policy papers

HONG KONG DEMOCRATIC FOUNDATION

P.O.Box No. 35588
King's Road Post Office
North Point, Hong Kong

Phone

(852) 2869-6443

Fax

(852) 2869-6318

HKDF

A Future Fund for Hong Kong

25 April 2008

The Honourable Henry Tang Ying-yen, GBS, JP
Chief Secretary for Administration
Government Secretariat
Government of the Hong Kong Special Administrative Region
12/F, Central Government Offices, West Wing
Lower Albert Road, Central
Hong Kong

Dear Mr Tang,

A Future Fund for Hong Kong

We are writing to propose that a portion of the fiscal surplus be used to create a Future Fund to provide for Hong Kong's elderly.

Following the Financial Secretary's announcement of a Budget surplus for the previous year of HK$115 billion, many people in the community have asked if the Government is doing enough for the disadvantaged. One important group that includes many disadvantaged individuals is the elderly, many of whom are not covered by retirement plans. The elderly in our society are also forecast to grow more numerous as the population ages. It is surely important to set aside some of our riches now to meet the needs of this group.

Another aspect of the elderly problem in Hong Kong is civil service pensions. These are unfunded (save to a very small extent), which means that the burden of the pension bill falls on the current working population. The dependency ratio will worsen in the coming years, which means that the burden of civil service pensions will increase. Again, it would surely make sense to use some of today's wealth to properly fund the civil service pension scheme, and relieve the burden on the working population.

Overseas experience provides examples for Hong Kong‘s reference. Norway, which has an ageing population but is currently blessed with excess revenues from its energy resources, has established a Global Pension Fund to provide for the elderly in the future. Australia, again benefiting from the resources boom, has just established the Future Fund to fund its presently unfunded civil service pensions. The attached note provides some information on these two schemes.

We hope that our suggestions are helpful, and are happy to discuss further if desired.

Yours sincerely,

Alan Lung Ka-lun
Chairman

25 April 2008

The Honourable John C Tsang, JP
Financial Secretary
Government Secretariat
Government of the Hong Kong Special Administrative Region
5/F, Central Government Offices, Main Wing
Lower Albert Road, Central
Hong Kong

Dear Mr Tsang,

A Future Fund for Hong Kong

We are writing to propose that a portion of the fiscal surplus be used to create a Future Fund to provide for Hong Kong's elderly.

Following your announcement of a Budget surplus for the previous year of HK$115 billion, many people in the community have asked if the Government is doing enough for the disadvantaged. One important group that includes many disadvantaged individuals is the elderly, many of whom are not covered by retirement plans. The elderly in our society are also forecast to grow more numerous as the population ages. It is surely important to set aside some of our riches now to meet the needs of this group.

We hope that our suggestions are helpful, and are happy to discuss further if desired.

Yours sincerely,

Alan Lung Ka-lun
Chairman

A FUTURE FUND FOR HONG KONG?

Introduction

For the past two decades, Hong Kong has been accumulating large fiscal surpluses. The surplus has become so large that in the 2008/09 budget the Financial Secretary gave a significant portion of it back to taxpayers. This note asks whether the surplus should be put to more productive uses.

Reference can be made to the experience of other polities that have large accumulated surpluses. In many cases, these polities form sovereign wealth funds, which in turn serve a variety of purposes from supporting industrial development to preserving capital for future generations. See Appendix for list of sovereign wealth funds. In the context of Hong Kong's ageing population, two examples appear particularly relevant. They are, the Government Pension Fund of Norway and the Future Fund of Australia. Both channel current surpluses to the future needs of the respective nation's elderly.

Government Pension Fund - Global (GPFG, Norway)

The GPFG (formerly The Petroleum Fund of Norway) was founded in 1990, and at March 2007 had assets of US$322 billion. It is funded by receipts from licences and taxes on oil, receiving about 80% of the government's oil-related revenues. The fund is to be used to meet the country's pension bill from 2015. It is forecast to reach US$500 billion by 2009.

The GPFG is owned by the Ministry of Finance in the Norwegian Government. Its operations are assigned to Norges Bank Investment Management (NBIM), which is part of the Norwegian Central Bank. Most of the assets are managed by NBIM, where front office staff have performance-related pay, but 28% is allocated to around 50 external bond and equity managers. Management costs have been just 0.09% per year.

