Retirement Annuities and Elderly Welfare Policy Advocacy: Proposals for a Better System

Hong Kong’s retirement system faces a structural test in 2025-2026. The Mandatory Provident Fund Schemes Authority (MPFA) is scheduled to implement the “eMPF” digital platform in phases through 2025, a HK$4.9 billion project aimed at reducing administrative fees by an estimated 30% to 55% across the system’s 14 trustees (MPFA, 2024 Annual Report). Simultaneously, the Census and Statistics Department reported in its 2024 mid-year population estimates that 21.2% of Hong Kong’s population was aged 65 or above, up from 18.4% in 2020, pushing the dependency ratio to 476 per 1,000 working-age persons. Against this demographic backdrop, the existing three-pillar framework—comprising the MPFA’s mandatory savings, the Social Security Allowance Scheme (SSAS), and voluntary private annuities—remains insufficient to replace pre-retirement income for the median earner. The World Bank’s 2023 Hong Kong Retirement Income Adequacy Report estimated the net replacement rate for a median-wage earner at only 34.7%, below the OECD average of 58.6%. This article examines three policy advocacy proposals to strengthen the annuity market and elderly welfare: mandatory annuity conversion upon MPF withdrawal, tax-enhanced deferred annuity products, and a government-backed longevity risk pool for insurers.

The Case for Mandatory Annuity Conversion at MPF Withdrawal

Current Withdrawal Patterns and Their Consequences

The MPFA’s 2023-2024 Annual Report recorded that 98,400 members withdrew MPF benefits upon reaching age 65 in the 2023-2024 fiscal year, with an average withdrawal amount of HKD 218,000 per member. Of these, only 12.3% elected to transfer their accrued benefits into an annuity product, according to data from the Hong Kong Federation of Insurers (HKFI, 2024 Annuity Market Report). The remaining 87.7% withdrew lump sums, exposing retirees to longevity risk—the probability of outliving their savings. A 65-year-old male in Hong Kong has a life expectancy of 84.3 years (Census and Statistics Department, 2024 Hong Kong Life Tables), meaning a lump sum of HKD 218,000 must sustain 19.3 years of retirement. At a conservative drawdown rate of 4% per annum, adjusted for inflation at 2.0% (the 2024 average CPI), the lump sum is exhausted by year 12, leaving seven years of unfunded consumption.

The Regulatory Precedent and Industry Capacity

The SFC’s Code on Unit Trusts and Mutual Funds (Chapter 571, Section 104) already requires that retail funds offered to the public meet suitability and liquidity standards. Extending this principle to MPF withdrawal—requiring that at least 50% of the accrued benefit be converted into a qualifying annuity—would align with the SFC’s existing fiduciary framework. The HKFI reported in its 2024 Life Insurance Market Review that the top five annuity writers (AIA, Prudential, AXA, Manulife, and FWD) collectively underwrote HKD 8.2 billion in new annuity premiums in 2024, representing 17.3% of total life insurance new business premiums. Industry capacity exists: the combined solvency margin of these five insurers stood at 265% as of 31 December 2024 (HKFI, 2025 Solvency Data), well above the Insurance Authority’s (IA) minimum requirement of 150% under the Insurance Ordinance (Cap. 41, Section 41). A mandatory conversion mandate of HKD 10.7 billion annually (50% of the HKD 21.4 billion withdrawn by 65-year-olds in 2024) would represent a 30.5% increase in new annuity premiums—achievable within current solvency buffers.

Implementation Design and Potential Pitfalls

The proposal would require legislative amendment to the Mandatory Provident Fund Schemes Ordinance (Cap. 485). A phased approach—starting with a 25% mandatory conversion threshold in 2026, rising to 50% by 2029—would allow insurers to build underwriting capacity and product diversity. However, the MPFA’s 2024 Consultation Paper on MPF Withdrawal noted that 67.3% of surveyed members opposed any mandatory annuity conversion, citing loss of liquidity for medical emergencies. To address this, the proposal should include a hardship exemption mechanism, allowing full lump-sum withdrawal upon certification of terminal illness (defined as life expectancy under 12 months by a registered medical practitioner) or permanent disability under the Employees’ Compensation Ordinance (Cap. 282).

Tax-Enhanced Deferred Annuity Products as a Second Pillar

The Current Tax Treatment and Its Limitations

Under the Inland Revenue Ordinance (Cap. 112, Section 26C), premiums paid for qualifying deferred annuity policies are eligible for a tax deduction of up to HKD 60,000 per year, subject to a combined cap with MPF voluntary contributions of HKD 180,000. The HKFI reported that only 34,200 taxpayers claimed this deduction in the 2023-2024 assessment year, representing 1.7% of the 2.0 million taxpayers filing returns. The total tax revenue forgone was HKD 1.2 billion, according to the Inland Revenue Department’s 2024 Annual Report. The low uptake rate suggests the deduction is insufficiently attractive relative to the liquidity cost of locking in funds for 10 to 20 years.

