National Report for Hong Kong
The profession working well in stabilising the monetary
At the time of writing this third National system and removing speculation.
Report for Hong Kong, there are 15 actuaries
resident in the Territory. These actuaries are (e) Inflation
Fellows of the Institute or Faculty (11)or of Consumer price inflation is currently running
the Society of Actuaries (4) and their activities at approximately 4% p.a. Salary increases
can be analysed thus: have generally continued to more than match
Consulting firms 5 the CPI, generally rangin between 8% to 11%
Life offices 7 in 1986. The actual levef of increase granted
Financial services 2 varies widely depending upon the level of
staff and upon company profitability.
Employee benefits manager -1
The rates of price inflation in recent years are
- 15 set out in the following table:
The Actuarial Association of Hong Kong also Year Inflation rate
has 22 Associates and about 40 Student 1982 11.6%
Members mainly of the Society of Actuaries. It 1983 10.4%
seems likely that the number of fully qualified 1984 6.2%
actuaries will increase in the next few years. 1985 3.0%
As well as the principle activity of advising on 1986 5.0% (forecast)
retirement benefits, some of the consultants
are involved in life office and in compensation (fJ Social security
work. Furthermore Hong Kong is a re ional There is no comprehensive social security
centre and actuaries are often concernef with system in Hong Kong although there have
activities in other Far East countries. been increasing calls by employee groups for a
centralized retirement plan. There is no
minimum wage but there are statutory mini-
Economic background mum redundancy payments and retirement
benefits (see paragraph 7).
Political status
The Sino-British Agreement which was (g) Taxation
ratified in Peking in Ma 1985 after three years For companies the rate of Profits Tax has now
sipifieblthe start of a 12-year been increased to la%%. Salaries Tax for
of transition. Hong Kong will change individuals has also been increased to a
Dependent Territory to a maximum overall rate of 17.0% of earnin s
Special Administrative Zone of China with a However, rates of taxation remain among t i e
large degree of autonomy. Under the theory of lowest in the world.
"one country, two s stems", Hong Kong
should retain its capita$st system for 50 years
after 1997. 3. Retirement schemes
Population (a) Number of schemes
The total population is 5.6 million, 25% of The number of schemes a proved by the
whom are under age 1 5 and 50% under 25. Inland Revenue has continuefto grow.
98% of the population is Chinese. The Number of
workforce is approximately 2.6 million. Year approvedschemes
(31 March)
Economy 1982 2,588
The econom is highly dependent upon 1983 2,943
manufacturebl ex ortslre-exports. There is 1984 3,300
concern over the egect of recent US-imposed 1985 3,728
textile restrictions and continuing protec- 1986 4,105
tionist sentiment. The export market is still Unfortunately no other official statistics are
relatively strong althou h relying on growth in kept. The estimated number of covered
the U.S. and increasingfy, the PRC. Followin employees in the private sector is
depression in 1982-84 the property and stocf approximately 400,000 and the estimated
markets have now fully recovered. assets are HK$4Obn (ie. US$Sbn). Retirement
scheme assets are growin rapidly and are
Currency likely to double in the next tfree years.
The Hong Kong dollar fell dramatically in (b) Design of schemes
September 1983 following adverse reports on
the Sino-British negotiations. Within a few There are certain trends in the design of
days, the currency fell from 7.50 to 8.60 to the schemes which can be summarised thus:
U.S. dollar and at one time was trading at 9.55. move to a final salary rather than defined
The Government eventually intervened by contribution format
"pegging" the local unit to the U S . dollar at trend towards non-contributory schemes
7.80. Since that time, the Hong Kong dollar trend towards a shorter vesting period
has fluctuated in a narrow range around this death and disability benefits being
rate and the peg is generally perceived as integrated into the retirement scheme
consideration as to currency protection for his final salary benefit or the market value of
benefits. his units. This latter approach automatically
The small number of schemes providing provides currency rotection to the extent that
pension benefits is falling as schemes are the assets are outsiie Hong Kong.
converted to a lump sum format.
(0 Accountants
Investments In the absence of legislation, auditors as well
Many of the smaller schemes are insured or as employers have frequently been unaware of
placed with bank ooled funds. The larger the necessity of actuarial valuations for final
schemes are normaiy established under trust salary schemes. However the recent
and the number of trusteed schemes is International Accounting Standard No. 19
increasing significantly. should have a beneficial effect in Hong Kong.
The branches and subsidiaries of U.S.
With trusteed schemes one or more corporations will often require FAS87
professional investment managers are valuations.
normally appointed. There are now about 15
investment managers actively competing to
manage retirement funds in Hong Kong. 4. Insurance companies
A feature of the investment pattern is the hi h The Insurance Companies Ordinance came
proportion of overseas investments h e h into effect on 30 June 1983.
