If you've recently joined the full-time workforce or switched jobs in the past five years brace yourself for some bad news. Today's retirement schemes don't compensate loyal employees anything like the old ones honoured by large corporations.
The finding is no surprise for retirement-planning experts, who have known for years the defined contribution schemes - such as those offered under the Mandatory Provident Fund (MPF) - don't measure up financially when compared to lump-sum payouts under the defined benefit schemes of yesteryear. But just how big a difference arises between the two schemes?
For illustration, compare the benefits of an employee who joined a company around the December 2000 launch of the MPF. Under the defined-benefit plans, which were common in Hong Kong before the 1997 financial crisis, employee entitlements could be calculated in the following way: assume the plan contributed one sixtieth of final salary for each year of service. An annual salary of $480,000 divided by 60, times five years of service, would equal an annual pension payout of $40,000 for life. If determined as a lump-sum payout, the employer would conservatively offer about $500,000.
If an employee opted for the MPF, the results would be very different. The employer's contribution plus minimum employee's contribution would provide $24,000 per year. If the investment returned 5 per cent per annum, less charges, then a lump sum of $140,000 would be available.
Employees had no choice between schemes as defined-benefit plans were phased out after the MPF was introduced. A few universities and big banks might still offer them, but in general they are closed to new employees. Their decline in popularity began about 1999, or about two years after the onset of the Asian financial crisis which forced corporations to get tough on employee benefits.
Today only 9.2 per cent of pension schemes exempted from the MPF are defined benefits. But even in their heyday, the lucrative schemes made up a small portion of the total and were largely the domain of multinationals, the financial industry and some government institutions. It is hard to make a direct spread-sheet comparison of the two schemes because a lot depends on the terms and conditions and the types of asset allocations chosen by the employee. Financial planners agree that joint contribution plans - such as the MPF - are less lucrative for the employee and a lot cheaper for the employer.
