New product can help maintain financial status

PUBLISHED : Thursday, 13 December, 2007, 12:00am
UPDATED : Thursday, 13 December, 2007, 12:00am

Variable annuities are emerging as a popular savings option as more individuals search for products in addition to their MPF to secure a reasonable level of income when they retire.

Variable annuities have been popular among United States investors since the 1990s and in the past few years they have been introduced in Canada and Japan. But they were only introduced to investors in Hong Kong in February by Manulife.

Sales of variable annuities in the US reached US$154.8billion at the end of 2006, according to a report released by Vards, a Chicago-based research company specialising in annuities. Figures from the US National Association of Variable Annuities (Nava) show that the amount of assets invested in variable annuities products has increased from US$800billion in 2002 to US$1.4trillion last year. The variable annuities market has shown no signs of slowing down.

But a survey conducted by Manulife reveals that Hong Kong investors are not financially prepared for retirement, with more than half of the respondents expecting they will have to halve their monthly expenditure after they retire.

According to government statistics the life expectancy in Hong Kong is 79 for men and 84 for women. Assuming retirement at age 57, one would need savings to last at least 25 years.

The Manulife survey showed that only 29 per cent of respondents had any financial plans in place for a regular income after retirement. This was despite the fact that most (69 per cent) believed that the MPF or company pension would account for less than 40 per cent of their retirement needs.

More than half of the pre-retirees (64 per cent) and retirees (57 per cent) anticipated they would experience a weaker financial status or a deteriorating lifestyle at old age. Nearly two in five retirees (38 per cent) found themselves financially worse off in retirement than they had expected, and on average about 53 per cent of general respondents and 57 per cent of affluent respondents expected they would have to reduce their monthly expenditure by half on retirement.

Manulife said variable annuities products could be a solution to retirement savings in addition to other types of annuity products. It has already had some success in the US and Canada. Sales reached C$1billion (HK$7.75billion) in March when Manulife launched Income Plus in Canada. The product drew attention from competitors, with structured products providers attempting to come up with a product to imitate its success.

HSBC Insurance introduced a variable annuity product in May this year. Both HSBC Insurance and Manulife declined to reveal sales figures from selling variable annuities products in Hong Kong.

Manulife's variable annuity product, Manulife Secure IncomePlus, is an investment-linked insurance plan with guaranteed withdrawal benefits. It allows policyholders to withdraw a set amount of their investment annually, while still guaranteeing that they will receive at least their initial investment when the policy matures.

Investors can receive 5 per cent of the guaranteed withdrawal amount every year. Regular withdrawals of the initial investment are guaranteed, regardless of how the market performs. The investment term is about 20 years and the potential returns of the funds are linked to the performance of the SRP Lifestyle Portfolios which can offer additional growth to the guaranteed withdrawal amount.

Manulife Secure IncomePlus offers a choice of three SRP Lifestyle Portfolios which invest in equities and bonds and can be categorised as conservative, growth-oriented or balanced. If investors make no withdrawals in the first five years, the guaranteed withdrawal benefit increases from 100 per cent to 125 per cent of the capital invested.

Bonnie Tse, vice-president at Manulife's Wealth Management, said investors were initially slow to react to the product, but added: 'We have allocated a lot of resources to educate investors about variable annuities. So far the results have been encouraging.' Ms Tse said Manulife Secure IncomePlus was popular among 45 year olds. 'Our research shows that the population of 65 year olds in Hong Kong will exceed Japan's,' she said. 'This indicates there is a strong growth potential in Hong Kong for variable annuities.'

HSBC Insurance has also been marketing its variable annuity product, LifeInvest Protection Plan in Hong Kong, said Jason Sadler, managing director at HSBC Insurance.

He said there was a strong appetite for the product in Hong Kong. 'Even though variable annuities are quite new to investors here, these products are relatively simple and easy to understand.' He said because the product guaranteed a return on capital, investors didn't have to worry about a loss if the market faced a downturn.