Stock response to retirement problem cuts both ways
Hong Kong's savers need to take their money out of the bank, cash in their bonds and invest the lot in the stock market if they want to stave off money troubles in their old age.
That sounds risky, but more conservative savings strategies will fail to provide an adequate post-retirement income, according to a new study by investment bank JP Morgan.
If a Hong Kong worker starts saving at 25, enjoys annual salary increases of 5.5 per cent, and socks away 10 per cent of his income in a pension plan, you might think he would be well set up for retirement. But JP Morgan strategist Adrian Mowat has calculated that if that worker's pension plan invests purely in low-risk assets such as high-grade government bonds, it will provide him with a post-retirement income equal to just 29 per cent of his final salary.
Or to put it another way, if the pension plan were to pay out in line with the World Bank's target rate of 70 per cent of final salary, our retiree would begin running out of cash aged 69, just four years into his retirement.
Happily, things are not quite that bad. At the moment, Hong Kong pension fund assets are invested 54 per cent in stocks, with the balance in deposits and bonds.
Bonds have performed well in recent years, providing handsome capital gains through the years of deflation that followed the Asian financial crisis, but Mr Mowat warns they are unlikely to go on doing so. Asia is entering a period of reflation, which will tend to erode the value of debt, inflicting capital losses on bond investors.
'There's too much comfort in bonds,' says Mr Mowat, arguing that savers across the region need to shift more of their pension assets into equities. For Hong Kong savers, that means investing all their pension assets in stocks if they want to be confident of securing a retirement income worth 70 per cent of their final salary.
Perhaps it is no surprise that a broker the size of JP Morgan should be encouraging people to buy more equities. Even so, Mr Mowat is making a vitally important point. At the moment Hong Kong has relatively few retired people. With about four workers for every retiree, the territory can easily afford to support its old people, even if they are not provided for through pension schemes.
But the population mix is changing. Low birth rates and longer life expectancy mean that the proportion of elderly people in Hong Kong's population is set to rise dramatically in coming years. By 2025 there will be fewer than two workers for every retiree. If the economic burden on those in work is not to become intolerable, it is essential that those retirees are properly provided for with adequately funded pensions.
Hong Kong made a good start with the introduction of the Mandatory Provident Fund in 2000, but the savings rate needs to rise and more of the money needs to be invested in stocks.
Such a development could have some interesting effects. In the short term a shift to a 100 per cent equity allocation would inject nearly $57 billion into stock markets.
In the longer run, by emphasising long-term investment goals rather than short-term capital gains, pension fund managers would require companies to focus on paying out more attractive dividends. That would force company executives to manage their cash flow more efficiently, which could yield some big benefits for the territory's economy as a whole.