The GPFG is regarded as the most transparent of the SWFs, and publishes extensive information about its performance, objectives and assets. Asset allocation is intended to reflect the structure of Norway's imports, but with emphasis given to the US markets. Over 50% is to be placed in European currencies and 35% in North America; investments in Asia account for less than 10%, but investment in emerging markets is growing. The fund has investments in 42 markets and 31 currencies. Bonds (more than half triple-A-rated) constitute 60% of the portfolio, and equities 40%. The Norwegian government has just decided to move the allocation to 60% equity and 40% bonds. Alternatives and real estate are also in view.

The GPFG owns small stakes of typically less than 1% in some 3,500 companies, with a cap of 5% (recently raised from 3%). Following the discovery that the fund had invested in controversial companies such as arms producers, an Advisory Council on Ethics was established by the Norwegian government in November 2004, and ethical guidelines were issued by the Ministry of Finance. The fund consequently has an ethical screening policy, excluding companies which show, "unacceptable violations of fundamental ethical norms".

There has been political debate in Norway as to whether the fund should be used in the state budget, and if so whether that would fuel inflation.

There is a separate, much smaller fund, the The Government Pension Fund - Norway, which is about 5% the size of the GPFG. This fund invests in the Norwegian stock market.

The Future Fund, Australia

The Australian Government's first Intergenerational Report showed that the current generation of taxpayers is likely to impose a higher tax burden on the next generation in order to pay for services such as health care and care for the aged. In addition, the Government will face the further burden of the unfunded liability for civil service pensions. At May 2007, this liability was A$103 billion. In response to these pressures, and in the context of substantial government surpluses due to the global resources boom, in the 2005/06 Budget, the Government announced that it would create the Future Fund in order to accumulate sufficient financial assets to offset the unfunded pension liability by 2020. Since then, the government has transferred assets from Government surpluses and shareholdings to the fund which at November 2007 had a value of A$61 billion.

In May 2007, the Government announced that it would create the Higher Education Endowment Fund (HEEF) to support capital expenditure and research facilities in Australian universities. The support will be provided by dividends on the capital invested in the HEEF. So far the government has transferred some A$6 billion to the HEEF. The HEEF is managed separately under the Future Fund.

The Future Fund has a target return of 4.5-5.5% above the consumer price index. It is managed by Northern Trust, a US fund management company; the fund is overseen by an independent board. It is understood that the fund does not intend to publish details of its investment programme.

APPENDIX

Table 1. Top twenty sovereign wealth funds

Rank	Country	Fund Name	Launch Year	Estimated assets (2007) US$ billion	% of 2006 GDP
1.	UAE (Abu Dhabi)	Abu Dhabi Investment Authority	1976	625.0	520.7%
2.	Norway	Norway Government Pension Fund - Global	1990	322.0	102.6%
3.	Singapore	Government of Singapore Investment Corporation	1981	215.0	169.0%
4.	Kuwait	Kuwait Investment Authority	1953	213.0	268.7%
5.	China	China Investment Corporation	2007	200.0	8.0%
6.	Russia	Stabilisation Fund	2004	127.5	14.2%
7.	Singapore	Temasek	1974	108.0	84.9%
8.	Qatar	Qatar Investment Authority	2005	60.0	185.3%
9.	US (Alaska)	Permanent Reserve Fund	1976	40.2	0.3%
10.	Brunei	Brunei Investment Authority	1983	30.0	309.4%
11.	Korea	Korea Investment Corporation	2005	20.0	2.2%
12.	Malaysia	Khazanah Nasional BHD	1993	17.9	12.3%
13.	Venezuela	National Development Fund (Fonden)	2005	17.5	10.5%
14.	Canada (Alberta)	Alberta Heritage Savings Trust Fund	1976	16.4	1.3%
15.	Taiwan	National Stabilisation Fund	2001	15.2	4.0%
16.	Kazakhstan	National Fund	2000	14.9	15.6%
17.	Chile	Economic and Social Stabilisation Fund	2006	9.7	7.6%
18.	UAE (Dubai)	Istithmar	2003	8.0	6.7%
19.	UAE (Dubai)	Dubai Investment Corporation	2004	6.0	4.0%
20.	Oman	State General RF	1980	6.0	16.0%
Total				2,072.3