Hong Kong pension scheme can be more than average

We all know how bad the Mandatory Provident Fund system is. I have no wish to minimise its inherent flaws and rip-offs such as high fees and the infamous offset mechanism. But maybe it’s not so bad, at least according to a new study by the research arm of the Legislative Council.

In the end, it’s whether your MPF makes money and whether the rate of returns is reasonable relative to other pension fund systems. Maybe other systems overseas make more sense in their designs and structures. But it turns out our returns, over a decade or longer, are just about average.

According to the study, net returns since the MPF began in 2000 amounted to HK$193 billion or 26 per cent of total assets, translating to a system-wide annualised return of 4 per cent after fees and charges over 17 years. During that time, average annual inflation was 1.8 per cent while Hong Kong dollar fixed deposit rates were in the range of 0.5 per cent to 0.9 per cent per cent per annum. Subtracting inflation, the average real return was roughly 2.2 per cent.

So, it’s better than putting your hard-earned savings in a bank account or under your mattress. But, you say, the mattress is a lousy benchmark. Well, how about we compare, roughly, a few long-term rates of returns of overseas pension funds. In Japan, the public sector pension investment fund had an annualised return of 2.99 per cent between 2001 and 2015.

A 2016 study commissioned by the Organisation for Economic Cooperation and Development on the worldwide pension markets makes for interesting reading. Over a 10-year period, the overall pension systems of only 11 out of 25 selected OECD countries earned an annualised average of a real rate of returns of 2 per cent or more.

Of course, these are all rough numbers. Still, comparatively, our MPF system is not beyond redemption, if only we get on with serious reform. Phase out the offset mechanism so bosses can’t raid your MPF account to pay for your severance and long service; and create a single account per MPF holder so employees may choose their own fund manager. This will help create real competition to keep fees low more effectively than the new default funds that cap fund fees at 0.75 per cent.

It’s too late for my generation but our millennials deserve a shot at a decent retirement.