Time to get rid of offsets by employers in Hong Kong’s MPF retirement fund
Government may be on the verge of moving to "end the practice of letting employers use their MPF contribution to offset severance and long service payments"
The Mandatory Provident Fund (MPF) is back in the news following press reports that next year’s Policy Address will end the practice of letting employers use their MPF contribution to offset severance and long service payments. While the Secretary of Labor Matthew Cheung says the government is still gathering views on this issue and has no position at this time, the matter has raised concerns.
Some businesses say this will hurt their interests. Labor representatives welcome the change, especially small and medium enterprises. But this is not a zero sum issue. Society will gain hugely if the practice is ended.
The “offsetting” arrangements were offered as a sweetener to induce business interests to support the MPF when it was introduced in 2000. I and other economists argued against the idea that employers contributed to the MPF because it was largely an optical illusion. Given time, it would all come out of adjustments in the wages paid to employees and prices charged to customers.
As it turned out, employers benefitted from “offsetting” in two ways. First, it allowed them to pass on some of the cost of severance payments and long service payments to employees. Second, employers were able to secure the privilege of selecting the investment funds on behalf of their employees. This incentivized banks and investments fund managers to provide preferential credit terms to employers rather than better investment returns to employees for the MPF funds they managed.
The result was to create an MPF scheme that served the interests of businesses that needed credit, rather than maximized the returns for pensioners. This was not what was envisioned in the model for such a scheme, the world’s first private retirement benefits scheme that was introduced in 1981 and has produced much better investment returns than the MPF.
Chilean workers contribute 10 per cent of their salaries to a government-supervised scheme, which invests the money in a variety of fixed income and equity securities at home and abroad.