When the Mandatory Provident Fund was set up more than eight years ago, only a third of Hong Kong workers had financial protection for their retirement. Now nearly all are using the MPF to save for their old age. With a rapidly ageing population, that is reassuring. But worries raised from the beginning remain, such as whether contributions are high enough to fund people's retirement as life spans increase, and whether exorbitant management fees will seriously erode their savings.
Inadequacies in the scheme have been cruelly exposed by the stock-market slump, with MPF investments having lost 10 per cent this year on top of a 31.5 per cent loss last year. It will take a sustained market recovery to make up these losses. Even then, someone facing retirement within 10 or 15 years could not afford another hit from a crash in the markets.
It is against this background that the government is suggesting that some of the retirement savings of 2 million workers could be invested in government bonds when they are issued for the first time this year. A government source says contributors with a low risk appetite may find the bonds an attractive alternative. Granted, they would offer a safe return, but this still leaves key problems with the scheme unresolved.
A review is needed to ensure that it can deliver the hoped-for social dividend and security in old age. The contributions formula of 5 per cent each from employer and employee, capped at HK$2,000 per month, are insufficient to guarantee a decent retirement sum for two reasons. First, as a defined contributions scheme, it does not promise account holders fixed benefits. Second, as things stand, a lot of the money is ploughed into shares.
Despite their superior performance in the long term, returns on shares can be erratic, making retirement planning more difficult. The government's move to provide MPF account holders with a means to invest in bonds is welcome, but with most contributions still likely to be invested in shares, the danger of fluctuating returns - a key weakness of the scheme - remains.
So do the problems with the performance of MPF funds. Tax deductions have been suggested to encourage account holders to contribute more, but this would be meaningless to more than half the working population, since they do not pay salaries tax. It would increase the retirement payouts of the better paid and remove some of the incentive to risk too much for too long in the stock market. But a review of the scheme should lead to an equitable way of encouraging higher contributions.