Hongkongers 'seriously' underestimate the benefits of the Mandatory Provident Fund, according to a survey commissioned by a top MPF provider. SCMP, October 27 What's this about underestimate? The only error of estimation we had here was one of overestimation by the people who conducted this survey, the Bank Consortium Trust Company, which is a collection of eight nobody banks trying to pretend that together they are a somebody bank. What this survey did was propose a hypothetical MPF account holder who takes a job when he turns 22, contributes HK$500 a month to his MPF plan for the first five years in his job and HK$1,000 a month thereafter, with matching employer contributions, until he blows out the candles on his 65th birthday. Now assume that throughout these 43 years our man's MPF savings enjoyed a 10 per cent annual investment return. How much money would he then collect at 65? And how much would it be if the annual return were 15 per cent? The answers, said the people who did this survey, is HK$15.1 million at 10 per cent annual return and HK$83 million at 15 per cent. In both cases most survey respondents guessed much lower figures. The first thing to take note of here is that our man isn't representative. If he contributes HK$1,000 a month to his MPF he must be making HK$20,000 a month but government figures say that median monthly earnings is only HK$10,000. What really puzzles me, however, is that if I could generate a steady 15 per cent annual return on investment for 43 years, year in year out, I wouldn't take a job as an MPF manager. I would run a hedge fund, advertise what I could do and, having proved that I could do it, be running zillions of dollars within 10 years. Move aside, Bill Gates. On what I would keep from that hedge fund I would be a trillionaire long before I retire. The best example I have ever seen of this utter nonsense of proposing consistently high annual investment returns was offered by Dr Doom, Marc Faber, in a book he published five years ago, Tomorrow's Gold. Let's say, says Marc, that in the year 1000 your distant ancestor put US$1 on deposit at an annual compound interest rate of 5 per cent. What would that US$1 be worth now? Your answer, he says, is US$1,546 followed by 18 zeros, which would come to a mere 50 million times the current value of world gross domestic product. Right, so we're not even going to try that exercise with a 15 per cent compound annual return. We're just going to laugh that someone could even suggest it for 43 straight years. Let's look at this another way. What really counts when you get your money back at 65 is what you can do with it. We have to take inflation into account. We have to think in terms of real return. If you get 15 per cent annual returns for a number of years but inflation is just as high, then in real terms you get nothing at all. We shall assume that a relatively risk-free real rate of return, an MPF-style return, is 3 per cent. That, for instance, is about the average over the last 50 years of the coupon on a 10-year US treasury note over the US urban inflation rate. For Hong Kong it's less, probably under 2 per cent, but we'll take 3. We haven't finished, however. We're talking of MPF funds and the fact is that your MPF manager rips you off on fees and charges. He can get away with this because, when the MPF was started, he fooled our government into refusing you the right to choose your manager. It's your employer who makes the choice and the boss has his banking lines to think of first. These MPF managers are very coy about letting the world know how they gouge you but it is generally over 2 per cent annually. Don't just look at their headline management fees. They have many other charges, some of which you never see, just as with pickpockets, you know. Now what made me think of pickpockets? We'll call it 2 per cent. Then we'll do the calculations again. I've set the model up on my spreadsheet. We'll look at the real inflation-adjusted return, which we'll call 3 per cent, credited and compounded monthly, and we'll deduct a 2 per cent management fee. We'll also base this on the government's median employee earnings figure of HK$10,000 a month. How much can our hypothetical MPF account holder now expect from the MPF on his 65th birthday after slaving away for 43 years? Your answer is HK$646,000 in money of today's spending power, of which HK$516,000 came from his wages plus employer contributions and only HK$130,000 from net investment returns over those 43 years. Thus, forget that talk of HK$83 million. It's pure MPF manager pipe dream. If it ever materialised he would rob you of it first and inflation would rob you of it when he was finished. But it will never materialise anyway. As an MPF account holder you are a captive and no fund manager has any interest in giving you any more than the equivalent of stale bread and water. What you get with the MPF is you get ripped off, that's what you get.