What will become of Hong Kong’s sandwich class when they reach retirement age?

Agnes Yeh says current options offer little security for wage earners to plan for old age, and it’s time the government developed an active and mature bond market to help their retirement planning

PUBLISHED : Tuesday, 08 December, 2015, 1:20pm
UPDATED : Tuesday, 08 December, 2015, 1:20pm

According to the Commission on Poverty’s latest report, the addition of 40,000 elderly folk living below the poverty line last year pushed the total number of old people in poverty up to 320,000 in Hong Kong. Although the city’s overall poverty rate has dropped to the lowest level in six years, poverty among the elderly is becoming an uphill battle for society as its population ages.

The much debated universal retirement protection scheme, if implemented, would be a safety net providing the basic necessities for the poorest among us. But how will the increasing number of wage earners in the sandwich class provide for themselves with their own hard-earned savings to live decently above the baseline?

A meaningful HK dollar bond market is a much needed move to strengthen the city’s competitiveness in financial services

Much to the disappointment of wage earners planning for their retirement, all current options yield negative returns, from dismal MPF fund performances since it began and inflation eating up savings in the low-interest-rate environment, to the roller-coaster volatility in stock markets and unaffordable property prices. These people have no access to investment vehicles that guarantee the principal sum and yield stable returns, that is, an active and mature Hong Kong dollar bond market.

Pension scheme scholars recommend investing in high grade bonds that ensure medium- to long-term compound interest earnings. As one of the world’s key financial centres, Hong Kong does not have a mature and liquid Hong Kong dollar bond market with a variety of means for pension investment. Corporate bonds are mostly denominated in foreign currencies for institutional investors. The government, with its high sovereign credit rating, prefers to fund its own projects, and that of statutory bodies such as the Airport Authority, with government funds or direct borrowing.

After much outcry from the sandwich class that inflation is eating deep into their meagre savings, the government has issued Hong Kong dollar retail inflation-indexed bonds for five consecutive years since 2011. However, the HK$10 billion issuances of three years tenor are so oversubscribed that, on average, only one lot of HK$10,000 can be allocated to each investor – the annual return of which barely buys a decent family meal today, never mind support savings for retirement in the long run.

Though hard to stomach, Chief Executive Leung Chun-ying got it right in his election manifesto when he said Hong Kong’s economic growth has lagged far behind its neighbours in the past 20 years. For example, Singapore’s GDP real growth has averaged 6.6 per cent versus Hong Kong’s 3.95 per cent. In 1997, the Singapore government started to build up a government securities market, and market capitalisation has increased sixfold since. In contrast, the key Hong Kong government financial goal in the past two decades appears to have been accumulating surpluses and tagging on to the mainland’s growth instead of any visionary strategic planning.

READ MORE: One in three elderly Hongkongers living in poverty despite slight overall drop in number of poor

The performances of our neighbours who invest for the future, compared with our planning to save for the worst, clearly demonstrates their respective merits. Issuing domestic debt does not mean operating a rash fiscal policy. Well buffered by budget surpluses, Hong Kong is safely positioned to develop a medium- to long-term government securities market – to fund government projects, and generate a cumulative income for pension investors, a much needed bold step to build new financial infrastructure for long-term competitiveness and diversification.

A meaningful Hong Kong dollar bond market is a much-needed move to strengthen the city’s competitiveness in financial services, and equally important, to address the imminent need of retirement planning for the growing sandwich class.

As shareholders of “Hong Kong Inc”, we are keen to find out what proposals the financial secretary has in store for us in his coming budget address.

Agnes Yeh is a retired banker and member of the Finance Expert Group at the Professional Commons