Jake's View

MPF's real swindle is way it is stacked against workers

Employer-based system, even with fund switch concession, ensures low returns and high fees

PUBLISHED : Tuesday, 21 January, 2014, 12:33am
UPDATED : Tuesday, 21 January, 2014, 12:33am

Speculation that Chief Executive Leung Chun-ying was planning to abolish the much criticised offsetting mechanism in the Mandatory Provident Fund was a "misunderstanding," the city's leader said ...


SCMP, January 18

It's true. He didn't say "abolish" in his election manifesto. He only said "adopt measures to progressively reduce" and we shall excuse him the split infinitive.

We shall not, however, excuse him of the offence of standing idly by while what is perhaps the most widespread swindle of Hong Kong's working people continues to sap their retirement savings.

Let us lay out the groundwork here as the real scandal is not what it at first seems. The offsetting mechanism in the MPF allows employers to deduct severance payments they may owe their employees from the half of the final MPF retirement payout that is notionally attributable to employer contributions

That's a mouthful. Let's simplify with the example of an employee whose final payout on retirement is HK$100. As both employer and employee have made the same 5 per cent contributions to the employee's investment plan, the employer's attributable share is HK$50.

Whether invested well or badly, the money continues to roll in every month

If the employer then owes the employee HK$40 in severance payments, he does not have to pay the money. It is already covered, or offset, by his notional HK$50 share of the MPF payout. Only if the severance payment were greater than HK$50 would he have to make up the difference.

Unfair, say a great many people. The employer should not be allowed an offset. Perhaps, but I cannot get hugely worked up about it. The real scandal lies elsewhere.

We start with the fact that the MPF was made deliberately inefficient. Instead of giving every individual an MPF plan that he or she could carry from employer to employer, the scheme was based on signing each employee up to a plan selected by his or her employer.

This cumbersome approach means that an employee gets a new and different MPF account every time he or she changes jobs. Some people have acquired sheaves of them, all small, all requiring separate administration.

Ridiculous as it is to do things this way, it is just fine by employers, who can then expect favours from the banks behind the fund managers to whom they steer MPF accounts. These managers are also happy. They need not compete to attract employees shopping for the best performing plans.

The average annual management fee they charge for MPF accounts is consequently 1.7 per cent, far more than they charge on other funds and more than is charged on pension plans elsewhere.

They also suffer no performance stress with MPF. Whether invested well or badly, the money continues to roll in every month. If it is then used to buy a new issue that the manager would otherwise not buy - well, who is to know that the sponsor of the issue now owes the manager a favour?

But attempts at reform to adopt the obvious solution of employee-based MPF plans have all foundered on the same rock. If we let employees choose their own MPF managers, say employers, then they will choose irresponsible ones and the value of their MPF investment funds will go down. Final MPF payouts may then no longer be great enough to cover our severance pay obligations.

It's utter nonsense, of course. Not only is it a distinct employee tendency to be conservative with pension investments, but the list of MPF fund managers from which they can choose is determined and closely monitored by government.

Yet the obstruction of reform continues. The most that has been done is to allow employees once a year to move their share of their MPF accounts to a manager they choose. The amount that their employers contribute stays where it was. It only makes things more cumbersome.

Let's put some numbers on this. The latest figure for total MPF assets under management is HK$488 billion. If annual management fees were reduced to 1 per cent, and they would drop at least that far with employee choice, 2.6 million employees would be better off to the tune of HK$3.4 billion a year.

That's per year. That takes no account of the performance incentives reform would bring. And that's the real scandal.