Asia insurance industry to gain from recovery

Asia insurance industry to gain from recovery

By TEH SHI NING

AS the global economy slowly recovers, Swiss Re’s chief economist Thomas Hess thinks that Asia’s insurance industry will benefit from the upswing in the assets market, and that the doors to acquisitions will soon be flung open.

Mr Hess: Thinks that prior to the crisis, there had been too much push for ‘risk-free’ products for policy holders
Mr Hess told BT in an interview recently, that ‘many have been surprised at how well the insurance industry did in this crisis’.

‘Not many needed government support, the ones which did were linked to the banking industry and its problems,’ he said. ‘It’s interesting that generally, the companies which had more confidence and sophistication in their risk management were more severely hit than the others. The bulk of the insurance industry remained more conservative.’

He sees strong growth in Asia. ‘This region will grow - China, India, the really emerging markets. We think growth for the insurance industry will be 3 to 4 per cent higher on trend in this area than in the developed world,’ said Mr Hess. Also, insurance has yet to be fully developed in many countries in this region, allowing for significant ‘catch-up effects’.

He thinks that Asia’s quicker recovery means that insurance companies here could use Asia’s stock markets as ‘acquisition currency’. There are interesting opportunities to be had at present, and the key to these are ‘capital strength and access to capital’, said Mr Hess. He expects the acquisition phase to begin by 2010.

The crisis has also been an opportunity to learn, for insurers as it has been for others in the finance industry. Said Mr Hess: ‘Every crisis is always an opportunity to get the homework done.’

He expects both risk management and underwriting to receive more attention looking ahead.

In a region where rapid growth in the stock markets over the past few years fuelled strong investment results, underwriting results may have been less important, but, should regain importance now.

Mr Hess thinks that prior to the crisis, there had been too much push for ‘risk-free’ products for policy holders. Products will now likely move towards containing asset risk and guarantees will price in more risks, without being so expensive as to make products redundant, he says.

As for changes in risk management, where previously, correlations between the different asset classes were calculated for a few years back and excluded ‘big tail events’, these tail risks are likely to weigh in more now, and lead to a tendency for more intensive capital requirements.

Looking at the broader insurance industry, Mr Hess says that more coordinated international supervision should be expected, though the administrative burden and costs will be an issue.

The crisis has also highlighted the artificial mismatch that often emerges purely from accounting - where assets and liabilities are being marked-to-market at different speeds. This is another area of balance sheet transparency, which bears re-examining for the insurance industry, Mr Hess said.

Source : Business Times - 05 October 2009

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CPF concern spawns corporate pension plans

CPF concern spawns corporate pension plans

But firms head to Brunei to do so, citing favourable tax treatment, among others

By GENEVIEVE CUA

(SINGAPORE) Concern over the adequacy of their employees’ retirement savings is driving a number of employers here to set up corporate pension schemes.

The schemes typically supplement the contributions that the employers continue to make to employees’ CPF accounts. Effectively, some employers actually contribute substantially more than the current CPF limits. This is particularly so for older workers, as unlike CPF limits which reduce contributions for those above 50, private corporate pensions do not impose any such limits.

Employers agree that the schemes are not only a good benefit for staff, they also lower staff turnover and enhance their reputations in Singapore’s highly competitive labour market.

Some of the schemes are set up as onshore trusts under Section 5 of the Income Tax Act and approved by the Inland Revenue Authority of Singapore. But here is the rub: increasingly, companies are setting up pension trusts in Brunei, citing lower establishment and running costs; speed and ease of set-up; favourable tax treatment of benefits; and a far more flexible investment universe for the assets.

This suggests that Singapore’s trust segment is losing out to its neighbour.

Employers told BT that current CPF contribution caps result in a woefully inadequate income replacement ratio in retirement. The latter refers to the proportion of income in retirement against the retiree’s last drawn pay. Globally, the desired ratio is around 70 per cent. In Singapore based on the CPF alone, it could be as low as 20 or 25 per cent.

Betinna Lim, human resources director of Firmenich Asia, says that the firm’s Section 5 scheme took three years of analysis before it was finally implemented in 2007. ‘In my analysis, I saw that the benefit employees receive from the employer’s CPF contribution would be cut by between 19 to 47 per cent as a result of the dwindling CPF rates and salary ceilings following the CPF reform in 2003. Seeing an adverse effect on the employees’ retirement funds, it prompted me to implement a supplementary pension plan.’

She adds: ‘Our employees are happy as we continue to contribute through this downturn. To ensure long-term sustainability for the company, the pension plan includes a provision for review where necessary.’

The firm employs about 250 in Singapore.

Schroders set up its Section 5 scheme in 1999. Its main purpose, says the firm’s Singapore managing director Susan Soh, is ‘to provide our staff with a sound financial retirement plan that would supplement the CPF scheme, since a majority of Singaporeans’ CPF savings are locked into fixed assets like housing’.

She says that any savings from the CPF contribution cuts can be passed back to the employee through the retirement plan. ‘As a global asset manager . . . we are also a major manager of pension plans for numerous companies globally. It’s only logical that we have in place a similar plan for our employees as well.’

Schroders manages about US$186 billion in assets.

Director of PWC Asia Actuarial Services David Richardson has long argued that Singapore needs a ’second pillar’ of retirement savings, comprising voluntary employer contributions. The first pillar is the CPF; the third pillar is mainly employee contributions under the Supplementary Retirement Scheme (SRS). Employers are now allowed to contribute to SRS subject to contribution limits. Their contributions are tax-deductible.

