Mandatory Provident Fund (MPF)
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The MPF system is the second best in Asia after Singapore, based on adequacy, sustainability and integrity scores by Mercer. Photo: Jonathan Wong

Hong Kong’s MPF ranks second among Asia’s pension systems, behind Singapore’s CPF, as adequacy, sustainability scores rise

  • The city’s compulsory retirement scheme scored 64.7 out of 100, behind Singapore’s 74.1, in a ranking by consulting firm Mercer
  • Hong Kong’s government tax incentives in 2020 helped improve the MPF’s adequacy sub-index score
Hong Kong’s Mandatory Provident Fund (MPF) improved its overall adequacy, sustainability and integrity over the past 12 months, helping the city’s pension system maintain its ranking as the second best in Asia after Singapore. Iceland took the global crown again.

The city’s HK$965 billion (US$123 billion) compulsory retirement scheme scored 64.7 points out of a possible 100 in the annual Mercer CFA Institute’s Global Pension Index, an increase from 61.8 in 2021. Singapore’s provident fund improved its score to 74.1 from 70.7, while third-ranked Malaysia’s pension fund collected 63.1 versus 59.6 in 2021.

Iceland, Netherlands and Denmark topped the list of 44 global pension systems in this year’s ranking, repeating the top three from 2021, according to the report published by the consultancy on Tuesday.

“Hong Kong has come a long way from a much lower adequacy score in 2018 to a much higher level now,” said Janet Li, Asia wealth leader in Hong Kong at Mercer. There is still room for improvement, she said, pointing to the low minimum contribution level in the city versus other schemes in the region.

Office workers heading to work in Central, Hong Kong in September 2022. Photo: Jonathan Wong

The Global Pension Index, the 14th in the series, uses adequacy, sustainability and integrity sub-indices to measure each retirement income system against more than 50 indicators, according to Mercer. The weightings used are 40 per cent, 35 per cent and 25 per cent, respectively.

Hong Kong’s overall score this year is much higher than 56 in 2018 when the MPF was first included in the annual study. The biggest improvement since then has been in adequacy, where the sub-index climbed to 61.5 points from 39.4.

The government introduced an incentive in 2020, offering up to HK$60,000 in tax deduction per year per person for voluntary contributions or an annuity plan. The MPF’s total assets stood at HK$965 billion this year, according to industry researcher MPF Ratings, versus HK$813 billion four years ago.

Hong Kong pension fund loses record HK$258.9 billion this year

The current adequacy score is higher than the average 50.8 points in Asia, but still far behind the global average of 65.7, the report showed.

The MPF scheme requires employers and staff to each contribute the equivalent of 5 per cent of monthly salary to the retirement pot, subject to a combined cap of HK$3,000. This is much lower than 37 per cent for contributors up to 55 years old in Singapore, and 23 per cent allowed in Malaysia.

The improved scores and high rank in Asia “demonstrated that the MPF system is a solid retirement protection system despite being only halfway through the 40 years required for the system to mature,” said Cheng Yan-chee, managing director of the Mandatory Provident Fund Schemes Authority, which manages the scheme.

Experts generally agree that a pension scheme takes about 40 years to reach a size and scale that allows every member to enjoy the full benefits. A person who started their career in their 20s and retires in their 60s will have completed a full cycle of the scheme.

Voluntarily MPF contributions under the government tax deduction scheme amounted to HK4.72 billion in the two financial years to April, he said.

Singapore ranks at the top in Asia because its contribution level is the highest in Asia. The top three markets globally also have high contribution levels between 15.5 per cent and 18 per cent.

The Mercer study does not compare investment returns. Hong Kong’s MPF just reported a loss of HK$258.9 billion in the first nine months of the year, its worst performance for the period on record, as soaring global inflation and interest rates rattled markets.

That equates to an average per-person loss of HK$56,500 for the 4.6 million members of the MPF, according to data of research firm MPF Ratings.

Update MPF system to meet needs of Hong Kong’s ageing society

“The MPF is a long-term investment, and we have seen those years with the biggest drops in investment bounce back in the following years,” Li said.

The Hong Kong government can further improve the MPF by relaxing the investment restrictions, according to Sally Wong, chief executive of Hong Kong Investment Funds Association.

At present, MPF participants can only invest in stocks and bond products, but Wong said the government could consider allowing investments in more asset classes, such as high yield bonds, infrastructure projects, private equity or commodities.

“This will enable fund managers to identify additional return drivers for MPF investors and at the same time, offer benefits of diversification,” Wong said.

It is also important to promote more products to help retirees manage the money they receive from the MPF when they retire at age 65, Wong said.

The pension regulator can also consider allowing the MPF to invest part of the contributions into individual stocks through stockbrokers to enhance their returns, said Robert Lee Wai-wang, a lawmaker for the financial services sector and CEO of Grand Capital Holdings.

Hong Kong’s MPF picks 5 providers for e-platform launch next summer

“The introduction of eMPF, a central electronic platform to manage the MPF, in 2025 will cut down the administration costs of the MPF, which will also help the pension scheme to further improve,” Lee said.

Hong Kong can also consider further increase tax incentives for employees to make more contributions, which will encourage workers to save for retirement regularly, said Kenrick Chung, director of Ben. Excellence Consultancy, a Hong Kong-based insurance broker.