Saturday, March 9, 2013

PRS or Deferred Annuity? The competition has heated up.

A New Tax Relief up to RM3,000 (or max tax saving of RM780) is applicable for PRS (Private Retirement Scheme) or Annuity.......

Some PRS players are feeling the heat of not being able to guarantee a return on their PRS funds.

This is especially so after the launch of a deferred annuity product by an insurer which guarantees the annuity payments (see how-attractive-is-the-great-retirement-plan-return on the calculation of the guaranteed return).

 A PRS distributor challenged the validity of the term "guarantee" ( and hinted that the rules governing deferred annuity products by BNM are not as stringent as the requirements by the Securities Commission.

The insurer, Great Eastern, has since refuted the arguments ( Under BNM's regulations, the term "guarantee" is not to be used freely. The guaranteed benefits are subject to stringent actuarial reserve under the Risk Based Capital framework. It is also not fair to say that as insurers do not issue prospectus, the disclosure level is less stringent.

BNM requires deferred annuity products to meet the Retirement Savings Standards before the products are allowed to be offered to the public.

Meanwhile HwangIM chief product officer was quoted as saying that PRS clients are not subject to any lock-in period. Our understanding from reading their PRS Disclosure Document is that this is not strictly true. There is a lock-in period of 1 year as "The first request for a withdrawal from a private retirement scheme may only be made after one year has elapsed from the date of the first contribution to the private retirement scheme" (Clause 7.3, Disclosure Document dated 31 October 2012).

There are other subtle differences between a PRS product and a deferred annuity, some of which were highlighted by us in our recent presentation to Actuarial Society of Malaysia.

To us, whether a deferred annuity or a PRS product is better really depends on the needs of the investor. Factors to consider include the guaranteed yield vs the loss in potential upside return, the discipline of the investor in handling a lump sum at retirement vs receiving annuity payments over a period, the portability of the product, the trust placed by the investor on the company and the service level provided by the company and its distributors.