Considerations re arding both investment The effect of this le islation was initially to
diversification a n 3 ultimate security often reduce the number of authorised life insurers,
result in 60% to 80% of the investments being but the number is now increasing. The
made outside Hong Kong. le islation is not onerous for any serious life
A service in Hong Kong for measuring and office and should certainly provide an
monitoring the investment performance of improved framework for Hong Kong.
directly managed retirement schemes has A number of im ortant overseas insurers have
been available since 1 January 1983. At recently o ene! offices in Hong Konf and
present this service has 140 participant funds there is t e e n competition in mar etmg
with assets of HK$lZbn. Good investment individual policies. There has been
results were achieved in 1985, as can be seen considerable innovation in designing savings-
from the following: type individual contracts through various
Measurement of investment performance currency and investment links.
survey - annualised return A problem for the life insurance industry has
1985 1983-85 been the posture of the Hong Kong Securities
(1 year) 13 years1 Commission that all investment-related
No. of funds 'li4 52- . insurance policies are also securities and
Highest return +101.8% +34.0% p.a. should be regulated as such. It is likely to be
Upper quartile + 40.9% +25.7%p.a. years before new legislation is in effect which
Median + 35.2% +24.2%p.a. prevents double regulation.
Lower ouartile + 31.6% +22.8%u.a.
Long Service Payment Scheme
1997
(LSPS)
With effect from 1 January 1986, the
e
~ h k r is every shade of opinion as to what will Em loyment Ordinance was amended to
happen after 1997, but the advice which inckde a Long Service Payment Scheme
actuaries can give to their retirement scheme (LSPS) covering all manual workers and non-
clients includes: manual workers with earnings up to
(i) Establish the scheme under trust. HK$10,500 per month. Under the LSPS
(ii) Appoint a professional investment employers must provide a lump sum payment
manager who will invest a high to employees whose contracts of employment
proportion of the assets internationally. are terminated by dismissal, end of contract or
retirement. Basically, the benefit payment is
(iii) As far as possible ensure that the scheme determined as follows:
is fully funded at all times. 213 x Last Month's Wages x Years of
(iv) Consider an emergency or alternate Qualifying Service with a maximum of 12
trustee off-shore from Hong Kong. months wages.
ualif mg Sewice under this Scheme will
Currency protection Y'
initial y be limited to service completed after
1 January 1980. In 1987, the limit will be
The volatile local currency and concerns
about the future have led to the introduction further backdated to 1 January 1979, in 1988 to
of various currency protection arrangements. 1 January 1978 and in 1989 to 1 January 1977.
It is possible to denominate the whole scheme There is also a minimum service requirement
U.S. dollars but the employer is not for benefit under the LSPS of 10 years if the
~uZ?' willing to do so. It is however always
possibye to give an option prior to retirement
employee is under age 41, falling to 5 years if
aged 45 or over. Benefits are reduced for
to take benefits in another currency. It is also employees under age 40.
ossible to link both contributions and The statutory benefits under the LSPS can be
genefits to the value of the Hong Kong dollar fully offset by retirement benefits provided b
as measured against a basket of currencies. the employer's contributions. The LSPS w i i
Another alternative is to unitise part of the therefore have a very positive effect in
contributions so that on retirement or encouraging employers to establish and
resignation the member receives the greater of formalise retirement schemes.
Central Provident Fund (CPF) one of protecting the employees' contributions
The LSPS which commenced this year will rather than aiming to ensure ade uacy of the
undoubtedly haye a social impact. The scheme's assets vis-a-vis liablities. The
Government will review the Scheme a year fundamental problem is that the Inland
after its introduction and consider then Revenue's ap roval requirements are in no
whether it should be extended to cover other way designe! to enhance the security of
contingencies such as ill-health retirement benefits.
and death. Certain pressure groups continue What seems desirable are some sensible
to lobby for the introduction of a Singapore- measures alon the following lines:
style CPF, but it seems much more likely that disclosure ofinformation to members
in future the Government will respond by official collection of information
simply improving the LSPS benefits or real assets to back real liabilities
extending the scope of the Scheme. audit of accounts
actuarial valuations of final salary schemes
People's Republic of China (PRC) approval by Inland Revenue to last say 5
years before re-approval is required.
In response to the o en door policy of the
People's Republic oI) China (PRC), many (b) Civil service
international companies are now extendin The civil service ension scheme provides
their Hong Kong office's sphere of generous pension genefits to 170.000 civil
responsibility to include the PRC. servants. The scheme is totally unfunded
Greater numbers of Hong Kong employees are although there is an accounting reserve for the
being recruited to work in the PRC in a variety Widows'and Children's Pension Scheme.
of positions, from junior staff to high level Certain pressure roups are now seeking
executives. As demand for such Mandarin- guarantees from tke Governments in both
speaking people far exceeds suppl the
compensation packages offered are gaving Hong Kong and the United Kingdom as to the
great importance in their recruitment, security of these pensions. There is also a
retention and motivation. Financial demand by some civil service unions for all
com ensation for working in the PRC is given benefits to be paid as cash lump sums prior to
1997. The Government's handling of this issue
in tKe form of various allowances, while will have a key effect on civil service morale
retirement and other employee benefits are in the next few years.
provided in Hong Kong.
(c) Actuarial profession
Future developments Clearly consulting actuaries in Hong Kong
face some rather unique circumstances when
Legislation advising clients. The simple objective is to be
Because of the failure of some large employers neither optimistic nor pessimistic concerning
where the assets of the retirement schemes the political and economic future, but rather
were invested in the employer's own business, to be as realistic as possible concerning the
there may be new legislation which seeks to best ways to advise clients o n the ultimate
protect employees. Unfortunately the security of both retirement and other benefits
Government perceive the problem as being and life assurance contracts.