Shaping the Hong Kong Retirement Landscape of the Future AsianInvestor Competition
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Transcript of Shaping the Hong Kong Retirement Landscape of the Future AsianInvestor Competition
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Jennifer Chee, Doris Ho
Shaping the Hong Kong Retirement Landscape of the FutureAsianInvestor Competition
2 December 2006
Mercer Human Resource Consulting and Mercer Investment Consulting 2
BackgroundThe Mercer Approach
Building on MPF success
Retirement savings introduced to significant proportion of population
Almost full compliance
Efficient mechanism for collection and investment of contributions
Our focus is on:
Basic design issues (contribution levels / retirement age)
Income in retirement vs. lump sum
Encouraging additional voluntary contributions
Changes to Employment Ordinance
Investment choice
Fee levels and disclosure
CSSA Benefit
Assume benefit level and indexing mechanism are appropriate
Try to ensure that less people rely on it
Mercer Human Resource Consulting and Mercer Investment Consulting 3
World Bank studies– Subsistence levels of retirement income = 40% of pre-retirement income
Other studies indicate 45%-50%– Still significant drop in living standards
Existing expected levels of benefit are not enough
Cannot rely on individuals/employers to save/provide more
Implication is that contribution levels and retirement ages need to increase
* The ratios assume that the MPF earnings cap is indexed in line with wage inflation. They further assume 2.5%/3% p.a. price/salary inflation for all scenarios and 2.5%/4%/5.5% p.a. net investment return for low/midpoint/high investment return scenarios respectively
Basic Design IssuesExisting level of benefits
High investment return scenario 59%*
Midpoint investment return scenario 35%*
Low investment return scenario 21%*
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Basic Design IssuesIncreased employer contributions / indexing
Need not necessarily add to overall employment costs
Restructure compensation packagesCash converted to MPF contribution
Mandatory indexing of salary caps, minimums etc.
Suggest index linked to general wage inflation
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Basic Design IssuesIncreased retirement age / indexing
20 Years
65
No
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Ag
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60
65
70
No
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No change
Increase in employer contribution to 8%, phased in over 6 years
Raise Normal Retirement Age to 70
Combined effect of both changes
59% 35% 21%
74% 44% 27%
High Investment Return Scenario
MidpointInvestment Return Scenario
LowInvestment Return Scenario
83% 48% 28%
104% 60% 36%
Basic Design IssuesEffect of proposed changes
Note that under the “low investment return” scenario, the replacement ratio remains too low.
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Income in RetirementThe drawdown concept
Lump sum does not provide security in retirement
Pressure on CSSA system may increase if income stream is not mandated
Traditional lifetime annuity products unpopular
Propose drawdown of accumulated mandatory contributions within maximum and minimum rates– Mandatory– Transparent– Age specific
Accumulated voluntary contributions may be taken as a lump sum or drawn down as required
Individual retains investment choice over accumulated fund after retirement
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Age
Income in RetirementSample drawdown rates
Minimum Factor Maximum Factor
65 5.8% 10.1%
70 6.6% 11.9%
75 7.8% 16.1%
80 9.5% 32.3%
85 12.0% —
90 14.5% —
95 18.9% —
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Income in RetirementExample of drawdown concept
0
50
100
150
200
250
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
102
104
Age
Rem
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bal
ance
0
1
2
3
4
5
6
7
8
9
10
Inco
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dra
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Balance (min. income) Balance (max. income)
Min income Max income
maximum
minimum
range
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Income in RetirementAdvantages / disadvantages of drawdown concept
ADVANTAGES
Flexibility of income level
Continued investment choice
Capital not given up on early death
MPF assets increased – lower fees?
DISADVANTAGES
Administration of choice (investment / income level)
Administration of income payment
Not complete protection against longevity risk
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Additional Voluntary ContributionsProviding individuals with incentive to save more
MPF fee competitive when compared to other forms of personal savings
Payment of regular and one-off contributions should be encouraged
We suggest:– Increased tax deduction for employee contributions, to say 10% or 15%
of MPF earnings In return, such contributions would be subject to preservation
– Matching contribution by government for lower paid For example, $0.5 by government for every $1 paid by individual “Lower” paid could mean those earning less than average salary
or some % of it– Government pays more now, less later
All plans required to offer flexible mechanisms for additional contributions e.g.
– Quarterly one-off payments – Additional deductions from payroll
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Employment Ordinance Removing the defined benefit underpin
Propose removal of statutory Long Service and Severance Payments
Given proposed increase to contribution rates, statutory Long Service and Severance Payments should no longer be relevant – 8% salaries = 0.96 multiple (vs. 0.67) with zero investment return
Protect existing entitlements
Simplifies administration for employers
Discourages unnecessary risk taking
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InvestmentBasic principles
MPF will be the only or a significant part of retirement savings for many
Investment decisions underwritten by Government via CSSA– Or employer via Long Service / Severance Payments
Government should have a greater degree of control over types of fund choices available
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Each MPF provider offer mandatory core funds with pre-determined risk levels. The purpose of the core funds:– Offer good prospects of exceeding inflation in the long term
(the “Growth” funds)– Reduce market risk during retirement (the “Defensive” fund) – Protect the drawdown income stream against volatile market
values (the “Cash” fund)
InvestmentCore funds
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Each MPF provider required to offer a minimum 6 “core funds” meeting pre-determined risk/expected return criteria
Growth Funds Defensive Fund Cash Fund
InvestmentCore funds
AggressiveBalanced
70% Equity30% Bonds
Lower Risk Balanced
30% Equity70% Bonds
MediumRisk Balanced
50% Equity50% Bonds
All equity
CashAll Bond
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InvestmentCore funds
Consistent platform for communicating concept of risk to employees
Annual statement to communicate expected retirement income – Expected investment returns– Favourable investment returns– Poor investment returns
Provides foundations for adding non-core funds to meet public demand
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Default strategy should:– Minimise the risk of individuals making inappropriate investment
choices– Invest in growth assets while individual is in a position to tolerate risk– Provide some certainty in period leading up to and during drawdown
Propose:
Switch anticipated income into cash 2 years in advance– Actual % will depend on actual drawdown rates
Aggressivebalanced fund
Medium riskbalanced fund
70 75 80
Low riskbalanced fund
Fixedincome fund
InvestmentDefault strategy
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Fees
Industry-wide methodology
Transparency to members and plan sponsors
Administration fees from asset based to per member fee – Consideration of a maximum fee for very low earners and during final
years of drawdown.