Annuity interest failed on two levels

Editorial | Mary Ma 14 Aug 2018

It's disappointing that only 9,410 elderly have expressed interest in subscribing to less than half of the government's much ballyhooed HK$10 billion annuity scheme.

Financial Secretary Paul Chan Mo-po had anticipated a far more enthusiastic response - with promises to double the amount to HK$20 billion should demand for the innovative annuity plan be overwhelming.

Noticeably, there exists a large gap, and it's plausible the numbers will fall even further when the moment comes for the elderly subscribers to actually fork over money.

But it would be unfair to judge the scheme by the responses to its debut. The Reverse Mortgage Programme has been gaining in popularity of late despite a similarly lukewarm public reaction at the start. It's probable the public will show greater interest in the annuity as they understand it more.

As for a debut, the amount committed wasn't as bad as some had feared. It's only that officials had been too ambitious in drumming up expectations unrealistically. So the shock doubled when the outcome fell below target.

As I've said before, the plan's greatest attraction is that members of the sandwich class can tap the extra source of government's Higher Old Age Living Allowance by investing a substantial portion of their capital into the annuity plan so as to keep them within the income and asset limits for the allowance.

Then, they will also be able to receive a few thousand dollars more each month in old-age allowance on top of the monthly payment guaranteed by the public annuity plan.

It's rather unfortunate that the annuity scheme was launched at a time when local interest rates were about to start climbing after multiple interest rate hikes in the United States, which renders the 4-percent return guaranteed by the scheme less attractive.

With US interest rates having been raised seven times since the end of 2015 - along with more hikes predicted for the near future - it's only a matter of time before Hong Kong banks will have to follow suit. In fact, the cost of mortgages are already on the rise.

As expectations about interest rates change, perceptions of the annuity's guaranteed yield are bound to shift too.

Meanwhile, corrections in the financial market on the heels of US President Donald Trump's trade war with China are likely turning some senior investors' attention from the annuity scheme to the stock market for bargains despite the higher risks involved in equities.

Those developing factors are beyond the control of the Hong Kong Mortgage Corporation.

However, the HKMC - which administers the annuity fund via a newly created subsidiary - may still review its marketing policy and the product design before it launches the second tranche for public subscription.

It was evident in the first phase that banking staff were lukewarm in selling clients the annuity plan that earned them no commission, and second, the plan's synergy with other old-age benefits was not emphasized enough to reflect its true merits.

A review of the current setbacks will be needed prior to the next launch.

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