particular formula. The cost of such a study would be in the region of HK$100,000 - HK$150,000.
Investment
There are no special difficulties involved in managing an investment portfolio designed to achieve the long term capital appreciation in a a mixture of foreign currencies which would be necessary to meet the objectives of the scheme. There are a number of houses represented or based in Hong Kong who have the investment management skills and administrative capabilities to undertake such a task.
The costs are difficult to estimate with precision in advance of being able to call for specific proposals from suitable institutions. The charges for managing portfolios of debt securities are generally much lower than for equity portfolios - around 0.75% of the value of the portfolio per annum.
If the Government were to proceed with such a scheme, I would recommend that the Government organise a panel of qualified institutions, all of whom would be guaranteed a minimum amount of funds to manage (subject always to satisfactory performance), in return for which lower than customary fee - perhaps around 0.5% might be charged.
The average annual compound rate of return which the investment portfolio might expect to achieve is a crucial element in determining the viability of the scheme. The majority of retirement schemes in Hong Kong are defined benefit schemes, which are not an appropriate yardstick for comparison. A more appropriate yardstick would be defined contribution schemes. There is very little historical data for such schemes in Hong Kong, where the whole concept is relatively new. There is much more information available from the United Kingdom, where such schemes have a much longer history. Reputable and well-established companies such as Standard Life, Clerical and Medical and Scottish Widows have consistently achieved returns in excess of 12%. The interviewees with relevant experience agreed 10% compound annual rate of return would be a prudent assumption. MAB have commented on an earlier draft of this report that they consider this figure over optimistic. The head of the best known firm of consulting actuaries in Hong Kong took the view that it was a reasonable assumption for a long term scheme. Whilst it is well above the rates which could be locked in by buying long term debt securities in the present interest rate environment, judicious investment in equities can enhance the returns without greatly increasing the risks. However, as will be seen from the further proposals developed in this paper, the question of what rate it would be appropriate to assume for a scheme of the kind originally envisaged will remain a largely theoretical one pending major developments in the debt market in Hong Kong.
Legal
The principal legal issue is the reluctance of the Inland Revenue to allow any person to borrow against a future pension entitlement (whether funded or unfunded). The reason for this is that pensions, however funded, are deferred income which would be liable to tax. Furthermore, tax concessions are granted to pension or provident fund schemes. The realisation in advance of a portion of the cash value reduces the future flow of income to the Inland Revenue, and defeats the objective of the tax concessions. The litmus test appears to be the granting of any sort of lien on the future pension or lump sum entitlement.
In a high inflation environment
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