Evolving with the times

When gauging the pros and cons of Hong Kong's MPF system, it is tempting to take retirement schemes operating in Singapore or Australia as a natural point of comparison.

That approach, though, has immediate flaws, as experts in the field of employee benefits are quick to emphasise.

'You are not comparing apples with apples,' says Philip Tso, director, investment services, for Towers Watson in Hong Kong. 'For example, Singapore's CPF [Central Provident Fund] has been in place since 1955 and the combined contribution rate is 35.5 per cent - 20 per cent from employees and 15.5 per cent from the employer. Regulators in Hong Kong can have aspirations or use other places as reference, but they can't just 'copy and paste'.'

So, while Singapore may allow workers to draw on accumulated CPF funds to buy a flat or cover short-term medical expenses, suggestions of Hong Kong moving in that direction are more like wishful thinking.

Australia, with a 9 per cent employer contribution going into a superannuation scheme set up in 1992 - and talk that this could rise to 12 per cent in a couple of years - essentially operates by a different set of rules.

Therefore, the MPF, which began in 2000 and is still based on 5 per cent contributions from employee and employer, should only be viewed on its own terms. And, while there is always scope for improvement, any ideas in this respect must take due account of the MPF's original purpose and current platform before trying to reach for the stars.

'The scheme's first priority is to save for retirement,' says Elaine Hwang, director of benefits in Hong Kong for Towers Watson. 'If you allow people to use their balance for other things before retirement, then the worries [about financial security in later life] increase again.'

As things stand, Hwang and Tso believe that efforts at enhancement should focus on a few key areas. One is the method of payment, which sees scheme members receiving a lump sum at the age of 65 or when retiring. With longer life expectancies and perhaps limited financial literacy, a better option for many would be a monthly draw-down facility, thus providing a steadier 'income' in retirement.

Another suggested change is to permit early withdrawal of savings in the case of critical illness. The MPFA is circulating a consultation paper on this and, in due course, may outline an amendment. Similarly, continuing discussions may lead to firm proposals for other kinds of post-retirement benefits for lower-earning scheme members.

'We hear quite a lot about a fixed lump sum - maybe HK$3,000 a month - paid from general government revenue,' Hwang says. 'It would be means-tested and something like a pension, but outside the MPF system.'

Alex Chu, director and head of employee benefits for HSBC Insurance, is quick to stress that prudent consideration and public consultation are the key prerequisites, whatever change is contemplated. He notes that the existing MPF framework offers members the flexibility and encouragement to build a sizeable retirement nest egg, over and above what accrues from their compulsory contributions. 'We always say members should [use the scheme] to save more for a quality retirement,' Chu says. 'A tiny sum in additional savings can mean a much better life after retirement because of compound growth.'

Regular inflows, never mind potential investment gains, mean the size of MPF funds will continue to swell. In due course, Chu believes, this should create room for reductions in management fees and simplified administrative procedures, which use a greater degree of automation. Singapore and Australia provide useful examples.

'Any extra costs incurred, for example by having a system of withdrawal by stages, will be minimal, if the process can be highly automated,' Chu says.

For Belinda Luk, senior vice-president, pensions and group business, for Sun Life Hong Kong, the MPF has firm foundations, but it must continue to evolve. In her view, items on the agenda should include more tax incentives to encourage voluntary contributions, a thorough review of payment conditions, and more investor education. 'The primary consideration is to meet the needs of investors during retirement,' Luk says. 'So, you have to explore the viability of programmed or phased withdrawals of accrued benefits.'

She adds that Hong Kong's scheme has attained a high rate of compliance from the respective stakeholders. The business community and working population should also make their voices heard when it comes to deciding further refinements.