Fixing the MPF
Chua Hoi-wai says the high fees of the MPF service providers must be cut, and there are plenty of ways to make that happen. But will the government take the bold steps required to ensure workers get a better deal?
Hong Kong workers have long complained that they are paying unnecessarily high fees and charges on their Mandatory Provident Fund savings. The Mandatory Provident Fund Schemes Authority has conducted a cost study and given the government ideas about how to cut these overheads. Among the proposals are capping fees, the provision of low-fee funds, the establishment of a default low-fee fund and a non-profit or low-profit operator.
The study, as with a similar report by the Consumer Council, found that different MPF service providers impose very different fees and charges. One operator might charge savers two or three times as much as another for funds in the same investment category.
The International Organisation of Pension Supervisors has rated the administration fees of Hong Kong's MPF scheme the fourth highest of 21 economies with comparable retirement systems. Only Turkey, the Czech Republic and Serbia had higher costs. The average annual fees and charges of our schemes came to about 1.7 per cent in 2012, while those in most other countries in the study were less than 1 per cent.
The difference between 1 per cent and 1.7 per cent looks small, but it can really add up. Thanks to the power of compound interest, over a 40-year period of contributions, its cumulative effect could be very significant - an extra 16 per cent in the size of your retirement savings.
As an example, take a man who earns HK$10,000 per month at the age of 25 and contributes continuously to the MPF up to the age of 65. Assuming a 2 per cent increase in salary every year, he will make a total contribution of HK$720,000. Assuming his nest egg has grown in line with the MPFA's latest average rate of return of 3.4 per cent a year, and the annual fees and charges are 1.7 per cent throughout this period of 40 years, he will receive HK$1.4 million when he turns 65.
Now do the calculations based on fees of 1 per cent: that nest egg rises to HK$1.62 million, HK$220,000 more, equivalent to around HK$1,000 per month during 20 years of life in retirement.
This would not matter if the MPF was a voluntary system. But, of course, it is compulsory. Even now, following a partial expansion of options for savers, workers cannot move all their savings around among competing operators. The government owes workers a better deal.