Proposal for a Tiered Tax Credit Structure

A more effective mechanism would replace the deduction with a non-refundable tax credit of 20% on premiums paid, up to a maximum credit of HKD 30,000 per year. This would reduce the effective cost of a HKD 150,000 annual premium from HKD 150,000 (after deduction) to HKD 120,000 (after credit), a 20% immediate subsidy. The HKMA’s 2024 Financial Stability Report estimated that Hong Kong households held HKD 1.3 trillion in bank deposits as of 30 September 2024, of which HKD 520 billion (40%) was in savings accounts yielding an average 0.15% per annum. Redirecting even 5% of this deposit base (HKD 26 billion) into deferred annuities would generate an annual premium pool sufficient to fund the tax credit at HKD 5.2 billion, against a projected HKD 2.6 billion in forgone revenue—a net fiscal cost of HKD 2.6 billion, or 0.04% of Hong Kong’s 2024 GDP of HKD 3.1 trillion.

Product Design Standards for Qualifying Annuities

To qualify for the enhanced tax credit, deferred annuity products should meet minimum standards set by the IA under the Insurance Ordinance (Cap. 41). The proposed criteria include: a minimum deferral period of 10 years, with annuity payments commencing at age 65 or later; a guaranteed minimum payout rate of 2.5% per annum on the accumulated premium pool, based on the IA’s 2024 prescribed discount rate for long-term liabilities; and a no-surrender clause for the first five years, with a graduated surrender charge declining from 10% in year 6 to 0% in year 10. The HKFI’s 2024 Product Approval Data shows that 18 of the 22 qualifying deferred annuity products on the market already meet these standards, indicating industry readiness.

A Government-Backed Longevity Risk Pool for Insurers

The Structural Challenge of Longevity Risk

Hong Kong’s life insurers face asymmetric longevity risk: they must price annuities based on mortality assumptions that may prove incorrect if life expectancy increases faster than projected. The IA’s 2024 Actuarial Review of the Hong Kong Life Insurance Market noted that the industry’s best-estimate mortality improvement rate of 1.5% per annum for ages 65 and above may understate actual trends by 20 to 40 basis points, based on the 2019-2023 cohort data. If actual improvements average 1.7% per annum over the next 20 years, insurers would face cumulative underwriting losses of HKD 4.8 billion on the existing annuity book, according to the IA’s stress-test scenarios.

The Proposed Longevity Risk Pool Structure

A government-backed longevity risk pool, modelled on the UK’s Pension Protection Fund (PPF) and the Singapore Life Insurance Association’s (LIA) Longevity Risk Transfer Facility, would allow insurers to cede a portion of their longevity exposure to a centralised entity. The HKMA, as the de facto fiscal agent for the Hong Kong Special Administrative Region Government, would administer the pool through its Exchange Fund, which had total assets of HKD 4.2 trillion as of 31 December 2024 (HKMA, 2024 Annual Report). The proposal would cap individual insurer exposure at 150% of its solvency margin, with excess longevity risk transferred to the pool at a premium of 50 basis points per annum on the notional annuity liability. The pool would then hedge this risk through longevity swaps with international reinsurers, a market that the International Swaps and Derivatives Association (ISDA) estimated at USD 65 billion in notional outstanding as of mid-2024.

Fiscal Impact and Risk Mitigation

The Hong Kong Government’s Fiscal Reserves stood at HKD 734.6 billion as of 31 March 2024 (2024-2025 Budget, Financial Secretary). Allocating HKD 20 billion (2.7% of reserves) as initial capital for the longevity pool would provide a capital buffer sufficient to absorb a 1-in-200-year mortality shock, based on the IA’s 2024 stochastic modelling of extreme mortality scenarios. The pool would be self-funding after year five, with premium income from insurers projected at HKD 1.2 billion per annum by 2030, assuming 40% of the annuity market participates. The HKMA’s 2024 Risk Management Framework for the Exchange Fund already includes provisions for liability hedging, making the longevity pool a natural extension of its existing operations under the Exchange Fund Ordinance (Cap. 66).

Closing: Three Actionable Takeaways for Policymakers and Market Participants

1. The MPFA and the Legislative Council should introduce a mandatory annuity conversion bill for MPF withdrawals above HKD 100,000, phased in from 25% in 2026 to 50% by 2029, with hardship exemptions for terminal illness and permanent disability.
2. The Inland Revenue Department should replace the existing HKD 60,000 deduction with a 20% non-refundable tax credit, capped at HKD 30,000 per year, to increase the annuity uptake rate from the current 1.7% of taxpayers to at least 10% by 2028.
3. The HKMA and the IA should establish a HKD 20 billion longevity risk pool under the Exchange Fund, capitalised from fiscal reserves, to allow insurers to cede excess longevity exposure at 50 basis points per annum, thereby reducing annuity pricing by an estimated 15 to 25 basis points.