Growing nest eggs grab public's attention
People are changing their attitudes to retirement savings as the MPF reaches $100 billion
When the Mandatory Provident Fund (MPF) was introduced almost four years ago, reactions from the working public ranged from apathy to hostility. Efforts to sell the benefits of long-term saving fell rather flat, as did warnings of a looming global pension crisis and the dangers of overly conservative investment strategies.
But there's nothing like money to get people's attention. As cash has begun to accumulate, people are beginning to pay more attention to their MPF accounts. Even expats who don't plan to stay in Hong Kong until their twilight years have begun to notice the growing sums which will serve as a tidy going-away present.
Between us we've racked up a healthy $100 billion, according to the Hong Kong Investment Funds Association (HKIFA), and a further $2 billion is added in contributions every month.
And while returns suffered from bad timing, which saw the MPF launched into an unprecedented three-year equity bear market, last year's rebound boosted returns and enthusiasm for the project.
One of the main benefits of the renewed focus on MPF is that more people are realising that, despite the growing sums, these savings alone will not be enough to fund a comfortable retirement. At current rates of contribution, which for most represents 10 per cent of salary up to the cap of $2,000 ($1,000 from employer, $1,000 from employee), industry figures suggest this will be enough to replace 30 per cent of pre-retirement income - hardly enough to keep up the club membership.
Despite this obvious shortfall, voluntary contributions to the scheme remain low at around 9 or 10 per cent of inflows. A low rate was perhaps to be expected initially as people were unfamiliar with the scheme, but now providers are gearing up to push for higher levels of voluntary contributions. Some will introduce measures to make saving easier, such as the flexibility to make direct contributions and bypass the employer.
The low level of additional contributions may also reflect the fact that people are investing independently, either through mutual funds or the insurance industry, which is now aggressively selling long-term investment products. Private investment is certainly a good thing and, according to the World Bank, it represents an important third pillar to complement tax-financed social safety-net schemes and mandatory, privately managed contribution schemes.
Many investors naturally prefer the extensive choice available on the open market to the MPF choice of five or six funds offered within one of 48 schemes selected by their employer. Beyond the MPF, the choice of funds authorised by the Securities and Futures Commission runs to almost 2,000.
Many people in Hong Kong have shown the urge towards disciplined and regular saving and investment and have opted for the long-term savings plans sold by insurance companies and their distributors. Unlike the MPF, these are generally costly in terms of distributor charges and provider fees and offer very little by way of regulatory protection.
Inexperienced investors, and perhaps those who have suffered in the recent run of investment scandals, may now consider that protection and sound regulation are more important than exciting choices.
Those looking to plan for their retirement could start by boosting their MPF contributions. The fund industry has long pushed for the government to provide more tax incentives for people to save more via the MPF. At present only the mandatory $12,000 of individual contributions is tax deductible. Making voluntary contributions deductible too would encourage higher rates of disciplined regular saving.
If the rate of saving is one key to securing a comfortable retirement, rate of return is the other. When the MPF was launched, providers warned investors that overly conservative investment choices for those with long-term investment horizons would deliver disappointing returns.
While around 50 per cent of MPF assets are invested in balanced funds, 16 per cent of investors remain in capital preservation funds and 16 per cent in guaranteed funds. Investors in conservative funds suffered less during the equity downturn but would have seen disappointing returns last year during the rebound. By contrast, investors with more aggressive choices benefit from dollar cost averaging.
Many investors have still failed to grasp that over a term of say 20 years, greater volatility comes hand in hand with higher returns.
MPF investors with a medium to long-term investment horizon should think about switching to more aggressive fund choices, suggests Sally Wong, executive director of the HKIFA.
'You have to think about the upside that is foregone, the ability to outperform inflation and the loss of purchasing power. Those are the greatest risks that people are not aware of,' she says.
With a four-year track record behind the MPF and with each of us closer to cashing it in, it is a good time to revisit investment choices.
