Public annuity plan - getting to grips

Experts welcome protection pillar for retirees, but warn plan has to be more assuring

Will it work in the long run? Will it be better off than my bank savings? How far can it go in offering decent protection for Hong Kong's retirees in a fast graying population?

These are among the key thoughts that are uppermost in people's minds, in particular the elderly, as they mull the pros and cons of an ambitious HK$10 billion public annuity program laid out recently by the government, ostensibly to reform the city's retirement protection system and offer seniors and old-age pensioners a "better quality of life" in their sunset years.

The initial public response has been muted and conservative so far, with critics being unanimous in that more has to be done to make the plan viable and convincing enough in addressing the city's aging conundrum.

The program, due to be launched in mid-2018 by government-owned Hong Kong Mortgage Corporation Ltd (HKMC), calls for participants, aged 65 and above, to dish out a lump sum capped at HK$1 million and a minimum of HK$50,000, in exchange for a guaranteed monthly income for the rest of their lives.

Male annuitants investing HK$1 million can expect to receive an estimated cash payout of up to HK$5,800 per month until death, while women, who are likely to live longer, will get slightly less - about HK$5,300 - for coming up with the same amount. Based on the internal rate of return, ranging from 3 to 4 percent, this translates into an annuity rate of around 6 to 7 percent.

HKMC - a wholly-owned subsidiary of the Exchange Fund, which was set up in 1997 to oversee mortgage securitization - gave the nod for the plan in April.

"The size of the proposed public annuity scheme, definitively, is not enough to cater to the financial planning needs of the elderly," commented lawmaker Chan Kin-por, who represents the insurance sector in the Legislative Council.

"The size of the fund should be between HK$50 billion and HK$100 billion," he told China Daily.

Hong Kong government officials have thrown their weight behind the project, with Chief Executive Leung Chun-ying calling the public's initial response "positive" based on "our assessment", adding that the program could be expanded if it proved to be well-received.

Financial Secretary Paul Chan Mo-po, who's also HKMC chairman, said: "It will provide an additional financial planning option for the elderly, help them turn cash lump sums into life-long streams of fixed monthly income so that they can better enjoy the rest of their lives."

The product will be sold through major local banks and, under the proposed structure, an annuitant would get back all the money he or she had initially invested within 15 years. If they live longer, they stand to benefit the most but, if the investor dies within 15 years, what remains of his or her initial investment would be left to the family.

The proposed annuity plan comes as the SAR comes under constant criticism for lacking a publicly managed network to offer ample and reliable financial protection for the elderly in their retirement.

Currently, local employees rely principally on their personal savings and the Mandatory Provident Fund (MPF) - a privately-run investment plan - to sustain their well-being after retiring, but the MPF has been widely criticized as providing only scanty returns, with service providers charging exorbitant investment fees.

Retirement planning practitioners have welcomed the proposal as a good initiative to enhance Hong Kong's retirement protection pillar as it can alleviate the burdens on the city's social welfare system.

"The proposed public annuity scheme provides a seamless connection when retirees withdraw the proceeds from the MPF and then they can invest in the scheme immediately to enjoy a stable income stream," said Gloria Siu Mei-fung, chief executive at Gain Miles MPF Consultants (Gain Miles) - a local advisory firm specializing in retirement protection.

"Hong Kong retirees, who have little investment knowledge and capital and who want to see a stable income, will find the program attractive," said Billy Mak Sui-choi, associate professor at Baptist University's Department of Finance and Decision Sciences.

The Exchange Fund's investment team will be responsible for investing the money collected. Investment managers will invest in various asset classes, including long-term real estate and hedge funds, to ensure that the returns would be sustainable at 3 to 4 percent and the risks controllable.

If the financial market turns bad, the HKMC will use its own reserves to ensure that annuitants get their guaranteed monthly payments.

Norman Chan Tak-lam, chief executive of Hong Kong's de facto central bank, the Hong Kong Monetary Authority (HKMA), said the premise for introducing the life annuity plan is that it must be financially viable and sustainable.

"HKMC also has to ensure that the relevant risks will be properly managed," said Chan, who's also the corporation's deputy chairman.

According to HKMA data, the Exchange Fund's investment return rate has dropped to below 3 percent in the past four years - 2.7 percent in 2013, 1.4 percent in 2014, minus 0.6 percent in 2015 and 1.8 percent in 2016.

The plan will also provide a death protection of a 105-percent premium insured for annuitants to allow beneficiaries to receive the remaining unpaid monthly installments or a lump-sum amount if the annuitant dies before getting 105 percent of the premium paid.

There's also a "surrender" option that allows participants to get a lump sum back by opting to stop investing for contingency reasons.

Siu, however, has a word of caution: "The HK$10 billion fund may not be a great pool of capital to generate sufficient returns. Besides, the scheme may not have ample time to grant adequate returns although it promises participants a stable stream of income immediately after retirees start contributing at 65."

To spur the local annuity market, she urged the government to consider offering tax incentives to residents who voluntarily save up for their annuity investment. The government should consider designing an annuity product with the age of entry set at 50, and contributors allowed to withdraw their money at 65.

Financial academics warned that the program might not be sufficient to cover the retirement needs of the city's less well-off.

"Residents without any financial assets are not eligible to join the scheme at all and, thus, the financial burden will still fall on the city's social welfare system," said Mak.

"To tycoons with big fortunes under their belts, the proposed annuity scheme will not make any difference at all," he added.

oswald@chinadailyhk.com

(HK Edition 04/28/2017 page8)