Come December 1, the way Hong Kong's workers prepare for retirement will change forever. That is when the Mandatory Provident Fund scheme comes into effect, forcing employees to save for the future - and their bosses to help them do it. But the scheme's impact will not be restricted to employers and employees. MPF will have far-reaching effects on the fund-management industry, service providers, and even the general economy. MPF specialist Tony Ng believes it will influence next year's interest rates. 'Since the mandatory contribution is 100 per cent vested, in the eyes of the employer it is just like a part of the salary,' said Mr Ng, who works for financial adviser Allen Perkins, and is the author of a guide book on the MPF. 'An increase in expenses is therefore expected next year, hence the chance of a rate rise will diminish.' It also will bring change to the fund-management industry, according to Mark Konyn, director of Dresdner RCM Global Investors (Asia). The impact would not be immediate, but over time the MPF would create a shift in the balance of power between Hong Kong and international fund management firms, he said. The new regime demands a significant commitment of resources, making offshore international businesses less keen to invest in the MPF. The ultimate result, Mr Konyn believes, will be high levels of growth for SAR firms prepared to make the required investment. Meanwhile, international firms will be left behind and 'become increasingly marginalised as players in the marketplace'. 'What MPF does is tilt the balance in favour of domestic business,' he said. It also will change the way fund managers conduct their day-to-day business. Until now, their daily interaction would have been restricted to a handful of trustees - the new order forces fund managers to liaise with thousands of individuals. Suddenly, they have to find a way to provide communications and service to 5,000 employees in a scheme. Solutions are likely to take the form of call centres and Internet sites. Mr Konyn does not believe all of this will have much impact on the way money is actually managed, or how funds are allocated. But it will change the quality of service. 'Service will emerge as a competitive factor,' he said. 'Over time, the MPF has to raise the service standards.' And Hong Kong needs them raised. Up to now, the quality of administration for retirement schemes has been below international standards. That may be because day-to-day service lacked visibility. Under the MPF, it suddenly has become highly visible. 'The whole process of choosing a service provider has caused many institutions to reassess their current arrangements with fund managers,' Mr Konyn said. 'As a result, there has been more activity in the institutional arena than there has been in each of the past three years.' For service providers, the MPF has meant cut-throat competition in the battle for market share. Price wars and expensive advertising campaigns have cut deep into potential profits. Despite such drastic measures, many providers still failed to capture enough of the market to make running the MPF financially practical. 'Mergers or consolidation among them are expected in the future,' Mr Ng said. 'And competition is still great, even for those who did manage to gain significant market share.' By the middle of last month, most leading companies had joined the MPF. But a lot of small and medium-size firms still had to commit. Many of these employers resent the MPF and have no desire to join. Small-business bosses complain that they cannot afford to pay their staff what amounts to a 5 per cent pay rise. This attitude has unions worrying the MPF will be used as an excuse to lay off people or slash salaries to make up the extra 5 per cent. Fears also have been raised that companies with generous employee retirement schemes suddenly will reduce them to MPF levels. Media company Television Broadcasts (TVB) fanned those flames in January when it announced that it was reviewing its voluntary retirement scheme. TVB contributes 10 per cent. Under the MPF, employers are required to contribute 5 per cent of the eligible employee's relevant income to the MPF every month. The income ceiling is HK$20,000 so the maximum contribution is HK$1,000 a month. Employees also are required to chip in 5 per cent, unless they earn less than HK$4,000 a month. A key difference between the MPF and the Orso schemes which preceded it is that employees no longer get their pension money whenever they switch employers. The MPF scheme is portable, with accrued benefits following members from one company to the next. You cannot touch the money in the scheme until the day you retire. 'With Orso, when the employee leaves the company he gets to cash in a lump sum and can use it to buy property or whatever,' said Fidelity Investments associate director institutional business Fanny Kwan. 'When you leave the company you have some money in your pocket. With the MPF, the spirit is to encourage people to save for their old age.' The penalties for ignoring MPF requirements are severe. Failure to set up a plan is a criminal offence carrying penalties of up to HK$100,000 and six months in jail. For repeat offenders, it rises to HK$200,000 and a year behind bars. It looks as though a strong deterrent may be needed. For small-business owners, reluctance to join the scheme is not just about the money. They also resent the time consumed by MPF decision-making and paper work. This was discovered by Aetna MPF when it commissioned a research project on employer-employee attitudes towards retirement schemes. Of the 700 people interviewed, half were employers, and half employees. All were involved in small or medium-size businesses. They found owners of small businesses considered they were far too busy with the day-to-day business of running the firm to take on extra paper work. 'They said 'I don't want to do the MPF',' Aetna MPF managing director for MPF David Hatton said. 'But if I have to do it, I want someone I know and trust to make it as quick and painless as possible.'