Hong Kong’s MPF needs an overhaul to keep up with living costs even as it tops HK$1 trillion in value
- The MPF surpassed the HK$1 trillion (US$129 billion) milestone in July, becoming one of the world’s 20 biggest pension schemes
- MPF investment funds have given annualised returns of 3.9 per cent in the past two decades, far better than the inflation rate
Hong Kong’s Mandatory Provident Fund (MPF) has a long way to go in meeting the retirement plans of its 4.5 million members, even after it surpassed HK$1 trillion (US$129 billion) in July as one of the world’s 20 largest schemes.
The aspiration for post-retirement living standard in Hong Kong outstrips reality by 18 times, with pensioners aspiring to HK$3.97 million at retirement with HK$15,000 per month to spend, while the average account balance stood at a mere HK$225,000, according to a March survey by Manulife International of 1,000 of its members.
“With an ageing population, Hong Kong will have 450,000 people retiring in the next five years,” said Raymond Ng Ching-fat, vice-president and head of employee benefits at Manulife (International), the largest MPF provider in Hong Kong. “The government should offer similar policies as the 2019 tax incentives to encourage more voluntary contributions to the MPF.”
Hong Kong’s MPF “members are not saving enough for retirement,” said Peter Crewe, chief executive of AIA Hong Kong and Macau. “With improved medical care and increasing longevity, members relying solely on the monthly 10 per cent MPF mandatory contributions by both employers and employees may not be enough to achieve their desired retirement.”
The MPF’s shortcomings were highlighted by Wong Lap-wai. The construction worker, who turned 65 in September, said his MPF savings were not enough to see him through his twilight years.
“I contributed to the MPF for 20 years since its establishment and invested in the most aggressive funds, but I only got about HK$300,000,” said Wong. “It is definitely not going to be enough for my retirement. I have no choice but to continue to work.”
To be sure, Wong is not against the MPF as before the plan was introduced in 2000, he had no pension cover. Before the MPF was launched, only one-third of the local working population had some form of retirement saving scheme, compared with 85 per cent of the working population covered by the MPF now.
“It is not a bad idea to have a compulsory retirement scheme, but the MPF lacks flexibility as we can only get our money back at 65. The government should simplify the system,” he said.
The MPF requires employers and staff to each contribute the equivalent of 5 per cent of an employee’s monthly salary to the pension fund, capped at a combined HK$3,000. This is much lower than Singapore’s 37 per cent for people up to 55 years old, or the 23 per cent required in Malaysia.
Malaysia’s pension fund surpassed US$200 billion in assets in 2018 as the world’s seventh largest, while Singapore’s topped US$295 billion as Asia’s biggest.
The Hong Kong MPF invests its funds in the financial markets to generate returns for members. About 40 per cent of the pension’s assets are invested in stock funds, while 36 per cent are put into mixed asset funds. The remainder is invested into guaranteed funds, money market funds and bond funds, according to the Mandatory Provident Fund Schemes Authority (MPFA). Employees can choose to allocate their investment in different funds based on their appetite for risk and returns.
On average, each of the 4.5 million participants has assets of about HK$225,000 in their MPF as the fund hit HK$1 trillion in July. At the top end, there are some 62,900 members with over HK$1 million who voluntarily pay more into their MPF. After the government introduced tax incentives in April last year to encourage people to pay more into the MPF, another 42,000 people signed up.
“The MPF system has served to promote financial inclusion,” said David Wong Yau-kar, chairman of the MPFA in a written response to a query by the South China Morning Post. “For two decades, the MPFA has made continuing efforts to meet changing public expectations and the needs of the working population.”
He added that the MPFA has carried out a number of reforms, including allow employees to switch their provider for their contribution. In the latest move initiated in November, MPF managers were now allowed to invest in A shares listed in Shanghai and Shenzhen stock exchanges.
Roderick Koliloedjoer, HSBC’s head of commercial business development and management of pensions, welcomed the inclusion of the stock exchanges.
“We … advocate the idea to further relax MPF investment restrictions as a way to provide trustees with greater flexibility to diversify and innovate retirement products and solutions,” he said. Koliloedjoer said MPF members with greater risk tolerance can consider investing in equities as they outperformed major asset classes.
The 415 investment funds under the MPF have returned 3.9 per cent a year on average over the past two decades as of October, beating the local inflation rate of 1.8 per cent, according to MPFA data.
Funds that invested in Hong Kong-listed stocks, in what has become the world’s fourth-largest capital market, gave investors returns of 4.5 per cent on average over the past two decades, followed by mixed asset funds at 4 per cent and bond funds at 2.7 per cent. Money market funds were the worst performers, with returns of only 0.7 per cent for MPF members over the period.
As the MPF turns 20, Hong Kong should digitalise the pension scheme to cut down on paperwork and administrative fees, said Jonathan Watkin, executive chairman of Asia First Financial Intelligence, a research platform.
MPFA’s Wong said that the eMPF platform will be ready in 2022, which will bring down fees further that had already decreased by 31 per cent in recent years.
