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Hong Kong: Offshore Investment

Pension Investments

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 HKD15.6 billion. By the end of 2009, there were 61,382 Retirement Scheme contracts carrying net liabilities of HKD151.6 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 or entertainers;
  • Residents in high-tax countries intending to become non-resident on or before retirement;
  • Residents in low-tax countries.

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.

 

 

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