Jake's View

Offset smokescreen hides real folly of multiple MPF accounts

PUBLISHED : Sunday, 12 June, 2016, 12:32am
UPDATED : Sunday, 12 June, 2016, 10:20am

The regulator of Hong Kong’s MPF pension system has for the first time called for a rethink of the notorious mechanism that allows employers to use the money they put into worker’s retirement funds to cover their severance and long-service payments.

SCMP, June 9

Notorious? Let’s consider this. We start with an economic crunch in the 1970s during which people lost jobs they had long held and found themselves distressed.

This should not happen, said the government. We must help such people tide themselves over in bad times. It then legislated a mandatory severance payment of two thirds of the last monthly wage times the number of years of service.

Employers didn’t like it, of course, but let’s accept that there was a true social need and the severance payment addressed this need.

Now we come to the formation of the Mandatory Provident Fund, when it was decided that both employee and employer should pay a mandatory monthly pension contribution of five per cent of the employee’s wage.

Very well, said the employers, but if we do this then we no longer need the severance payment to address the termination needs of long service employees. Their MPF benefits will now cover these needs. This was agreed all round. Employers could set off their severance payments against their MPF contributions.

Where is the injustice in this? Why notorious?

I just don’t see it. The purpose of severance payments was to fulfil a specific social need. It was fulfilled and continues to be so.

Meanwhile, no employee gets less than his or her entitlement of severance pay and every employee still gets 100 per cent of the MPF benefits paid out on his or her account. Why then should the employer be obligated to make a duplicate severance payment? Help me, please. Understanding fails me.

But there is indeed a flaw in the system here and a much bigger one. It is that your employer picks the fund manager of your MPF funds. You do not have that choice.

This leads first of all to an administrative nightmare. You have as many different MPF accounts as you have employers over your working career. You can consolidate them but only once a year and only for your part of the contributions, not your employers’.

The fund management industry pulled the wool over the eyes of our bureaucrats in getting them to agree to this inefficiency. Employers, not being the beneficiaries, naturally do not care as much about how well these MPF funds perform but do value the financial relationship with the fund managers.

The result has been high MPF management fees and other charges, all of them a drain on the eventual benefits you receive. The result is also laziness in how the money is invested. It comes in every month in the same amount on the same day and the manger then tells his clerk, “Buy Hutch and where’s my coffee?”

But the employers’ lobby has always strongly resisted the obvious reform of creating one MPF account per person and allowing you to take it from one employer to another and make your own choice of manager.

The lobby’s excuse has been that you will make a rash choice with the result that your MPF funds will perform badly and your employer may then have to make some of it up to you in severance payments that would otherwise be covered by MPF benefits.

It’s outright nonsense. You would still have to choose your fund manager from the same government approved list that your employer has and no manager would stay long on that list if he gambled your money.

Why do employers continue to insist on it? Help me, please. Understanding fails me here, too, which brings me back to the question of whether this severance payment offset is notorious.

In my view, if employers continue to use the offset as an excuse to prevent the real reform of one unified MPF account per person with that person’s choice of manager then the least bad of two bad options may be to eliminate the offset.

But worse yet would be to eliminate it and still not make the reform. That would be truly notorious.