Turnaround on MPF joke a victory for placard wavers
I propose to make a one-off injection of HK$6,000 into the MPF accounts of all MPF scheme members.
Financial Secretary John Tsang Chun-wah, Budget speech, 2011
Of course he has now proposed to depropose it or repropose it or do something else to satisfy the placard wavers. But let's just examine why it was a bad idea anyway.
With the Mandatory Provident Fund you must always start by recognising that the big financial houses devised the scheme to suit themselves rather than the purported beneficiaries, the working people of Hong Kong.
Yes, I know the MPF is actually a government scheme. I also know that it was the Tooth Fairy who left a coin under my pillow in place of my loothe tooth when I was a kid.
Let's get real. The banks told the bureaucrats what to do and the bureaucrats said: 'Yes, Sir.'
What the banks wanted was to stop MPF account holders from being able to choose their own pension managers, thus rendering them captive so that they could be squeezed for high MPF fees and charges. The plot worked. The basic administration fee alone averages 1.89 per cent a year.
Now let's take the HK$6,000 that John Tsang first proposed and then deproposed to stick into every MPF account, which is to say, pickpocket from you with one hand and give back to you with the other.
Let's also assume a younger worker who would only collect the money as a pension in 30 years. How much would he get if his HK$6,000 were charged 1.89 per cent every year?
Your answer is HK$3,384.
But we don't stop there. This covers only the administration fee. It takes no account of the time value of the money. Here is the critical question: How much would you pay me today for the right to collect HK$100 from me in a year's time?
Tell me HK$100 and the deal is yours. Tell me HK$90 and no deal. Somewhere between is the right figure. We must thus add another discount factor to arrive at a value today for the HK$6,000 that our MPF beneficiary would have collected 30 years from today. We shall be conservative and put this annual discount factor at only 3 per cent.
We are now at 4.89 per cent in total and our HK$6,000 would now be worth only HK$1,333.
Way too low, say my financial analyst friends, meaning that the discount is way too low. Make it at least 7 per cent in total, they say, including the fees. We are now at HK$680 in present value.
So, yes, we shall have to concede this one to the placard wavers. This MPF handout was a joke. It was a handout to MPF managers, not MPF accounts.
But stop, you say. Surely these managers would use their superior knowledge of the market to invest my money wisely so that my MPF account would rise in value?
We are entering the world of illusions, I see. In the first place, only inside information gives you superior knowledge of a market. You must otherwise ask an astrologer. The future remains opaque to all others. The superior knowledge of a fund manager lies in how to deal on a market, not in knowing what that market will do.
Second, your MPF manager has no interest in managing your money wisely, at least not for you. You're a captive. He just takes your MPF contribution from your employer every month, tells his broker to buy Hutch or Bank with it and then lends the shares out for another fee to people who want to short the market.
The fact is, and fund managers hate this statistic although many studies have confirmed it, most of them underperform the benchmark indices of the markets in which they invest.
If you don't mind the paperwork you could probably do as well yourself. The only barrier is that you keep telling yourself that you don't understand investment. You do that, don't you?
Well, of course you don't understand investment. No one does, not really. We are all blind to the future. You should certainly not give your MPF manager more credit than you give yourself.
And if you do give yourself some credit you would realise that you might have some ideas here and there for making a great deal more money, doing anything from analysing alligators in Alabama to zoning ziggurats in Zanzibar.
I don't know what it is but I do know that among seven million people in this town there are plenty of great ideas for generating returns of 20 per cent and up on invested capital. There always have been and always will be.
Except that John Tsang doesn't realise it. He had to be told that the MPF handout was a bad idea.