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Enoch Yiu

The investment returns for the Mandatory Provident Fund may not have been good this year, but the pension regulator could show strong figures to prove the compulsory retirement scheme has a good debut year.

The MPF, which was launched a year agon on December 1, is the first compulsory retirement scheme in the SAR, and covers about two million workers.

Mandatory Provident Fund Schemes Authority (MPFA) chairman Charles Lee Yeh-kwong says the first year of the MPF was successful, as it had achieved a high compliance rate.

At the end of October, a total 1.74 million employees were enrolled in MPF schemes, representing 95 per cent of the Hong Kong workforce.

A further 301,000 self-employed people have joined MPF schemes, representing 91 per cent of self-employed people; 209,000 employers, or 88 per cent of the total, have set up MPF schemes for their staff.

Compliance is higher than the government predicted. Before the launch, the government estimated that first-year compliance would be only about 70 per cent.

'The compliance rate has been high, and teething problems have been resolved, thanks to efforts by employers, employees, the industry and the MPFA,' Mr Lee says.

'Taking all these factors into account, the MPF system in Hong Kong has had a successful start.'

He says the MPF is important as Hong Kong's population is ageing. By 2029, 20 per cent will be above 65 years, compared with the current level of 10 per cent.

Mr Lee says another good sign is that some employers and employees are willing to pay more than the compulsory contribution levels, to increase the amount of their pensions when they retire.

Under MPF, the employer and employee are each required to pay five per cent of the employee's salary to an MPF plan. Employees may top up their fund with voluntary contributions.

About HK$2 billion was contributed in September, bringing the total asset pool to HK$28.28 billion. Of that HK$2 billion, HK$180 million, or nine per cent, was contributed voluntarily, Mr Lee says.

The MPFA's goal for next year is to keep up enforcement measures, as some employers have delayed their payments this year, Mr Lee says.

In the first year, the MPFA received about 10,000 reports of default contributions from services providers, representing about five per cent of employers.

'In times of economic hardship, we expect the default contribution rate to grow modestly,' he says. 'We will use all measures to ensure employers comply with the legislation.'

By the middle of November, 55 employers had appeared in court, charged with failing to comply with the MPF ordinance. Those convicted were ordered to pay fines of between HK$2,000 and HK$36,000.

Mr Lee says the MPFA will work with service providers to increase transparency of the fee and charge schemes.

The association is also considering changes to the law to allow investment funds to invest 100 per cent of assets in index funds, in a bid to increase choice for investors, Mr Lee says.

Under current legislation, an MPF fund may not invest more than 10 per cent of its assets in any one stock.

As index funds such as the Hong Kong Tracker Fund are traded as a single stock, MPF funds are restricted in their investments.

The authority also intends to focus on education, to build a culture of long-term investment, Mr Lee adds.

Such measures are designed to restore the confidence of employers and employees who are dissatisfied with the first-year performance of MPF investment funds.

According to the Hong Kong Investment Fund Association, about 60 per cent of the 290 MPF investment funds have declared negative returns in the first 11 months of the year.

The funds were hit hard by the fall in the global stock markets. The Hang Seng Index alone has dropped 20 per cent in the year to November 30.

The MPF balanced funds that invested 80 per cent in equity and 20 per cent in bonds have had an average return of minus 18.76 per cent from the beginning of this year to November 30.

The balanced funds that invested 20 per cent in stock and 80 per cent in bonds had an average return of minus 4.92 per cent for the same period.

Balanced funds are the most popular fund choice, with 45 per cent of employees having chosen to put their MPF contribution into these funds.

Mr Lee says MPF should be viewed as a long-term investment, and people should not focus too much on the first year's investment returns.

'The Hong Kong community has wanted a retirement protection scheme for 30 years, and a social programme of this magnitude must start at some point of time,' he says.

'This year may not be the best time for equity investors, but MPF investment is for long-term protection. Members should look at it from a long-term perspective.'

Mr Lee says that as payments are made to MPF schemes every month, fund units could be bought relatively cheaply in falling markets.

This dollar-cost averaging effect will mitigate the impact of market fluctuations over the long0term, Mr Lee says.

The current low-inflation environment means employees should not worry too much about poor performance, compared with a high-inflation era, he says.

'When inflation was as high as 10 per cent in the 1980s, one would expect the investment returns would have to be as high as 10 to 20 per cent to beat the high inflation,' he says.

'But now we have a period of deflation, and even if returns are low, they may still beat returns in periods of inflationary pressure,' he says.

Graphic: MPF17gsp



Funds take long-term view to ride slump