A Search for the Root Causes of the Underdevelopment of the Hong Kong Annuity Market

Abstract

It has long been predicted that the human lifespan will increase with medical, technological and economic advancement. In fact, the life expectancy of a newborn baby has climbed a steep slope from 45 in 1900 to 80 in 2001 in many developed countries. Decreasing mortality has allowed people to stay in the workforce longer and to enjoy longer retirements. Life annuity, as an instrument that provides financial protection to those who live ‘‘too long’’, is one of the few businesses that have been directly pulled up the slope by the lifespan cart. Since it was invented, life annuity has been commonplace in the life insurance world. Even though its development has lagged behind that of other insurance products, its important role in offering people financial protection is undeniable. With the reform of retirement and pension systems sweeping the Western world in the past decade, life annuity markets have grown significantly. Asian countries, which are forecast to account for 62 per cent of the world’s population aged 60 and older in 2050 (United Nations, 2003), have recently realized the need to modify their retirement and pension systems. Hence, it will not be surprising to see a growing annuity market in Asia before long. As one of the most developed Asian cities, Hong Kong must also respond to the need for increased retirement savings as its population ages. Although there was already a voluntary private-sector scheme governed by the Occupational Retirement Scheme Ordinance (‘‘ORSO’’), covering about 925,000 workers, in mid-2000, the Hong Kong government decided to establish the Mandatory Provident Fund (‘‘MPF’’), an employerdesignated, private-sector-administered pension scheme that commenced operations on 1 December 2000, as a long-term response to the continued ageing of its population. In embarking on this, Hong Kong was generally expected, like its counterparts elsewhere in the world, including Australia, Brazil, Chile and the U.S., to unleash forces that would help to reshape its long underdeveloped life annuity landscape, which only had 60,681 life annuity contracts in force at the end of 2002. Although it is indisputable that the implementation of the MPF will help to develop the undersized life annuity market in Hong Kong, we believe that there are also a myriad of long