MPF loss averaged 8.4pc last year

Last year's turmoil on global financial markets battered the retirement funds of the 2.5 million Hong Kong employees in the Mandatory Provident Fund. Their investments lost an average of 8.41 per cent last year.

It was the second-worst performance since the launch of the scheme in 2000; in 2008 the global financial crisis saw MPF funds plunge an average of 26 per cent.

The 423 MPF investment funds rose an average of 7.19 per cent in 2010 and gained 25.89 per cent in 2009.

The loss last year saw the compulsory retirement scheme's total assets fall to HK$336.9 billion at the end of September, down 2.5 per cent from a year earlier. Total assets have fallen 12.37 per cent since mid-June, according to the Mandatory Provident Fund Schemes Authority.

The MPF requires employers and employees to pay 5 per cent of salaries, up to a maximum of HK$1,000 a month each, into funds run by banks, insurance firms or fund companies. Employers choose the fund provider but the employee chooses which of the provider's funds they want the money invested in. They can only withdraw their capital and returns upon retirement at 65 or if they leave Hong Kong for good.

Principal Financial Group's Asia president, Rex Auyeung Pak-kuen, said the poor MPF returns were a result of stock market declines worldwide in the face of the European sovereign debt crisis, the slow economic recovery in the United States and anticipated slower growth in China.

'Most of the major capital markets including Hong Kong have been hard hit, hence the poor MPF investment return is a reflection of this negative factor,' Auyeung said.

Equity funds were the worst performers last year with an average loss of 15.11 per cent; the Hang Seng Index dropped 20 per cent. Mixed-asset funds, including stocks and bonds, came second, reporting a loss of 7.27 per cent, funds analyst Lipper said.

These two poorly performing sectors represent a major part of MPF investments, since 42 per cent of money is invested in mixed-asset funds and 33 per cent in equity funds.

The better performers were less popular. Bonds, the best-performing type of MPF fund last year, had an average return of 2.76 per cent, but only 2 per cent of MPF assets are invested in them.

'Unfortunately, I foresee this volatility will continue for the first half of 2012. But the situation will become more predictable in the second half and many of the central banks are taking appropriate actions,' Auyeung said. He expected better investment conditions in the second half of the year.

'For MPF participants, taking a safer approach is always advisable, but before doing that one should consider his or her situation, such as time to retirement, other means of savings and the dollar-cost-averaging technique,' Auyeung said.

Hong Kong Investment Funds Association chief executive Sally Wong Chi-ming also expects uncertainty.

'The European debt crisis is far from being resolved,' she said. 'Policy risks loom large. The emerging markets have their own set of issues, in particular how to maintain the growth momentum, especially as many are dependent on exports. In general, the global economy is braced for slower growth.'

Wong said while investors should be prepared for more market volatility, this did not mean everyone should shy away from equities. 'If one looks at the valuations and fundamentals, some markets do look attractive,' she said. 'Ultimately, MPF investment is different from other types of investment. It is about the long haul and about how to capitalise on the long-term economic growth potential to build up one's retirement nest egg.'