What’s the point of a mandatory pension that offers no financial security?

Hongkongers cashing out their Mandatory Provident Fund last year and this year are likely to get less than they put in
At the very least, such forced savings should provide a minimum of financial security into old age – focusing on defining the benefits rather than the contributions

David Dodwell

Published: 5:30am, 9 Mar 2024

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One of the most cherished moments of my career was at the 1997 World Bank annual meeting in Hong Kong – three months after China resumed sovereignty. The world’s top fund managers were harassing the Hong Kong government to introduce a compulsory pension scheme and criticising the administration for failing to provide a retirement safety net.

During a presentation on the merits of Hong Kong joining the rich economies with compulsory government-orchestrated pensions, I pushed back from the floor: “Of course, as fund managers you would prefer we put our retirement savings in your hands. But Hong Kong people have an alternative to compulsory pensions: it’s called saving.”

There was a storm of applause, and some deep scowls from the podium. Hongkongers had a reputation for being tenacious savers. How else could so many taxi drivers have funded exits to Canada ahead of 1997? How else could so many ordinary working families have funded an overseas education for their children?

The conviction was deep that savings are more reliably nurtured by savers themselves, rather than entrusted to highly paid fund managers. Families believed fund managers had more interest in the fees that made them rich than in the financial security of Hong Kong families in old age.

I confess I also nurtured a prejudice. My father’s company pension evaporated when his factory went bankrupt during the Thatcher recession. My mother, who only started building a pension when, after raising five children, she became a part-time nurse, reached the compulsory retirement age of 60 with a grand monthly pension of less than HK$10 (US$1.30) a month.

Of course, the scepticism of people like myself was ignored. After intensive fund management industry lobbying, Hong Kong’s Mandatory Provident Fund (MPF) was launched in December 2000.

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Twenty three years on, I feel that most of my forebodings are well justified. A good friend opened her most recent MPF statement to discover her funds down by a third since last October. After consistent losses since 2020, her fund sits more than 40 per cent below her contributions. So much for the prospect of financial security in old age.

Go to the official MPF website, and you will be told the fund has returned 2.5 per cent a year on average. Last year, the return was 3.4 per cent. But with around 400 funds taking part in the scheme covering 4.7 million accounts, individual MPF account performances will vary.

For example, someone holding an MPF account with HSBC will have seen a 190 per cent gain if invested in its Asia-Pacific Equity Fund right from the start, but just 8 per cent with the Chinese Equity Fund, while those with its Guaranteed Fund will have lost 0.5 per cent.

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With the MPF’s average allocation of 56 per cent in the Hong Kong market (and just 14 per cent in other Asian markets), few MPF account holders are likely to have enjoyed the gains of HSBC’s Asia-Pacific Equity Fund.

The MPF has reported losses for eight years of its 23-year life – 30 per cent in 2008 was the worst, followed by 11 per cent in 2011, 9 per cent in 2018 and 15 per cent in 2022.

My greatest concern sits with those who retired last year and are retiring this year. They are likely to be cashing out pensions worth less than what they put in, with almost certainly no sense of financial security.

Back-of-the-envelope calculations suggest that anyone who joined MPF at its launch and has paid in the maximum HK$1,500 a month since would have made 276 contributions by the end of last year, amounting to HK$414,000.

Add the employer’s share (and ignore the pernicious deductions they can still make), and contributions will stand at HK$828,000. If both husband and wife have done the same, their joint contributions will amount to over HK$1.65 million.

If they had been smart or lucky enough to have those funds in HSBC’s Asia-Pacific Equity Fund, they would have about HK$4.8 million today. If they have just turned 65 and decided to take out their pensions, assuming a life expectancy of 86 years, they should have around HK$18,900 a month.

But if they were locked into HSBC’s Guaranteed Fund, they would have less than HK$7,000 a month – an alarmingly mean reward, and far short of what’s needed to keep them out of poverty.

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MPF will doubtless defend itself by pointing to the extraordinarily unfortunate events of the past few years, which have damaged the savings of many worldwide. There is some truth there: a recently released report found that pension fund values in the United Kingdom had plunged by 24 per cent in 2022 alone.

But for anyone approaching retirement, such excuses provide cold comfort. Pension funds worldwide should, at the very least, assure savers that such forced savings will provide a minimum of financial security into old age.

The old-fashioned “defined benefit” pension schemes promised an income for life set as a proportion of the salary at retirement. But with today’s “defined contribution” schemes, that promise has gone – and with it any sense of financial security in old age. No wonder so many in Hong Kong see no choice but to work far into what should be their retirement years.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades