Now that the expected face-off between Mr Tan Kin Lian and NTUC Income at its annual general meeting (AGM) did not occur, what exactly was his original grouse?

For Mr Tan, Income's former head, it boiled down to this: You made a promise, so keep to it.

The issue: bonus payouts on Income's life policies, which it wants to restructure.

The gist of the rejoinder: Income is keeping to the spirit of its promise so that policyholders will benefit and Income will be strengthened.

In the end, at the AGM last Friday, Mr Tan withdrew his protest, following 'assurances' earlier in the day from company heavyweights.

Adopting a conciliatory stance at the AGM, Mr Tan said he did not wish to drag the matter further as it will affect Income's reputation.

But he said he will monitor the situation to ensure that policyholders' interests are protected.

Income stuck to its position that the restructuring was necessary. It declined to offer an option for anyone to remain on the old structure.

The restructure affects two of Mr Tan's policies, along with those of some 310,000 other policyholders.

As outlined, Income will cut its annual bonus payouts on life policies sold after 1993. Instead, more cash will be earmarked for the special bonus portion - to be paid only at the time of death or when a policy is cashed out.

Income gave, as its key reason, greater flexibility with regard to making investments.

While Income has never guaranteed any annual bonuses, it implied this in the benefits table shown to prospective policyholders. It has been paying such bonuses, even though these were reduced in some years.

Income now argues that this implied guarantee is unwise. Annual bonus quantums, once declared, means it will need to set aside reserves and invest in lower- yield instruments such as bonds.

The result: Income's investment flexibility, such as investing in higher-yield longer-term equities, is crimped.

The first salvo rejecting this argument was fired by Mr Tan in late April. Others then joined in.

He claimed restructuring is a bad deal because:

It will result in a lower annual bonus. Any compensatory higher rate of special bonus is not guaranteed. There is a need to reduce this uncertainty by giving satisfactory assurance on special bonus payments on surrenders and claims, so that policyholders do not lose out.

It contravenes the 'reasonable expectation' of the policyholders who were given to believe, through the benefits illustration, how the proportion of future bonuses would be distributed.

Contrary to Income's assertion, annual bonus rates - based on those declared by Income in the past - are sustainable. In the early 1990s, they were calculated based on a long-term yield of 6.5 per cent. In the late 1990s and early 2000s, the long-term yield was reduced to 5.25 per cent.

The actual yield earned during the past 10 years was 7.8 per cent.

Contrary to Income's argument, too, is the built-in flexibility: At any point of time, the bonus rates were adjusted (up or down) to reflect the projected long-term yield. This projected yield is based on the mix of investments prudent for the fund.

In fact, in some past years, policyholders suffered a bonus cut - when the investment yield was low - compared to what was illustrated at the point of sale. Indeed, because Income had earned a good yield of 7.8 per cent during the past 10 years, the shortfall in the bonus for the poor years should be restored, subject to financial solvency.

Income has stuck to its reasons for the restructure - basically that both it and the policyholders will benefit.

Still, there remain some detractors. Among them is an industry observer, who declined to be named.

He told The Sunday Times: 'For those who just bought an Income plan without knowing the change in bonus payouts, the impact of the restructure is like halving your annual fixed deposit rate after you bought it and saying we might pay you more in three years' time.'

This article was first published in The Sunday Times on Jun 1, 2008

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