In a presentation to HKICS members last month, Anna Wu, Chairman, Mandatory Provident Fund Schemes Authority, discussed her wish list for reforms to Hong Kong’s MPF system.
Since its creation in 2000, Hong Kong’s Mandatory Provident Fund (MPF) pension scheme has never been far from the media spotlight. In particular, the MPF has been criticised for its administrative complexity, for not providing adequate retirement protection and for charging high fees. At a recent HKICS Members’ Luncheon, held on 5 September at the Hong Kong Bankers Club, Anna Wu, Chairperson, Mandatory Provident Fund Schemes Authority (MPFA), discussed some of these issues and some of the long-term structural reforms she hopes will address them.
Does the MPF provide adequate retirement protection?
Ms Wu said the MPFA recognises that the current MPF contribution rate is low and the system’s adequacy for retirement remains a serious concern. She pointed out, however, that the MPF system was never meant to be the only financial provision for retirees. The government’s strategy is based on a three-pillar approach to protect the aged as set out in the World Bank report of 1994, Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth:
- a publicly managed, tax-financed social safety net
- a mandatory, privately managed, fully funded contribution scheme, and
- voluntary personal savings and insurance.
Ms Wu said that the MPF was designed to form the second pillar of this approach, but all three pillars are needed to provide sufficient protection for the community. For example, the MPF is an employment-based retirement protection system. It covers anyone in employment (except exempt persons) between the ages of 18 and 65, but there are many categories of people who are not in formal employment, and this is why the establishment of the first and third pillars is critical.
Another adequacy issue concerns ‘leakage’ – the pre-retirement withdrawal of MPF benefits. As you might expect, this is only allowed under very limited circumstances since the MPF is designed to ensure adequate benefits are in place after retirement. However, a widely discussed problem here is the ‘offsetting’ arrangement which permits employers to withdraw the MPF benefits derived from their contributions to make up for severance or long-service payments. This loophole can result in major leakage from the MPF and has been targeted for reform for some time.
The restrictions on pre-retirement withdrawal of MPF benefits have also been criticised as being overly rigid and the MPFA is working on allowing scheme members to withdraw their MPF benefits early on the grounds of terminal illness. This proposal gained 92% support in a consultation in 2011. The MPFA is also working on giving scheme members the option to withdraw their accrued benefits upon retirement in stages rather than as a lump sum payment. This proposal gained 89% support from consultation respondents.
Are MPF fees too high?
This issue has attracted public concern and Ms Wu said the MPFA has been looking for ways to drive trustee fees down. She confirmed that the MPFA has looked at the option of capping trustee fees, but this poses major technical and policy challenges. Less invasive reform options currently being implemented, or on the drawing board, include the following.
• Increasing automation. The MPFA is encouraging trustees to use electronic means for enrolment, contributions and transfers between schemes. This would reduce administrative costs but there are challenges involved – some employers and employees, for example, may not be computer literate.
• Enabling portability. The MPFA proposes to give employees the chance to transfer benefits derived from their mandatory contributions from the scheme chosen by their employer to one of their choice once every calendar year. Ms Wu said that the goal is to give full control back to employees over all their benefits, but the ‘offsetting’ arrangement discussed above is clearly an obstacle. The government has invited the MPFA to map out the implementation of full portability by early 2016.
• Introducing low-cost investment options. The MPFA is also considering introducing a standardised, low-cost default investment option, possibly run by not-for-profit operators. This would provide non-financially- literate members a default option which could help them minimise their investment risks in the long term.
The future of the MPF
The MPF system has been in operation for over 13 years. Since 2008, the financial global crisis has ‘tested’ retirement provision systems around the world. The MPF is particularly vulnerable to market downturns since the equity content of the MPF system is higher than comparable retirements systems globally. That percentage is currently about 60% and Ms Wu conceded that this is a concern – ‘Hong Kong people really are gamblers’, she quipped. Nevertheless, the overall annualised rate of return of the MPF over the past 12 years has been 4 per cent, which is above the 1.4 per cent inflation rate over the same period.
Ms Wu said that the MPFA is committed to the long-term reform of the system, but she pointed out that the MPF is designed to address a very real challenge for Hong Kong. Like many jurisdictions globally, Hong Kong has a rapidly ageing population. The percentage of the population over the age of 65 (currently at 13%) is predicted to grow to 30% by 2041. This means that the working population will have a much larger number of retirees to support – where each retiree is currently supported by six working age adults, by 2041 each retiree will be supported by just two working age adults.
The risks that the MPF was designed to address are therefore very real and Ms Wu said that the system has had some success in mitigating these risks. It has, for example, significantly increased the number of people with some form of retirement provision in Hong Kong. Before the implementation of the MPF only about one-third of the Hong Kong workforce had some form of retirement protection – that figure is now around 84% (including both the MPF schemes and other statutory pension or provident fund schemes). This, she said, is a measure of the MPF’s success.
This article is based on the presentation given by Anna Wu, Chairperson, Mandatory Provident Fund Schemes Authority, at the HKICS Members’ Luncheon held on 5 September at the Hong Kong Bankers Club. Details of future HKICS events are available on the HKICS website: www.hkics.org.hk.