Milton Friedman, the late Nobel prize-winning economist, once explained that there are four ways to spend money. We take the most care, and get the best value, when we spend our own money on ourselves. When we spend our own money on other people - buying presents, for example - getting good value for money is not such a weighty consideration. And when we spend other people's money on ourselves - think of lunch on expenses - we tend to be even more extravagant. But it is when we come to the fourth way - spending other people's money on other people - that we really throw all care out of the window. After all, we don't bear the expense and we don't get to enjoy the fruits of the transaction, so we aren't bothered either by cost or by quality. Getting good value for money is no longer a consideration. The trouble is that it's Friedman's fourth way of spending money that best describes how Hong Kong's Mandatory Provident Fund scheme works. When our employers select MPF providers, they are spending other people's money - ours - on other people - us. As Friedman described costs have shot through the roof while quality has fallen through the floor. I'm not setting out here to duplicate the work of Jake van der Kamp. He has done an excellent job in these pages of lambasting the government for its failure to allow workers to pick their own MPF providers. But for those of us who feel their eyes begin to glaze over when the topic of pension provision comes up, a couple of charts might help to underline just how vitally important MPF reform really is to Hong Kong. The first chart below comes from pension consultancy Mercer and shows how inadequate the present arrangements are. Mercer points out that at a venerable 82 years, Hong Kong's life expectancy is among the highest in the world. What's more, it's only likely to get higher, with a large proportion of those at work today expected to live well into their 90s. That should be good news, but to pension geeks, it's a troubling prospect. Mercer assumes that a 21 year-old worker earning HK$30,000 starts out making his or her mandatory minimum MPF contribution and keeps up the payments throughout their career. Assuming 'typical' investment returns and operating expenses, our diligent worker will have accumulated almost HK$5 million by the time they retire aged 65. That might sound like a sizeable nest egg, but it is not nearly big enough. Assuming only modest living expenses in retirement, Mercer projects that our worker will have exhausted his MPF savings almost 10 years before reaching the age of average life expectancy. Now you can quibble with Mercer's assumptions. The investment return looks generous, for example. Since the scheme's introduction 10 years ago, MPF funds have made an annual rate of return of just 3.4 per cent. But however you look at it, if they are to rely on the MPF to fund their retirement, Hong Kong's workers will need a bigger pot of savings in their accounts when they retire. The easiest way to achieve this would be to raise the returns made by contributors. And the simplest way to do that would be to allow people to choose their own MPF providers. At the moment, employers choose the providers. And in line with Friedman's rule about spending other people's money, they care little about keeping fees low. As a result, the average annual management fee on MPF funds is around 2 per cent of assets under management. That compares poorly with other countries, where according to Mercer the average management fee on similar pension plans is just 0.8 per cent. That might sound like a small difference, but it has an enormous impact on returns. The second chart below shows the savings accumulated by a worker making average MPF returns after paying a 2 per cent fee, compared with what they would make if they paid fees of only 0.8 per cent. Because of the effect of compounding, the relatively small reduction in annual fees would add up to a 40 per cent bigger nest egg on retirement. At current rates of return, that would mean HK$1 million extra for each retiree, which would go a lot further towards funding their old age. The conclusion is simple: letting people choose their own MPF providers would force fund managers to compete by reducing fees. With less money going to the providers and more to contributors, investment returns would improve sharply, helping to plug Hong Kong's gaping pension deficit.