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.
Is now the right time to reform MPF for savers' benefit?
With more power in savers' hands, is now the time for reform so scheme achieves its original goals?
It was only after more than three decades of heated debate that the government launched the Mandatory Provident Funds in 2000.
Now, 12 years on, Hongkongers have about HK$400 billion in assets invested in the compulsory savings programme. But as the funds' size has mushroomed, so has controversy surrounding its high administrative fees, dismal returns and the fact employers, rather than employees, have the biggest say in who manages the funds.
While calls are growing for the scheme to be scrapped and for the government to implement a new pension scheme, there are also voices arguing that the MPF can be reformed to fulfil its original goal of providing for the city's ageing population. But what kind of reforms would make the scheme work?
The Mandatory Provident Fund Schemes Authority (MPFA) released a long-awaited report last week which set out recommendations for change and made comparisons with other countries' pension schemes.
To no one's great surprise, Hong Kong's fund-expense ratio - which measures the fees and expenses of an MPF fund as a percentage of fund size - is higher than that in four countries with which it was compared.
The average ratio is 1.74 per cent for Hong Kong, with administrative costs averaging 0.75 per cent and investment management fees 0.59 per cent; the rest goes on sponsor fees, trustees' profit, rebates and other expenses. By contrast, the fund-expense ratio in Mexico's pension system is 1.32 per cent, that in Australia is 1.21 per cent, that in the United States 0.83 per cent and that for Chile 0.6 per cent.
MPF funds achieved an average annualised net return of just 3.4 per cent in the first nine months of this year.
The fact that the rate in Hong Kong is higher than in the countries with which it was compared can be explained by differences in fund maturity, scale, design and structure, the report says.
It says that there is an inverse correlation between scale and administrative costs - the bigger the overall size of the fund, the lower the administrative costs.
Centralisation of the administration system in Australia, Mexico and Britain also cuts costs, it says.
"Although privately operated, the reference systems have centralised either some or all of the administration functions, include member enrolment, contribution processing, benefits transfer and payment," it says.
Among the authority's recommendations, one in particular attracted widespread attention - the prospect of bringing in a not-for-profit operator to run a simple and low-fee MPF scheme.
Authority chairwoman Anna Wu Hung-yuk said such an approach would provide an alternative to the private scheme providers that now run MPF funds.
Speaking as she announced the report's findings, Wu also said non-governmental organisations, social enterprises and trade unions would be allowed representation on fund management boards as non-executive directors to ensure their members' interests were protected.
"They could also negotiate with banks or fund companies for a lower management fees for their members," Wu said.
But unionists cast doubt on the viability of such an approach.
Confederation of Trade Unions chief executive Mung Siu-tat says the limited resources and manpower of NGOs mean the idea may be impractical.
"If we do not have enough resources, we may not be able to provide services at a low administrative cost," Mung said.
While he supports the idea of allowing union representatives to sit on fund management boards, he believes it will be difficult to achieve this on a voluntary basis. The authority should make it compulsory, he said.
Welfare sector lawmaker Peter Cheung Kwok-che was more positive, and said unions and non-profit groups might be able to recruit investment experts and bankers, many of whom retired young, to offer professional advice on a voluntary basis.
But even if the idea of asking NGOs doesn't add up, another possibility remains - the idea of a public-sector trustee.
"Why can't the government set up a trustee and do it itself?" asked Professor Chou Kee-lee, an MPF expert and associate head at the Hong Kong Institute of Education's Department of Asian and Policy Studies. He doubts whether unions and NGOs would be able to take on the task.
Britain could provide one model for a public-sector trustee system with the creation of its National Employment Savings Trust (NEST) Corporation, set up as a non-departmental public body, accountable to lawmakers.
It is responsible for running the NEST, which was designed to be a simple and low-cost saving scheme especially aimed at workers on low incomes.
The corporation is overseen by a chairman and a number of trustees and is able to operate with a management charge of just 0.3 per cent of a member's total fund each year; members also pay 1.8 per cent of the contributions they make.
Chou says that a public trustee should also offer a minimum return to its members.
"High administrative costs are something that has to be handled. But the return on MPF investments is, in my opinion, more important," he said. "There needs to be a minimum return rate. It does not need to be high. Many people are happy to have a return of 5 per cent each year."
Among the report's other key recommendation are a cap on fund fees, requiring the provision of basic low-fee funds, and relying more on electronic methods to settle payments and process data.
More than 30 million transactions are processed for the MPF scheme each year. And more than 65 per cent of these are paper-based or executed through cheques, which incur extra administrative costs.
Another problem that has long been identified by critics of the scheme is that employers have, until last month, chosen the MPF provider in whose funds their employees can invest. That limits worker choice and, critics say, and means there is little incentive for MPF providers to cut their prices.
Last month, the authority introduced a procedure allowing employees to transfer the half of the MPF fund they contributed - but not the half put in by their employer - to any MPF provider they choose. But employees can only make the switch once per year, and the process has been criticised for its complexity.
Mung said making the MPF fully transferable would be difficult unless the government set up its own trustee scheme.
"The MPF market is monopolised by several big providers. If the government does not set up a trustee, workers still have few options for MPF providers," he said. "Without a government trustee, a fully portable MPF scheme will just be a pseudo one. Workers still will not have many providers to choose from."
Kenrick Chung, director for MPF business development at Convoy Financial Services, agreed there should be more low-fee funds, but not that there should be a cap on fees.
He said the purpose of the MPF scheme was to provide people with a sum of money sufficient for their life after retirement. If the focus was only on keeping the administrative fees down and service quality was neglected, people might not get the sum they needed when they retired.
Bonnie Tse, CEO of AIA Pension and Trustee, said there should be an industrywide initiative to deliver end-to-end online and electronic payments and data processing to reduce cost.
"The MPFA's intention is to improve the efficiency of the administration process, thereby reducing operation costs to bring MPF fees down. The ultimate objective is to work for the benefit of members," she said.
"We agree with the MPFA's intention, and will be working with the MPFA to find ways to improve MPF administration and reduce overall costs with an aim to passing on savings to members."
When asked if she believes allowing employees to transfer all of their funds is feasible, she said that retirement systems usually took several decades to mature.
"Our MPF system is still at the relatively early stage and we just achieved an important milestone with the implementation of semi-portability," she said.
With the clock ticking, Hongkongers hope the government will find the ideal way to run the MPF scheme as soon as possible.
Number of members: About 2.5 million.
How it works: Employer and employee each contribute 5 per cent of the employee's salary. The maximum level of income for contribution purposes is HK$25,000 per month. Employees earning less than HK$6,500 do not have to make personal contributions.
What are the benefits?: Employees will normally be able to retrieve their accrued benefits at the age of 65, but can receive them earlier if they retire after the age of 60, permanently leave Hong Kong or become incapacitated.