Hong Kong Pension Investment
Hong
Kong offers an excellent environment for insurers
and reinsurers amidst a global trend of convergence
among financial services industries with its
sophisticated capital markets and concentration
of fund managers. Being a leading insurance
centre in Asia, Hong Kong has attracted many
of the world's top insurance companies. Hong
Kong has the largest number of authorised insurance
companies in Asia. The industry has also built
up a critical mass of professionals.
As
at June 30, 2010, there were 170 authorized
insurers in Hong Kong, of which 105 were pure
general insurers, 46 were pure long-term insurers
and the remaining 19 were composite insurers.
As of the same date there were 2,365 insurance
agencies, 32,381 individual agents and 25,911
responsible officers/technical representatives
registered with the Insurance Agents Registration
Board (IARB).
There
were 572 authorized insurance brokers as at
June 30, 2010. All of them are members of the
two approved bodies of insurance brokers, namely
The Hong Kong Confederation of Insurance Brokers
and Professional Insurance Brokers Association.
In addition, there were 7,423 persons registered
as chief executives/technical representatives
of these authorized brokers as at June 30, 2010.
Insurers
are active players in the retirement scheme
business. In 2001, premiums received by the
life (long-term) insurance sector in Hong Kong
were HKD57m. This figure has been growing rapidly,
not least due to the introduction of the Mandatory
Provident Scheme.
Yearly
contributions for Retirement Scheme contracts
administered by insurers decreased 1.2% to HK$15.6
billion. By the end of 2009, there were 61,382
Retirement Scheme contracts carrying net liabilities
of HK$151.6 billion.
In
2004, Hong Kong's retirement funds recorded
a 9.27% average return. About 90% of the 295
mandatory provident funds (MPF) covered in a
survey delivered positive returns in the period.
Hong
Kong Investment Funds Association (HKIFA) executive
director Sally Wong said that with sustained
robust growth in the United States, the recovery
in Japan and the even stronger growth experienced
by some developing countries last year the global
economy enjoyed one of the highest growth periods
in the past three decades.
"Virtually
all equity sectors and lifestyle [balanced]
funds managed to post positive returns in the
year,'' she said.
The
MPF funds had delivered negative returns of
8.87% in 2001 and 7.19% in 2002, the first two
years of the scheme's inception.
Since
the launch, 88% of MPF funds have managed to
record positive returns, with an overall average
performance of 10.48%.
Hong
Kong equity funds was the best performing category,
with an average return of 18.58%, followed by
16.31% for Japanese equity funds. Bond funds
delivered average returns of 0.98% for Hong
Kong dollar bonds to 6.14% for global bonds.
Virtually all lifestyle funds delivered positive
returns in 2004. Against a backdrop of low interest
rates, money market funds recorded slightly
negative returns while capital preservation
funds provided a marginal return of 0.05%.
At
the end of September 2004, the 26 MPF providers
in the survey managed assets of about HKD106.6
billion, accounting for 99% of the market. By
June 30, 2010, there were 39 registered MPF
schemes with an aggregate net asset value of
HKD307.6bn.
The
Legislative Council in July 2009 passed the
MPF Schemes (Amendment) Bill 2009, which lays
the framework for employee choice. Under the
system, employees can, at least once per calendar
year, transfer accrued benefits derived from
their employee mandatory contributions made
during their current employment to an MPF scheme
of their own choice.
This
change will give employees access to a broader
spectrum of MPF service providers, schemes and
investment funds for investment of mandatory
contributions that they make during their employment.
Upon implementation, the proposal will result
in 60% of MPF benefits being portable between
trustees.
The
Mandatory Provident Fund Schemes Authority has
stated that the proposed new arrangement will
not add undue burden with regard to trustees'
administrative duties, while the transfer of
employee mandatory contributions will not require
employers to change their administration systems.
Taking
into account the lead-time that trustees require
to make necessary adjustments and other preparations,
the Authority hopes that the proposal will be
implemented within a year after the legislative
exercise is completed.
As
a corollary of the proposal, the authority will
rename "preserved accounts" as "personal
accounts", which it hopes will instill
in employees a greater sense of MPF account
ownership.
Just
under one third of the respondents to a survey
commissioned by the HKIFA in July 2009 said
they would consider switching to another MPF
service provider once the employee choice regime
is implemented. The key reasons cited for switching
providers are the desire to look for better
investment returns (56%) and more fund choices
(28%). Almost half (45%) indicated that they
were not considering a switch. This is underlined
by a perception that the switching process may
be rather complicated, the HKIFA said.
In
April 2011, Legislative proposals were set out
by the Hong Kong government to enhance the regulation
of the sales and marketing activities of Mandatory
Provident Fund (MPF) intermediaries.
The Mandatory Provident
Fund Schemes Authority (MPFA) has recently reviewed
the regulatory regime of MPF intermediaries
and recommended the existing administrative
arrangement be strengthened by statute to ensure
the availability of an effective deterrent against
MPF sales and marketing activities by unregistered
people.
The legislative proposals
also provide a range of disciplinary tools to
the Monetary Authority, Insurance Authority
and the Securities & Futures Commission
to promote compliance with the conduct requirements
governing the sales and marketing of MPF products.
They will cover aspects including prohibiting
unregistered intermediaries from engaging in
regulated MPF sales and marketing activities,
registration of intermediaries, regulatory scope
of frontline regulators, conduct requirements
for intermediaries and guidelines.
In addition, the Financial
Services & the Treasury Bureau and the MPFA
are preparing legislative proposals to provide
for the establishment and operation, by the
MPFA, of an electronic platform to facilitate
the transfers of benefits among trustees, and
to strengthen deterrence against default MPF
contributions by employers.
The MPFA will bear the
cost of developing and establishing the e-platform.
The legislation should provide for a fee to
be payable by the trustees to the authority,
at a level determined with reference to the
costs likely to be incurred and the number of
elections likely to be processed in the daily
operation of the system.
Deterrence
against employers' default contributions will
be strengthened. Key proposals include making
it a continuous offence if employers fail to
pay mandatory contributions. It will also be
an offence if employers fail to pay any sum
awarded by a tribunal or court.
It
is expected that the new law will be passed
in 2012.
Individuals in a number of situations can gain
advantage from offshore pension investment,
for instance:
Expatriate executives, professionals, entertainers
and similar types of global wanderer have a
considerable problem with pension provision,
since it is often the case that while non-resident
they cannot continue with tax-privileged pension
investment at 'home', ie in their original domicile,
to which they probably intend to return in the
end. It may well be that offshore investment
is the only practicable route, even though the
income they eventually receive in retirement
is going to be taxed - and they may decide to
retire offshore, in which case they will have
preserved flexibility by not committing to any
particular high-tax jurisdiction.
People who already live offshore and have no
intention of moving onshore, are not really
concerned with the distinction between 'pensions'
investment and 'non-pensions' investment, since
there are probably no taxes to consider either
way. They need to have regard to security of
course, and will no doubt be planning to maximise
income in retirement, so that offshore pensions
products are still relevant to them.
Investments
intended to provide pensions income need to
take into account the choice of jurisdiction
for eventual retirement. Hong Kong does not
tax income from retirement schemes, even for
residents, and has no withholding taxes, so
it is a suitable place in which to create a
retirement fund, whether or not you plan to
retire there.
For
a fuller treatment of offshore pensions investment,
see www.investorsoffshore.com.
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