The Mandatory Provident Fund (MPF) is a compulsory pension fund designed by the Hong Kong government as a major protection scheme for the aged and retired residents. Most employees and their employers are required to contribute monthly.
Ongoing challenges faced by the MPF
Anna Wu says ensuring security forHong Kong's rapidly ageing population through the ambitious MPF scheme requires longer-term changes to ensure the system is robust enough for the job
The Mandatory Provident Fund was launched in 2000 to address, in part, the challenge of financing the retirement of a quickly ageing population. Its net assets had reached HK$455 billion at the end of March and the annualised rate of return over the past 12 years has been 4 per cent.
Compared with an inflation rate of around 1.4 per cent over the same period, MPF benefits are, on average, earning investment returns above inflation.
The scheme is often criticised for its administrative complexity, not providing adequate retirement protection, charging high fees and providing poor investment returns. The adequacy issue has at least three aspects - coverage, interaction with other retirement protection measures, and leakage.
On the first two, it is often overlooked that the MPF was set up as the second pillar under the World Bank's three-pillar retirement protection approach. [The other pillars are a state-run pension system and voluntary, private-funded accounts]. All three must work together to provide sufficient protection for the community.
By design, it was not intended to cover those not in employment. It is, however, noteworthy that, before 2000, only around 30 per cent of employed people had any formal pension coverage. Now 84 per cent have. This is a measure of its success.
We recognise that the contribution rate is low and adequacy for retirement remains a serious concern. A taskforce under the Commission on Poverty has commissioned a study on the future direction of retirement protection. The government has also set up a working group to explore ways for public finances to cope with the ageing population. We look forward to hearing the deliberations of these two groups.
The third aspect of the adequacy issue is leakage. The pre-retirement withdrawal of MPF benefits is only allowed under very limited circumstances. However, the system has a troublesome feature - the "offsetting arrangement" which allows employers to withdraw the MPF benefits derived from their contributions to make up for severance or long-service payments, and this feature may give rise to serious benefit leakage from the MPF.
The chief executive recognises this issue. However, abolishing the offsetting arrangement might increase the operation costs of employers, which some argue could be so significant that many small and medium-sized enterprises would no longer be financially viable.
The issue is not going to be resolved any time soon, but I hope the government will at least begin talks with stakeholders to explore solutions over the long term. Another area of vigorous debate is on fees and returns. Over the past five years, the fund expense ratio, a comprehensive fee indicator, has come down from 2.1 per cent to 1.72 per cent. But the general sentiment is that fees are still too high.
We are following up on the recommendations of a study commissioned earlier to identify administration aspects that could be improved to achieve additional cost savings. We are encouraging members to merge multiple accounts into one. We are requiring trustees to further automate administration, to provide at least one low-fee fund under each MPF scheme and to consider eliminating less efficient schemes and funds.
Last year, employees were given the chance to transfer benefits derived from their mandatory contributions from the scheme chosen by their employer to one of their choice once every calendar year. Our ultimate goal is to give full control back to employees over all their benefits.
However, this will take time because of the offsetting arrangement. The government has invited the MPF authority to map out the implementation of full portability by early 2016 and we are now conducting a study of the costs involved.
The government has also invited us to provide proposals for a consultation on rationalising funds and capping fees by the end of this year. Fee capping by legislation has long been posed as a rather interventionist regulatory option, if market forces failed to do the job. There will be obvious technical and policy challenges in designing any such arrangement.
An issue that continues to cause concern is the level of investment risk in the system. The equity content of the MPF system is extremely high, at over 60 per cent - one of the highest in the world. This means volatility is also high and members may not fully understand the potential consequences of their choices.
To simplify employee choice, achieve greater efficiency and reduce volatility, we are considering whether and how a standardised, low-cost default investment arrangement could be structured for all schemes. Average members could default into this arrangement which could help them steadily increase the size of their retirement benefits and minimise the scope for extremely negative outcomes in the long term. Again, there are challenges in how to make this work and we are exploring the possibility.
The last issue of administrative complexity may be easier to deal with. One recommendation from the consultancy on administration costs is to use electronic means for enrolment, contributions and transfers between schemes.
It is challenging to move from paper-based transactions. The MPF system covers a wide spectrum of employees and employers. Some employees may not be computer literate. Some employers do not use computers. We would need to consider appropriate means to fit this very uneven landscape.
The MPF system did not come easily. On the whole, this ambitious social programme has achieved its objectives of providing greater retirement protection for Hong Kong workers and has weathered a few financial crises in the past decade. This is the right juncture for us to reflect on the objectives of the system and consider making longer-term changes. If we are to make a difference to the retirement life of the working population, remaining static is simply not an option.
Anna Wu Hung-yuk is chairwoman of the Mandatory Provident Fund Schemes Authority. This is an edited version of her speech at the recent Global Retirement Savings Conference