A good starting point

Category: Asia, Hong Kong, Global
By Elaine Hwang*

New Hong Kong government annuity scheme broadens retirement options

A mid Hong Kong’s energy, business drive and taste for the new, it’s sometimes forgotten that its population is getting old. Gracefully maybe, and quickly, for sure. So much so that the city’s government is putting renewed emphasis on the need to enhance the quality of life for people after retirement.

In her first policy address as the city’s new chief executive earlier this month, Carrie Lam referenced the government-owned Hong Kong Mortgage Corporation’s (HKMC) plan to introduce a HK$10 billion (US$1.28 billion) public annuity scheme in mid-2018. The scheme could be expanded if popular. It will be an additional financial planning option that allows senior citizens to invest a lump sum in exchange for a guaranteed monthly income for the rest of their lives.

This scheme would nicely complement the Mandatory Provident Fund (MPF), Hong Kong’s compulsory pension fund that requires employees and employers to contribute monthly. Under the MPF scheme, retirees can withdraw their accrued benefits in one lump sum or in instalments once they reach age 65. Yet, for the latter approach, it may be difficult for elderly people to know how much to draw down while ensuring they have enough for their lifetime. The new scheme addresses that and offers a stable stream of monthly income for their whole life.

The annuity scheme is set against a backdrop of an ageing population and rising demand for retirement protection. Figures from the city’s Census and Statistics Department1 show that the number of senior citizens aged 65 and above was 1.16 million in 2016, or 16.6% of Hong Kong’s population. It is projected to more than double in the next 20 years to 2.37 million in 2036, and rise further to 2.59 million in 2066. A low birth rate contributes to the ageing trend. The number of young people aged below 15 is projected to drop from 11.8% of the population in 2016 to 9.2% in 2066.

Lifetime payouts

Under the HKMC’s new public annuity scheme, citizens aged 65 and above can invest between HK$50,000 and HK$1 million in a lump sum and get immediate lifetime payouts. Based on an internal return rate of 4% per annum, the expected monthly payout for males at the entry age of 65 would be HK$580 per HK$100,000 premium paid, while for females, the monthly payout would be around HK$530 due to longer life expectancy.

The 4% rate of return makes this scheme more attractive than other existing options such as private annuity plans, or Silver Bonds, the inflation-linked bonds that were launched last year, which targets citizens aged 65 or above with a minimum return of 2%.

Hong Kong’s inflation has fallen for six consecutive years2, with this year’s rate set to be 1.8%3. So a 4% return offers an excellent buffer to protect annuity holders from inflation.

While holders get security, the HKMC takes the risk. The main risk is mortality risk – people living for longer than expected and therefore increasing the cost of the overall scheme. Conversely, there’s the possibility that some people may not live as long as expected. A guaranteed minimum payment is a good feature to reduce these worries. These risks help explain why the private sector has not taken a lead with such products.

The reality is that if everyone fully understands the benefits of the new scheme, the HK$10 billion supply may not be enough. Better awareness and resultant rising demand will likely drive insurers to develop similar products to tap the growing market. We are already aware of enquiries from insurers asking about demand and pricing.

Education about retirement protection should not only be about accumulating wealth before retirement, but also about how to use the money in a way that is sustainable for the long term. People are not supposed to celebrate receiving a large sum of money by using up every cent within a month, which can happen with the current MPF system. This is something that needs to be addressed through a joint effort by the government and the private sector. The new annuity scheme offers a good starting point.

Looking forward, we would like to see this new scheme linked with the MPF schemes, for example by requiring a certain portion of the MPF accrued benefits be used to purchase this annuity product to ensure assets are better used for financial needs over the members’ lifetime.   

*Elaine Hwang is Hong Kong director of retirement at Willis Towers Watson

1 http://www.statistics.gov.hk/pub/B1120015072017XXXXB0100.pdf
2 http://www.scmp.com/news/hong-kong/politics/article/2114848/carrie-lam-her-own-words-hong-kong-people-are-still

3 http://www.scmp.com/news/hong-kong/economy/article/2072924/hong-kong-budget-2017-live-coverage-paul-chans-maiden