HONG KONG, CHINA - Media OutReach - Jun 17, 2016 - On 17 June 2016, the Actuarial Society of Hong Kong ("ASHK") responded to the Labour and Welfare Bureau and Subcommittee on Retirement Protection of Legislative Council on the consultation relating to Public Engagement Exercise on Retirement Protection.
The ASHK is established with more than 1,000 qualified actuaries and to-be-qualified actuaries who are working in pension, insurance, academic and other areas. Actuaries are usually recognized as the engineers for defined benefit pension systems and actuaries' expertise enables decision makers to understand the financial sustainability and the underlying risks of a pension system.
ASHK does not have specific comments towards those questions listed in the consultation document. However, ASHK would like to express its views as follows:
1) All pension systems could be unsustainable under certain circumstances. The best-estimate scenario is not suitable to illustrate financial sustainability.
The key actuarial issue in this case is around the financial sustainability of the proposed retirement security program. The high level illustration of the two proposals as published by the Commission on Poverty easily leads to a conclusion that the universal pension proposal is not sustainable for a near term while the targeted pension gives a higher chance of sustainability. This easily gives a wrong perception for the user of the results that the projection gives a very accurate estimate of what will happen. Unlike the pre-retirement mortality which the actuaries are usually more comfortable that the correlation is low, and therefore the best-estimate is more reliable and relevant. The most sensitive assumptions for the actuarial projection of the financial sustainability are post-retirement mortality, birth rates, investment returns and price inflation. None of them could be well diversified to achieve a higher degree of certainty. Hence, the actuarial question should not be around "what is the best estimate", since a narrower range of estimate cannot be made anyway. The actuarial question should be what are the uncertainties and what elements in the program could "hedge" those uncertainties such that the proposal could be financially sustainable.
2) When will the program be not sustainable?
This will happen when the post-retirement mortality is low, the birth rate is low, the investment return is bad and the price inflation is high. So what can be done at that time? Increase tax? Increase the employer contribution? Increase the employee contribution? Reduce the amount of retirement benefits? Extending the eligible retirement age for benefits? These may be labelled as "adjustment measures". All of them could help, but it seems that, when referencing to other countries, there are always demonstrations and politics around the decision of what adjustment measure is taken. No one would like to suffer and therefore everyone is fighting for a better outcome for themselves. The program is not sustainable when there are no auto adjustment mechanism and when the outcome is worse than expected.
3) How to make a retirement security program financially sustainable?
ASHK proposes to agree on a few principles before starting program.
3.1) Separate fund. A separate fund should be set up for the retirement security program. This should not be mixed up with the government money otherwise the government (and the underlying tax payers) will be the "equity" player of the program and they will always be the last resort for the sustainability.
3.2) Pre-agreed funding allocation. The funding allocation among tax payers, employers, employees and other potential parties should be agreed in advance. This is a social question (not an actuarial question) of what should the allocation be. For simplicity and illustration purpose, it can be assumed that 1/3 from tax payers, 1/3 from employers and 1/3 from employees. Hence, in the future, whenever there are changes of required contributions to the system, all parties are bearing the same outcome. The interests of all parties are better aligned and there is no need to regularly review this funding allocation.
3.3) Pre-agreed auto adjustment mechanism. A list of sequential auto adjustment mechanism should be agreed in advance before the system is set up. An example is shown below as an illustration:
Extending benefit eligible age by 1 year to age of 66
Freezing the benefit increase due to inflation for 1 year
Increasing the contribution amount by 10%
And others ...
3.4) Regular Valuation. An actuary should carry out the valuation of the program regularly and assess the level of financially sustainability of the program. The financial sustainability should be well defined in advance and the results of such valuation should trigger the pre-agreed list of "auto adjustment mechanism". For illustration, the level of financial sustainability can be defined as:
Present value of future benefit payments / (present value of future contribution + current asset of the program)
When the level of financial sustainability is lower than a certain percentage (say 80%), then it will trigger the pre-agreed auto adjustment mechanism.
ASHK hopes the above comments contribute to the healthy debates for this topic and would be pleased to answer any questions or respond to any comments that you may have. Please feel free to contact the Society.
About the ASHK
The Hong Kong actuarial professional body was first formed in 1968 as the Actuarial Association of Hong Kong. 26 years later, its successor, the Actuarial Society of Hong Kong (ASHK) was duly incorporated in January 1994. The ASHK is a membership organization for actuaries in the industries of insurance, consultancy, finance, education institutes and government. Since 1999, the ASHK has become a full member of the International Actuarial Association. The ASHK is governed by an elected Council with a President, an Immediate Past President, a Vice President and 10 Council Members.