The Hong Kong Mortgage Corporation Limited (HKMC) is actively preparing for the implementation of the Life Annuity Scheme. Since the announcement of the Scheme, there have been widespread discussions in the society. Smart Ambassador interviewed Mr Raymond Li, Chief Executive Officer of the HKMC, to shed light on some of the issues that are of greater concern to the public.
Raymond, the initial response of the community to the Life Annuity Scheme has been generally positive. They are keen to learn more about the details of the Scheme. For example, one of the issues that the elderly are most concerned about is what their children will inherit from them when they pass away. I note that the Scheme has a death benefit of 105%. Does this mean that when an annuitant passes away, his/her beneficiary(ies) will receive an amount equal to the premium paid plus 5% immediately?
The death benefit of the Scheme guarantees that an annuitant or his/her beneficiary(ies) will receive monthly annuity payments of total amount not less than 105% of the premium paid. For instance, for a 65-year-old male annuitant with a total premium of HK$1 million, assuming monthly annuity payment of HK$5,800 (based on the maximum of tentative estimates of the internal rate of return of 4%), we guarantee that he will receive at least 182 instalments of monthly annuity payments (i.e. 15 years), equivalent to HK$1.05 million in total. Of course, 15 years later, the annuitant can continue to receive the monthly annuity payments of HK$5,800 for the rest of his life. However, if he passes away before receiving the full 182 instalments, his beneficiary(ies) will be entitled to receive the remaining unpaid monthly annuity payments until the 182th instalment.
If an annuitant has an urgent funding need, can he/she receive the remaining annuity payments in a lump sum?
Yes, early surrender of the policy is allowed. A discount rate will be applied to the remaining unpaid monthly annuity instalments to derive the surrender value. Of course, the later the policy is surrendered, the more the annuity amount will have been received by an annuitant and hence the lesser the remaining surrender value will be. Another point to note is the discount reflecting the time value of money. If the policy is surrendered early, while there will be more remaining unpaid annuity instalments, there will also be a larger discount when deriving the present value of the remaining instalments. In principle, the earlier the policy is surrendered, the larger the discount will be. The book value of the sum of the paid annuity amount and the present value of the remaining unpaid annuity instalments may be less than 105% of the premium paid or even less than the premium paid. This is a very important point. One should consider carefully before taking part in the Scheme.
How is the discount rate determined to calculate the surrender value?
The exact discount rate is still subject to further assessment and validation, and will be announced before the launch of the Scheme.
What if the beneficiary(ies) of an annuitant would like to receive the remaining annuity in a lump sum immediately after the annuitant passes away?
Similar to the case of early surrender by annuitants as mentioned earlier, the surrender value will be derived by a discount rate.
Let’s talk about return on the Scheme. According to the preliminary estimates of the HKMC based on an internal rate of return of 4%, the expected level of monthly payout for a male annuitant at the entry age of 65 would be about HK$5,800 per HK$1,000,000 premium paid. However, it appears that there are already some annuity products in the market which allow participants to achieve the same return by joining at an earlier age and by paying a relatively smaller amount of monthly premium. What are your views on this?
This is akin to comparing apples and oranges. You have indeed highlighted the crux when you mentioned “joining at an earlier age” – the time value. There are indeed some deferred annuity products in the market, which mostly rely on investment income/gains on the premiums received over a long period from an early entry age to pay for future monthly annuity. The HKMC’s Scheme, on the other hand, allows annuitants, upon contribution of a one-off premium, to immediately start to receive life-long monthly annuity. This kind of immediate annuity product is rarely found in the market. It provides an additional financial planning option for those who have cash savings and do not want to manage their own investments, but would like to have stable stream of monthly income immediately. The public should decide which product is more suitable for them having regard to their own circumstances and needs.
Retirees are concerned about the erosion of income by inflation. Why aren’t the monthly annuity payments of the Scheme linked with inflation, e.g. inflation rate plus a certain percentage point?
We understand the public’s desire to maintain the long-term purchasing power of their savings. However, our study suggests that it is difficult to design an inflation-linked yet financially viable annuity scheme, because of the absence of appropriate investment tools for hedging inflation risk in Hong Kong. The HKMC always attaches great importance to risk management. We will strictly adhere to this principle when designing the Scheme, and will not take unmanageable risks.
There are some comments that the internal rate of return of 3-4% offered by the Scheme is not as attractive as dividend yields on some blue-chip stocks or rental yields on properties. So why should people take part in the Scheme?
There are indeed different options for retirement financial planning. However, it should be noted that different types of investments have different returns and risks. To put it simply, the higher the return, the higher the risk. The Life Annuity Scheme is a low-risk option offering stable returns. Annuitants can be spared from the risk of asset price changes and the pressure of asset management. Moreover, they can enjoy a life-long guaranteed stream of income. So, the Scheme is more suitable for those elderly people who are more risk-averse. In any case, I would advise our elderly friends to have a clear understanding of the risks and the terms and conditions of various investment products, and assess whether the products suit their own financial needs, in order to better prepare for retirement. Be a smart senior!
The HKMC’s scheme is certainly a smart choice which offers the elderly peace of mind! But one drawback is that the Scheme is discriminating against women as female annuitants will receive a smaller monthly annuity payment than their male counterparts. It’s so unfair!
I think you have misunderstood something here. The internal rate of return of the Scheme is the same for both men and women. As to why female policy holders receive a lower monthly annuity payment, the reason is that women generally have a longer life expectancy than men, and the longer the life expectancy, the lower the monthly annuity payment (and vice versa). This approach is commonly adopted for life insurance products in the market, so there is no discrimination against women.
In case of over-subscription when the Scheme is formally launched, will the HKMC consider expanding the scale of the Scheme which is intended to be HK$10 billion initially?
The cap of HK$10 billion for the first batch of the product is based on risk management considerations. We may make some adjustments depending on market response. As annuity products are not yet popular in Hong Kong, the most important thing at this stage is to enhance the public understanding of the Scheme, so that they can have an additional option for retirement financial arrangements.
Written by Smart Ambassador
Smart Ambassador, a staff at the HKMA, is inquisitive and will share with you from time to time the tips on using banking and financial services in a smart and responsible manner.