Jake's View

MPF severance benefits debate a diversion from the real scandal of high fees

PUBLISHED : Wednesday, 18 January, 2017, 4:06pm
UPDATED : Wednesday, 18 January, 2017, 11:04pm

Hong Kong’s biggest business chambers ramped up pressure on Chief Executive Leung Chun-ying on the eve of his swan song policy address, against abolishing the controversial practice of allowing employers to use the money they put into workers’ retirement funds to offset severance and long-service payments.

SCMP, January 18

I think employers actually have a reasonable case to argue. Win or lose, however, once again we have had our attention diverted from the real scandal in the Mandatory Provident Fund.

First the technicalities. Severance and long service benefits are payable to employees who have been made redundant. The payments are calculated as two thirds (the chief executive now proposes one half) of the last month’s wage times the number of years of service.

But employers are entitled to offset these redundancy payments against the accumulated contributions they have made to an employee’s MPF retirement fund, which is the cause of the current fracas.

It is no small amount. The offset from employers’ MPF contributions amounted to HK$3.35 billion in 2015, the latest year for which the full figures have been tabulated.

These payments were mandated more than 30 years ago as a primitive form of unemployment or retirement benefit and that’s all they were – a buffer against hard times for employees who had been laid off or retired.

Right from the start it was understood that they could be offset against any retirement benefits that the employer also paid and this understanding was formally incorporated in the structure of the MPF system when it was launched in 1999.

The real theft is the high fees that MPF managers charge on MPF accounts, an average of 1.57 per cent a year

The reasoning is perfectly straightforward. From 1999 onward the MPF became the retirement buffer. Why then should employers be asked to double up on retirement benefits they owe their workers?

I sympathise with this reasoning and I have yet to see it refuted by the labour lobbies that complain about it so loudly. They may not like it, they may even claim it is unjust, but they cannot deny that it was fully understood right from the beginning or that they had previously accepted this arrangement.

It is thus disingenuous of them now to claim that these payments are income supplements rather than retirement benefits and that they are being robbed of their due. It is not so and it never was.

But it is particularly regrettable that they focus on it so much because it obscures the real theft of retirement benefits, which the MPF commits against the Hong Kong’s working people.

The real theft is the high fees that MPF managers charge on MPF accounts, an average of 1.57 per cent a year when big private funds charge as little as 0.15 per cent.

The MPF Authority claims that this is entirely fair because of all the extra work to which MPF managers must go. These managers themselves, however, have publicly confessed that it is not so and that they are ripping us off.

They have declared so through the prices paid to buy out the MPF businesses of other managers, the latest being US$400 million for a 2.4 per cent share of the total, which values the entire MPF universe at HK$129 billion.

Take note here that these managers invest next to nothing in the business, only some desks, computers and rents for leased space, for which they are already handsomely compensated through the fees they collect.

What we, the Hong Kong public, have done, in short, is made them an enduring gift of an income stream that so hugely exceeds their requirements for return on capital that they value this unearned windfall at HK$129 billion.

And this in turn tells you that you can ignore the MPF Authority’s twaddle about it being a fair return. It’s twaddle. The fund managers themselves have told you so in the most direct manner possible.

Thus why are the labour lobbies so obsessed about the offset when this much greater theft is practised under their noses?

It is long past time that we give the choice of MPF fund manager to the employee beneficiaries rather than to their employers and thus let some real competition emerge in retirement investments.

You have to wonder, in fact, whether the labour lobbies even suspect that they are dupes of financiers who have diverted their attention from the real injustice of the MPF.