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.
Governments around the world follow several different approaches to controlling the fees of retirement savings funds. One is simply to have a scheme administered by the state, such as the Central Provident Fund in Singapore and the individual retirement account under the pension system in mainland China.
Some countries allow citizens to choose between private and state-administered funds. In Sweden, about 60 per cent of the population choose funds operated by the private sector, but a government-run default fund automatically covers workers who do not join any. The administration fees of this default fund are only 0.6 per cent and are anticipated to drop to 0.3 per cent in 2025, but it aims to at least equal the returns of the other funds.
Another approach is for the state to select the funds that offer the most competitive administration costs and rates of return. Such a system is helpful to workers who have difficulty understanding and choosing among complex investment options. In Chile and New Zealand, schemes were chosen through an open bidding process. In Australia, the government does not select a scheme, but lays out the framework for private operators to follow.
A third approach is for the government to control the administrative costs through statutory measures, as happens in Poland and Israel. However, this raises the risk that fund operators might cut corners on administration costs in ways that affect service quality or returns.
Ever since its implementation, Hong Kong's MPF has been criticised for its high fees. Increasingly now, employees think that the trustees or fund providers have been benefiting at their expense.
Not surprisingly, the industry has not welcomed suggestions for reform, but at least some operators seem to be accepting that public awareness and expectations are rising.
We must now wait to see whether the government gives its blessing to the MPF Schemes Authority's proposed "fundamental changes", which will require amending the MPF Schemes Ordinance. Without such bold steps, the MPFA will only be able to implement administrative measures with relatively limited effect.
Chief Executive Leung Chun-ying pledged in his policy address to bring down MPF fees and charges. He should also abolish the practice of allowing employers to offset severance payments and long-service payment using MPF contributions for their employees. If changes are made, people will start to see the positive sides of the MPF system.
Chua Hoi-wai is business director (policy research and advocacy) at The Hong Kong Council of Social Service