keep an IP.
So do keep a lookout for the standard B1 plan and work out your sums.
This article was first published on Jan 3, 2015.
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