The Mandatory Provident Fund (MPF) enjoyed its best returns since 2009 last year, but could not beat the Hang Seng Index.
The 453 retirement funds, which cover the city's 2.5 million employees, returned on average 12.07 per cent, swinging into the black from an average loss of 8.42 per cent in 2011 and improving on a 7.18 per cent gain in 2010.
It was the best year since 2009, when the funds returned 25.88 per cent after a 26 per cent loss in crisis-stricken 2008, according to data provider Lipper.
Last year's performance was better than the dismal MPF returns of late and much higher than the returns offered by bank deposits. But it fell short of the city's key stock index, the Hang Seng, which rose 23 per cent.
The MPF, criticised for its high management fees and low returns, is a compulsory retirement scheme that requires employers and employees to pay 5 per cent of individual salaries - up to HK$1,250 a month from each side - into funds run by banks, insurance firms or fund companies.
Bosses choose the fund provider but employees can choose which of the provider's funds they want the money to be invested in and can switch the fund manager for their part of the contribution once a year.
Last year's best performers were equity funds, which returned 17.89 per cent - a turnaround from an average loss of 15.12 per cent in 2011.
These funds, which invest in stocks in markets ranging from Hong Kong to the US, Europe and elsewhere, are the second-most popular MPF vehicles, accounting for 35 per cent of all fund assets.
Mixed-asset funds - a combination of bonds and stocks and the most popular choice, representing almost half of all MPF assets - returned 11.73 per cent, after losing 7.28 per cent in 2011.
Bond funds returned 4.27 per cent, compared with a 2.75 per cent gain in 2011.
Joseph Tong Tang, executive director of Sun Hung Kai Financial, said MPFs' strong returns last year had much to do with the monetary easing policies initiated by governments around the world to keep interest rates low and provide ample liquidity to keep their economies humming.
"We have started to see a bull run from the fourth quarter of last year, which is likely to continue this year. Employees who switched to equity funds three months ago have seen good returns, and I think it is not too late for them to do so even now. The bull run is likely to continue for some time," Tong said.
Mark Konyn, chief executive of Cathay Conning Asset Management, said most MPF investors choose multi-asset funds and are benefiting from diversification as bonds performed well through the year and offset some of the equity losses earlier in the year. He said this year would continue to be volatile.
"There is wide expectation that volatility will increase as the US addresses the debt ceiling and budget issues. But China equities are continuing to recover from their lows," Konyn said.
Rex Auyeung Pak-kuen, Asia president of US pension and investment fund operator Principal Financial Group, agreed: "For 2013, I continue to take the view that it will be as volatile as 2012."