The Actuarial Society of Hong Kong
MPF Market Size Projection Wong Tak Chi 15 Sep 2015
Agenda
1. What triggers such exercise 2. The Taskforce 3. The Projection Model 4. Assumptions 5. Key Results & Sensitivities 6. What’s Next?
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What triggers such exercise •
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Hong Kong pension actuaries perform projections of MPF market sizes from time to time. •
Too many factors, including economics, demographics, regulatory changes and member and employers’ behaviors
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Lack of an independent view
Aim to provide an independent view towards the projection based on the discussions and debates among the pension actuaries in Hong Kong •
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Limitations – No definite prediction since the actual outcomes depend on a number of uncertain factors
This is the first step – Fine-tuning of the projection model and more analysis needs to be done
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The Taskforce •
A taskforce has been formed within the Committee to work on this study. This study was approved by the Committee on Aug 17, 2015 and the Council of the ASHK on Aug 26, 2015.
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The taskforce consists of the following ASHK members: •
Billy Wong
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Gary Lee
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Michele Yuen
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Tak-chi Wong
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The Projection Model •
The MPF marketing size projection is based on the data as of December 31, 2014 as extracted from MPF Schemes Statistical Digest MPF Market Size as of Dec 31, 2014 Contributions received for 2014 Benefits paid for 2014
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HK$ 565 billion HK$ 60 billion HK$ 19 billion
Most important and challenging part of the model:
Projection assumptions
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Assumptions
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Assumptions
investment returns of the underlying funds members’ choices of funds
salary inflation
fees of the funds
mandatory contribution rate special voluntary contribution rate
retirement age for MPF benefit withdrawal
numbers of members eligible to early/normal retirement permanent departure rate
phased withdrawal
death, disability, small balance withdrawal rates
increase in Minimum wage voluntary contribution rate working population growth
adjustment to minimum & maximum relevant income MPF scheme participation rate MPF-exempted ORSO schemes 7
Assumptions
investment returns of the underlying funds members’ choices of funds
fees of the funds
retirement age for MPF benefit withdrawal numbers of members eligible to early/normal retirement permanent departure rate
phased withdrawal
death, disability, small balance withdrawal rates
salary inflation mandatory contribution rate special voluntary contribution rate
increase in Minimum wage voluntary contribution rate working population growth
adjustment to minimum & maximum relevant income MPF scheme participation rate MPF-exempted ORSO schemes 8
Assumptions
INVESTMENT RETURN •
Based on historical return
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Net of management fees
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4% p.a. is recommended
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The future MPF market size is highly sensitive to this assumption
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Assumptions
CONTRIBUTION INCREASE RATE •
Total contribution growth in the past 10 years = 10% p.a.
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Growth expected to slow down as the industry start to mature
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In the long run, contribution growth should be mainly driven by salary inflation
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The contribution increase rate is assumed to start at 10% at the first year of projection and linearly decrease to 3.5% over a 10 year period 10
Assumptions
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Historical benefit payment rate in the past 10 years = 3.1% p.a.
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Benefit payment rate anticipated to increase gradually as the working population ages
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Too many uncertainties, limited experiences, difficult to determine the long term rate
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The benefit payment rate is to be set at 3.1%, increase linearly to 5.0% over a 10 year period
BENEFIT PAYMENT RATE
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Key Results – Base
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Projected 2035 MPF market size is about HK$2.9 trillion, which is close to 5 times of that of 2014
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CAGR @ 8% in the next 20 years
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In 2035, the average account balance per MPF member will be close to HK$1 million
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Contribution is still higher than Benefit Payment in 2035, but much closer 12
Sensitivities – Investment Return
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Sensitivities – Contribution Increase Rate
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Sensitivities – Benefit Payment Rate
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Key Results – Summary
Projected 2035 MPF market size is HK$2.6 to 3.2 trillion (5 times 2014) Close to HK$1 million average account balance per MPF member
Investment Return is the most sensitive factor - 1% difference in investment return leads to HK$ 300 billion in the 2035 MPF market size 16
What’s Next?
• Enhance the projection model •
Currently it is a rather simple model with higher level assumptions
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Further study on the key assumptions should be performed in future when more data is available, e.g.
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Trend of voluntary contribution
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Demography affecting benefit payment
Reference the projection with other countries’ pension system
• Update with regulatory and market changes 17
Thank You!
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