The Hong Kong Monetary Authority’s (HKMA) Exchange Fund will receive asset inflows from the territory’s new annuity scheme, but these funds are set to be linked to the investment approach of the Future Fund and kept separate from its own assets, the de-facto central bank told AsianInvestor.

The territory’s new annuity scheme was launched by the Hong Kong Mortgage Corporation (HKMC) on July 5. It is designed to allow retirees to invest some of the pension savings they have accumulated, and receive periodic guaranteed payments in return. 

Oversight of the annuity scheme’s assets will involve several linked government financial entities. The HKMA’s Exchange Fund, which is responsible for supporting the currency peg between the Hong Kong dollar and the US dollar, has been designated as the recipient and investment manager of the annuity premiums. It had HK$3.54 trillion in assets under management (AUM) as of June.

However, these annuity assets will be “managed by reference to the arrangements for the Future Fund”, a HKMA spokesman told AsianInvestor in an emailed reply to questions. The Future Fund is a type of sovereign wealth fund that is overseen by the Exchange Fund and receives its assets from government fiscal reserves. In addition, the HKMC Annuity Ltd (HKMCA), a unit of the HKMC, will manage the longevity and investment risk associated with annuity products.

The spokesman explained that this approach means the Exchange Fund will not need to change its investment allocations. However, the HKMCA will receive capital support from the Exchange Fund to support its operations and business expansion, as it receives more assets.

FUTURE FUND APPROACH

The Exchange Fund’s decision to invest annuity assets in reference to the Future Fund appears to mean it will copy the latter’s goal of targeting “higher investment returns”.

The spokesman referred AsianInvestor to the Future Fund's placement strategy in its latest annual report (page 203). This discussed how its investments are split between the Exchange Fund's investment portfolio—which invests mainly into equities and bonds in OECD countries—and its long-term growth portfolio (LTGP), which includes private equity and investments into properties outside Hong Kong. 

The Future Fund was established in 2016 with an initial endowment of HK$220 billion. Its assets are being overseen by the Exchange Fund for an initial 10-year investment period, and about half of its allocations are gradually invested through the LTGP.

Janet Li, wealth business leader for Asia at Mercer and chairman of the Hong Kong Retirement Schemes Association, told AsianInvestor it makes sense to invest the premiums in a similar manner to the Future Fund, because both have long-term investment focuses.

In contrast, the Exchange Fund would be less ideal a recipient, because it needs to stay invested in more liquid and thus less high yielding investments for its purpose of supporting the currency peg. Additionally, the quota for the annuity plan may be increased in the future, and Li noted that the Exchange Fund would likely have to change its allocation plan each time it received a new injection of assets, which would not be efficient. 

Currently there is a HK$10 billion quota for the first batch of annuity premiums. Paul Chan, financial secretary of Hong Kong and chairman of the HKMC, said earlier this month that if there is an oversubscription of the scheme, this could be doubled to HK$20 billion.

SENSIBLE OVERSIGHT

Under the new setup, the HKMCA bears the investment risk of the annuity contributions because it will have to make up any shortfalls if investment returns cannot meet their target. The HKMA said its preliminary internal rate of return for annuity investments is 3% to 4%.

Ultimately, the Hong Kong government will be on the hook if returns fall below this. The HKMCA is backed by its parent, the HKMC, which in turn is wholly owned by the HKMA, a government entity.

In effect, the annuity premium plan is a pension insurance product. Contributors can immediately receive a life-long guaranteed stream of fixed monthly income after paying a single premium, which can be part of their savings of the Mandatory Provident Fund (MPF) accumulated through their working lives.

This kind of immediate annuity product, unlike deferred ones, is rarely found in the market, Raymond Li, chief executive of the HKMC, said in May.

The investment risk for annuity products with instant payouts are much higher than deferred ones due to the short investment horizon. Insurance companies generally do not have the financial strength to offer them, Li said.

The HKMC has set a floor of HK$50,000 and a cap of HK$1 million on premium amounts. Based on the maximum IRR of 4%, the expected monthly fixed payout for a male annuitant at the entry age of 65 would be about HK$5,800 per HK$1 million in paid premiums, and around HK$5,300 for female Hong Kongers due to their longer life expectancies. Last year the average life expectancy in Hong Kong was 81.7 years for men and 87.7 for women.

Hong Kong permanent residents aged 65 years or above can register their intent to subscribe for the plan starting today (July 19). The registration period will end on August 8. The plan is being distributed through 20 retail banks in Hong Kong.