Insurers in Hong Kong could be spurred into sourcing more potential investment products for pension savers after the government said on Wednesday that it is planning to give tax concessions to deferred annuity products.

Insurers, who are liability-driven in nature, will probably take an asset-driven approach to pursue this business opportunity, market experts said, describing it as good news for the Hong Kong insurance market and pension system. 

“Insurance companies should be interested in these annuities products if they see the market demand. If there is a tax incentive, the demand may be higher,” Elaine Hwang, director of retirement at Willis Towers Watson (WTW) in Hong Kong, told AsianInvestor.

In his Budget statement on February 28, Financial Secretary Paul Chan said he wanted to encourage the development of the deferred annuity market.
 
"I will ask the Insurance Authority to issue guidelines and enable all deferred annuity products available in the market meeting the guidelines to enjoy tax concessions,” he said, without elaborating on the level of tax reductions or their likely timing.
 
The annuity products offer the buyer a stable and guaranteed flow of monthly income after a specified time period; they can be purchased with a lump sum or through regular contributions.
 
The head of investment solutions at one international insurer in Hong Kong, who declined to be named, told AsianInvestor that insurers would likely approach the annuities business from the asset side, rather than look for suitable investment tools to meet their financial obligations.

Insurers will see what investment products can give a known level of guarantee returns after certain years and try to sell them to pension savers. Most of the returns from annuity investment products are passed to policyholders, so there will be little asset-liability mismatch, he said.

Insurers would probably also seek to be mildly innovative but more so in the fixed-annuity space, he added, given the extra risk management attached to variable annuities, where the level of retirement income is determined by the performance of the investments annuitants choose. 

FLEDGLING BUSINESS

The debate around Hong Kong’s pension system centres on the accumulation of pension assets, including contribution levels, investment returns and management fees. But not much attention is being paid to the deaccumulation of these assets—in other words, how to spend, withdraw or invest the pension savings upon retirement, Hwang at WTW said.

The authorities are now seemingly trying to fill this gap, with the government-owned Hong Kong Mortgage Corporation (HKMC) set to launch a life annuity scheme in mid-2018. Upon retirement, Hong Kongers will be able to pay an amount to HKMC, particularly the Mandatory Provident Fund (MPF) savings they have accumulated through their working lives, in exchange for immediate lifetime payouts.

A cap of HK$1 million (US$128,000) and a floor of HK$50,000 on the premium amounts were tentatively set by HKMC. Based on internal rates of return of 3% to 4%, the expected monthly fixed payout for a male annuitant at the entry age of 65 would be HK$500 to HK$580 per HK$100,000 of premiums paid, and around HK$450 to HK$530 for female Hong Kongers due to their longer life expectancies.

Chan said in the Budget that the HKMC will actively consider increasing the issuance size of the annuity scheme because of the positive response to such products. The initial target was HK$10 billion.

Meanwhile in the private market, annuity products remain at an embryonic stage.

Non-single premiums for annuities totalled HK$8.18 billion and accounted for only 1.4% of new business in the first three quarters of 2017, according to provisional statistics released by the Insurance Authority in Hong Kong.

IMPLICATIONS FOR MPF

In the Budget, Chan said voluntary MPF contributions would also enjoy the new tax concessions being formulated, as they were similar to contributions made to deferred annuity products.

Voluntary contributions, which have enjoyed tax deductions, will be transferred to the mandatory contribution accounts and subject to the same withdrawal restrictions on mandatory contributions, he said.

At present, employers and employees have to each contribute 5% of the latter’s salary to an MPF scheme each month, subject to a total cap of HK$18,000 every year. But the two parties can also make voluntary contributions. Employer voluntary contributions are tax-exempt but not those of employees.

HK$12.49 billion of the HK$68.99 billion MPF contributions received in 2017 were voluntary contributions, of which HK$8.89 billion were made by employers and HK$3.60 billion by scheme members, the Mandatory Provident Fund Schemes Authority (MPFA) said in a press release.

The tax concessions in the works will definitely lead to more asset inflows into the MPF system but that will not necessarily translate into a lot more profit for MPF schemes because costs will also go up, Lau Ka Shi, managing director and chief executive of BCT Group, told AsianInvestor. BCT is a fund selector of MPF products.

A different MPF account for tax-exempt voluntary contributions will have to be set up and the additional operational procedures will likely push up administrative costs, she said. The industry, in turn, is unlikely to pass that extra cost to pension savers as this is not something the authorities will want to see, Lau added.

The fund expense ratio (FER) of MPF schemes is 1.56% on average and the aim is to bring that below 1% in the coming years, AsianInvestor reported last month, quoting the MPFA's chief operating officer and executive director Alice Law.

AsianInvestor is hosting its 5th Insurance Investment Forum in Hong Kong today (March 1). Visit the website to find out more.