China should clone Hong Kong’s pension model, says MPF Authority chairman
Hong Kong’s Mandatory Provident Fund (MPF) provides a role model for mainland China’s reform of the state pension system as the Chinese government replaces its cradle-to-grave welfare with market practices, said the MPF’s chairman.
“Employees in Hong Kong are clear how much money they will have after retirement, they know they will get it in cash and it won’t be gone,” said David Wong Yau-kar, chairman of the MPF Authority and delegate to the National People’s Congress, during an interview with the South China Morning Post in Beijing. “The working class is yet to be the real beneficiary of the pension system in China, as the return is inappropriately low in comparison to their contributions.”
China’s policymakers announced changes in 2015 to allow the National Council for Social Security Fund to invest part of the country’s 2 trillion yuan (US$300 billion) of funds held by retirement savings managers in equities, to boost yields for a pension system hobbled by low returns due to investment limitations on deposits and government bonds.
Despite some unsolved issues within the MPF system, the transparent and efficient nature of the scheme sets a good example for China’s pension system reform, Wong said.
The current pension system in China has been criticised as being opaque and confusing. Another frequent gripe according to Wong is that contributors are unable to identify linkages between their contributions and returns, which undermines trust in the entire system.
Acknowledging that Hong Kong’s MPF scheme is also beset with issues including high management fees and exclusion of voluntary contribution from tax deductibility, Wong believes it nevertheless provides a good model for mainland China, as the contributions under the MPF are held in an individual’s personal account.
Meanwhile, concerns over the sustainability of Chinese pension funds are mounting due to a widening gap between contributions and payouts in endowment insurance funds. An additional concern involves the mainland’s ageing demographic profile.
Hong Kong’s Mandatory Provident Fund last year generated an average return of 1.26 per cent, beating the 0.4 per cent gain in the benchmark Hang Seng Index and the near zero return on bank deposit rates, according to data from Thomson Reuters Lipper.
The MPF gain also represents a turnaround from a 3.1 per cent loss in 2015.
However, bigger returns were seen 2012, 2013 and 2014, which were 12.43 per cent, 8 per cent and 1.68 per cent respectively, according to Thomson Reuters.
China’s pension system has also been criticised for what some say are excessive contribution requirements.
For example, employers in Shenzhen are required to make monthly pension contributions equivalent to 14 per cent of an employee’s salary for those with a local hukou, and 13 per cent for those without a local household registration. Employees are required to contribute 8 per cent of their salary to the scheme every month.
The two components exceed 20 per cent of the base pay of an employee every month.
Still, individuals can experience difficulties in receiving pension payouts upon retirement because of restrictions on transferability and other issues.
Social insurance funds, including pension funds, are managed independently across each local government and may not be transferable between regions.
In a related example, in Shenzhen, retirees are only entitled to a local pension if they have made social contributions in the city for more than 15 years.