‘There is a need for a scheme on top of the CPF because that’s really a housing scheme with what’s left over for retirement. That’s insufficient for the average person. Life expectancy after 62 is about 30 years and children aren’t available to pay for parents. You can have a voluntary scheme like the SRS, but few save on a voluntary basis.’

On a cumulative basis, there is roughly $1.72 billion as at end-2008 sitting in the SRS, a rise of about 20 per cent from $1.44 billion in 2007. About 25 per cent of the funds are sitting in cash, and 32 per cent in insurance products. Unit trusts’ share is about 14 per cent. SRS contributions are subject to caps similar to the CPF. While contributions are tax deductible, half of the benefits in retirement are potentially taxable, although this can be mitigated by spacing out the withdrawals over 10 years.

Mr Richardson says that employers - mostly multinationals - prefer to set up their own schemes, rather than make contributions to the SRS. This is partly because companies can impose a vesting schedule on their own schemes to encourage long-term service. SRS, on the other hand, vests immediately.

He says that there are at least 20 or so corporate pension schemes by companies in a range of industries including finance, shipping and services. An increasing number are opting to set up their trust funds in Brunei.

‘There are a number of defects in Section 5 as it is currently practised. First of all, no one knows anything about it. It’s a one-liner in tax books. Most companies don’t know it exists.’

Approval time for a Section 5 scheme could take six to nine months, he says. Investment restrictions are unwieldy and stuck in a ‘time warp’ (see accompanying article). BT understands that the scheme is being reviewed by IRAS.

But the worst disadvantage, he argues, is that benefits paid out of a Section 5 scheme to retirees are taxable. ‘You can mitigate it by spreading it out like an annuity, but it shouldn’t be taxable.’

In contrast, payouts from an offshore pension trust are not taxable. In Singapore, investment income and capital gains are not subject to tax.

In addition, Section 5 plans are costlier to maintain. IRAS requires an annual actuarial certification, as plans must comply with a formula that imposes a cap on future benefits. ‘An offshore plan wins all the time in terms of costs. In Brunei, no discussion is needed with the regulator.’

Yet another benefit for employees is that employers can negotiate for lower fees for fund management services. While the CPF has imposed caps on fees, fees of CPF-included funds are still relatively high. Funds picked for SRS investments are also subject to high retail fees.

Source : Business Times - 05 October 2009

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MINDY YONG

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Property agents to be regulated

Property agents to be regulated

Measures to include monitoring body and dispute resolution

By Jessica Cheam

THE Government is moving quickly on a plan to regulate real estate agents in the wake of growing calls to improve the standards of the industry.

The Straits Times understands that an independent body will be set up and chaired by a neutral party appointed by the Government. It will also house a dispute resolution centre to mediate between agents and consumers.

Key agency bosses, industry associations and individual agents have already met with Government officials to discuss the reforms.

The proposals, which could be made public in the next month or two,will likely require that agents sit a compulsory exam and that all accredited agents be monitored through a central database run by this independent body.

This will mean that errant agents will no longer be able to switch agencies easily, as they can now. Currently, agents fired from an agency for dodgy activity can just switch to another firm.

There are also suggestions that agents will have to buy indemnity insurance protecting customers for losses resulting from negligent or unethical conduct.

While the Government has in the past maintained that the industry should self-regulate, it has decided to step in due to an increasing number of complaints against rogue agents, which has occurred in tandem with Singapore’s property market boom.

In February, for example, a couple successfully sued ERA Realty Network over its agents’ conduct. The agents, who have since resigned from ERA, had made a profit from ‘flipping’ an apartment they were supposed to sell for the couple.

The Consumers Association of Singapore (Case) received 1,100 real estate-related complaints last year, 1,113 in 2007 and 991 in 2006. This year, it received 619 complaints from January to August.

Case executive director Seah Seng Choon told The Straits Times this week that the proposed measures were long overdue.

‘There is a need to ensure a proper standard of practice so there aren’t abuses in the industry,’ he said.

Mr Seah is pleased that a central dispute resolution centre will be set up to help consumers and agents settle rows.

Although a clearer picture of the proposed reforms has emerged, two big questions remain: Are agents going to be individually licensed, and who else will be involved in running the independent body?

There are now two industry bodies - the Singapore Accredited Estate Agencies (SAEA) and the Institute of Estate Agents (IEA)- but it is not compulsory for agents to join either. While both associations are involved in the review process, discussions are ongoing as to their specific role in the independent body.

Industry observers note that some of the associations’ existing functions may become redundant in light of the new regulatory framework.

Ngee Ann Polytechnic real estate lecturer Nicholas Mak said that ideally, agency bosses, many of whom advise the current industry bodies, should not be involved in this new independent body, as they might resist the reforms or have a conflict of interest.

‘The priority now is to put in place a system that can permanently remove errant agents from the industry so they think twice about behaving unethically,’ he said.

Agency heads say they fully support the suggested reforms.

‘Even if it involves more work for agency bosses like myself, I don’t mind so long it makes our industry more professional and disciplined,’ said C&H Realty managing director Albert Lu.

Mr Lu is one of many who back the idea of licensing not just agencies but individual agents.

‘They are the ones doing the transactions, so they should be made accountable for their actions,’ he said.

Knight Frank agent Peter Tan, 40, said it was a good idea to have a compulsory exam ‘to give clients confidence that agents know their stuff’.

But it remains to be seen how effective the new accreditation will be, he said.

‘It’s the right initiative. But there are many agents who resort to unethical conduct because it’s quite a tough business. We’ll have to see if it is enough to deter such behaviour.’

Public consultation on the proposed reforms is due to begin this month with the findings due by December.

Source : Straits Times - 05 October 2009

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