The current gap between aggregate savings and expected annual retirement income needs across eight countries studied – Australia, Canada, China, India, Japan, Netherlands, the UK and US – stands at US$70 trillion, according to recent research by the World Economic Forum (WEF) in collaboration with global HR consultancy Mercer.
This is one and a half times the combined GDP of the eight countries studied, which, in aggregate, make up 44% of the world’s population and 57% of the world’s economic activity. Even more troubling, the report finds that, without immediate and concerted action, these eight countries are on course to face a combined shortfall of US$400 trillion by 2050 – a growth in the gap of $28 billion every day between now and 2050.
This shortfall is mirrored around the world and with roughly half of those born today in the developed world expected to live past 100; governments, employers and individuals need to take action. So how well prepared are we to support ourselves and future generations in old age? This article is the first of a series of country specific reports looking at the different options available to expats in Asia.
Hong Kong
Due to low birth rates and increased life expectancies, Hong Kong is facing the challenge of a rapidly ageing population. As the population collectively grows older, the working population will have a much larger number of retirees to support.
In the World Bank’s 1994 report ‘Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth’, a three-pillar approach was recommended to protect the aged comprising:
- First Pillar – A publicly managed, tax-financed social safety net;
- Second Pillar – A mandatory, privately managed, fully funded contribution scheme; and
- Third Pillar – Voluntary personal savings and insurance.
In Hong Kong, the Comprehensive Social Security Assistance (CSSA) scheme, which has been in operation since 1971, was considered the first pillar, while the Mandatory Provident Fund (MPF) system, launched in December 2000, was designed to meet the condition of the second pillar. With voluntary personal savings and insurance also encouraged, the HK government considered the ‘three pillar’ approach had been fully implemented.
There is currently some HK$561 billion invested in the MPF, with the top five providers accounting for 72% of the assets and 69% of inflows. However the MPF has generated only a modest average investment return of 3.1% over its first 15 years. It is forecast that after 40 years of contributions to the MPF, it will provide an approximate return in retirement of HK$8,333 per month. For most, this will be insufficient to provide for the basic living costs in retirement.
Prior to the introduction of the MPF system, Hong Kong had only a voluntary employment-related system under the Occupational Retirement Schemes Ordinance (ORSO). This now exists in tandem with its mandatory counterpart and can be utilised by employers that wish to make additional contributions to a retirement benefit scheme on behalf of staff.
Employee benefit packages are a vital consideration for any employer that wishes to attract and retain the best talent, as well as maintain a loyal and committed workforce. Most employees now regard retirement provision as a key part of their remuneration package. There is currently over HK$28 billion invested in around 4,500 ORSO schemes, benefiting a combined 373,000 employees. These employers are assisting both their employees and the government to reduce the pensions funding gap.
Hong Kong is yet to introduce a personal pension ordinance so expats that do not wish to make additional voluntary contributions via the MPF or lack an employer willing to provide an ORSO scheme will have to look outside Hong Kong. An International Personal Pension (IPP) is a purpose-built retirement planning vehicle that is designed for internationally mobile individuals.
Sovereign bases its IPPs in Guernsey, where neither the investment growth nor income drawn down at source are subject to tax. IPPs can be funded by a lump-sum contribution, so there is no contractual obligation to make a minimum investment on a regular basis. A member can simply top-up their investments as and when it suits their personal circumstances. Assets within an IPP should enjoy creditor protection.
An IPP is also recognised as an international pension, such that is able to hold a number of different asset classes, including residential and commercial property. An IPP allows a member to maintain control over their investments, watch them grow and then draw them down in a tax efficient manner in their chosen country of retirement.
There are therefore three potential solutions for expats in Hong Kong that wish to fund their retirement whilst they are in a high salary and low tax jurisdiction:
- Contribute more to your MPF;
- Persuade your employer to establish an ORSO;
- Establish your own IPP elsewhere in the world.
For more detail please contact your financial adviser or contact the Sovereign Hong Kong office.
