Economic and legal forces are fueling interest in defined contribution pension plans in Hong Kong.
Traditionally, larger employers in the British crown colony often preferred defined benefit schemes. Smaller companies and newer schemes that had pension funds typically went the less complex defined contribution route.
But increasingly, change is coming to some of the larger companies.
Effective Jan. 1, for example, Philips Hong Kong Ltd. switched to a defined contribution plan for all of its employees from a defined benefit style. A company official who asked not to be named declined to specify the size of assets involved, but an outside source put them at the equivalent of roughly $20 million (U.S.).
Hong Kong Telecommunications Ltd. reportedly is in the process of switching to a defined contribution from a defined benefit pension plan, but company officials could not be reached for comment.
In 1993 Cathay Pacific Airways set up a defined contribution plan for pilots it hired from then on. Pilots already employed by Cathay Pacific were allowed to choose between staying in the existing defined benefit program or switching to the new plan.
According to some local experts, quite a few other organizations, from companies to universities, also are exploring the feasibility/desirability of adopting defined contribution style pension arrangements. The experts debate how far the trend will go. But at one extreme, Fidelity Investments' Richard Darke, managing director-institutional business, Asia ex-Japan, predicts eventually the market in Hong Kong "will be totally defined contribution."
For his part, A. Grahame Stott, managing director, the Wyatt Co. (H.K.) Ltd., foresees noticeable change. He estimates Hong Kong's defined benefit assets now total roughly $10 billion (U.S.), and defined contribution roughly $6 billion (U.S.). Over the next five years, those numbers could be "just about the opposite," he said.
Factors driving the change include:
Spillover from the growing worldwide interest in defined contribution plans.
New regulations governing pension funds, which, among other things, require them to meet solvency standards.
Rapid salary growth making defined benefit plans costly to fund;
Extremely volatile investment returns, which make contribution levels difficult to forecast.
Experts say that during the past 15 years, annual salary growth has been in double-digit territory, creating a need for pension sponsors to invest aggressively, especially in equities. But investment returns in local and regional markets have been unpredictable. Although in some years they've soared, in some others, such as 1994, they've fared poorly. As a result, according to Wyatt's Mr. Stott, the median balanced pension fund in Hong Kong posted a 53% return in 1993, but a -13% return in 1994.
Added to those problems has been the advent of the Occupational Retirement Schemes Ordinance, a set of legal standards for the previously unregulated industry. Among the various provisions: ORSO, passed in October 1993, requires all employers offering pension benefits to register by this coming October to qualify for tax relief and avoid penalties.
ORSO also requires that, by 1998, pension plans must have attained financial solvency. (Assets must at least equal resignation benefits.) However, as employers know, reaching or maintaining solvency can be difficult if markets remain in the doldrums. Indeed, according to Mr. Stott, "a significant number - although not a majority - of funds that were solvent in 1993 are not solvent now."
In such cases, employers would worry about having to raise contribution levels to keep plans adequately funded. But with defined contribution plans, employers aren't saddled with long-term liability concerns or worries about investment returns. These risks are transferred to the employees.
In turn, defined contribution plans are attractive for some employees. Not only might they be better understood than defined benefit plans, but also might offer an easier way to gain political safety.
With the coming of July 1997 - when Hong Kong returns to Chinese sovereignty - some Hong Kong employees might be concerned about the safety of their pension assets after the colony changes hands. To skirt that problem, they can easily and quickly put money in funds domiciled outside of Hong Kong if their employer offers that option.
Quite a number of Hong Kong companies already have set up offshore pension arrangements to protect their pension assets.
Companies themselves offer their own reasons for switching to defined contribution plans.
An official at Philips Hong Kong, who asked not to be named, said the company's switch was part of a change "all over the world" for Philips and had been "initiated from headquarters in Einhoven," the Netherlands. But Philips in Hong Kong decided to make the change now because of the necessity of registering by October. Changing schemes after Oct. 15 would be "too complicated," the official said.
Philips' new plan applies to all of its Hong Kong employees, and it offers four investment options: a growth fund (80% equities, 20% other securities); a balanced fund; a capital stable fund; and a U.S. dollar-based money market fund.
In Hong Kong, "member choice" arrangements for defined contribution plans are still relatively unusual. Nonetheless, Cathay Pacific apparently went all out when it introduced its new plan for pilots. The plan's options now number more than 30, and even have been higher, according to several observers.
Participants who don't wish to make their own investment choices can use the "fallback situation." In that case, the employer picks conservative investments for the plan participant.
But however innovative some plans have become, it remains unclear how many other companies - if any - will follow suit.
Syd Bone, managing director of consulting actuary Towers Perrin in Hong Kong, thinks "it would be scare-mongering to (forecast) massive change" to defined contribution plans in Hong Kong. Mr. Bone believes it's actually "difficult to predict how companies will react" to the current economic conditions and legal requirements concerning pension funds.
