Hong Kong’s pension fund service providers benefit most, not the clients
As one of the few people still working in Hong Kong who was involved in putting together the Mandatory Provident Fund (MPF) scheme between 1998 and 2000, I would like to provide some colour to Jake van der Kamp’s excellent column (“High time for us to set up a simpler, less costly pension scheme”, August 10).
Back then, I ran Bank of Bermuda’s pension fund administration business (now part of HSBC), and was closely involved with the government and industry in the run-up to launch. The biggest issue we faced was not administration systems but distribution. How to reach the myriad of small businesses in the community that needed to sign up to MPF?
The solution was to create a business incentive for the insurance sector which had the sales forces to match the problem. Thus, the whole scheme was essentially privatised with a revenue basis to make it interesting. The expectation being that, over time, consolidation and asset growth would reduce the number of players and the costs of administration to the consumer.
This has not happened. Our market is simply too small for competitive pressures to work in the way then envisaged.
Seventeen years on, the original players have more than recouped their sizeable initial investments and garnered a very healthy return.
I received my own MPF statement last week (after the same number of contribution years) and it is quite clear that the main beneficiaries under MPF are the service providers and not the clients. Costs are simply too high and centralising administration, as van der Kamp suggests, is the correct solution. Impoverished pensioners will be a significant charge on the government of Hong Kong if we don’t act now to correct this problem.
I would add that this is not an issue unique to Hong Kong. At CFA Institute, we are passionately committed to ensuring that the financial services industry does a much better job of providing value for money to consumers across all product ranges.
The retirement scheme industry, in this regard, is particularly challenged as its responsibilities towards society are so obvious to everyone.
Paul H. Smith, president and CEO, CFA Institute