The ultimate mandate

Hong KongÆs bureaucrats ponder the future of their own pensions.

Governments, whether of corrupt police states or by-the-book democracies, are adept at not only deciding how their citizens should behave but also at exempting themselves from these same rules. Hong Kong is no exception. Most of the town is caught up in MPF fever. The Mandatory Provident Fund rules kick in on December 31, when every citizen, regardless of their wealth, profession or employment status, will have to enroll. MPF may be good for you, but for service providers and plan sponsors alike, the next few months will be grueling.

PA mag: ultimate mandateUnless you are a civil servant, that is. The bureaucrats are conveniently exempt from MPF legislation. No panicky last-minute mandate to investment managers for them; no confusing education seminars; no hassle.

But Hong KongÆs civil service pension schemes are going to change. With the rest of the Special Administration RegionÆs citizens on track for MPF, the civil servants will look awfully out of sync.

Nancy Hui, principle assistant secretary for special projects at the Civil Service Bureau of Hong Kong, is on the hot seat. It is her job to determine whether the organization should make the switch to a provident fund scheme. (In Hong Kong, references to a provident fund are usually synonymous with defined contribution, while a retirement scheme means defined benefit.) The outcome will impact the BureauÆs 180,000 permanent staff.

She explains that the reviewÆs origins predate MPF. A major problem, hardly unique to Hong KongÆs bureaucrats, is the longer people stay, the less productive and innovative they become. Beyond a certain age, civil servants never leave for the private sector. They ploddingly put in their time and grow moss. In March last year, the Tung administration issued a paper on reforming the civil service and giving it a shot of vitality.

One focus of the so-called civil service reform consultative document was pensions. Currently the bureau operates under two retirement schemes, one that is quite old and another introduced in 1987. Both are defined benefit plans that pay out on a regular basis, as opposed to a lump sum. For young civil servants, neither plan looms large in their motivation. ôBut for people over the age of 40, the pension plan is quite an anchor,ö she says.

A result of the consultative document was for the civil service to commission its own study in January of this year. The idea: find out how to create better incentives for civil servants, without creating chaos and angering staff. ôWe donÆt want to rock the boat,ö Hui says. As part of this, the Bureau signed on Watson Wyatt to find a benchmark.

Sharon Bronzwaer, principal consulting actuary at the consultancy, says the firmÆs mandate this year has been to compare and contrast the pension schemes at civil services across the globe, from Asian markets such as MalaysiaÆs to those in the United States and United Kingdom. Watson Wyatt is also looking at private sector pension schemes iná Hong Kong. ôWeÆre in the discovery phase,ö she says.

The Bureau faces a number of central questions. Will it adopt a provident fund scheme? Will it do so under MPF guidelines, or draw up its own? What will it do with its two existing defined benefit programs? Will employees receive payments in lump sums or as a stipend? Should employees contribute, the government contribute, or both?

Watson Wyatt is also to give the Bureau a costing of its existing pension scheme. ôWe havenÆt received any definite figures yet,ö Hui says. Bronzwaer wouldnÆt comment on the BureauÆs current liabilities, but Hui notes the retirement plans operate on a pay-as-you-go basis. Benefits are charged to a pension reserve based on the governmentÆs annual contributions that currently holds HK$7-8 billion (around $1 billion). If the Bureau switches to a provident fund scheme, payments would have to come not from the government but from employees and possibly the Bureau.

Watson Wyatt is starting to also analyze possible designs for a provident fund plan. It is now grappling with questions such as the investment options that can be made available, the percentage of salaries employees can contribute to a scheme and so on. At the same time it must weigh the pros and cons of sticking with a defined benefit regime. ôProvident fund and retirement fund schemes are different in terms of who gets the best value, who takes on the investment risk, how benefits are accrued and how you handle special benefits, such as for a disability,ö Bronzwaer notes.

The question that Watson Wyatt can not answer is how the bureaucrats will react to all this, particularly those in the middle stages of their career. Once their final report is submitted in the coming weeks, the Bureau will provide a comment period for employee unions, the government and the Legislative Council (Legco), which must ultimately pass new legislation to change the BureauÆs pension plan. ôOur policy is for pay conditions for civil servants to equal best practice in the private sector,ö Hui explains. That will be the guiding principle for pensions as well, particularly in terms of competing for new recruits. Once a consensus is reached on Watson WyattÆs recommendations, the Bureau will return to the consultancy for fine-tuning and implementation.

Although Hui and Bronzwaer caution that a provident fund scheme is not a foregone conclusion, the requirements they have point in this direction. If the idea is to prevent ageing bureaucrats from avoiding the private sector, then portability of benefits will be important û and this is better achieved under MPF or another defined contribution scheme. And if the Bureau seeks a benchmark, then the advent of MPF will shift the emphasis, in Hong Kong at least, from defined benefit to defined contribution. And then thereÆs the original point about political pressure û how long can the civil service isolate itself from what it has required the rest of Hong Kong to do?

What about service providers? The Bureau offers a potentially mouth-watering opportunity for fund managers, insurance companies and trusts. Once the race for MPFÆs deadline is over, next year will see little new business from Hong Kong. Even for private companies maintaining their ORSO schemes, MPF is a convenient excuse to review service providers. What new business is left next year? Nothing û except maybe the Bureau.

Hui says as long as no decision on switching to a provident fund has been made, the Bureau isnÆt asking this question. Service providers in Hong Kong say a mandate from the government carries a special weighting in terms of prestige, and that politically the government would find it impossible to pick only one. ôTheyÆll probably adopt five MPF service providers and pick one as a default if the employees donÆt make a choice,ö says Paul Smith, senior vice-president and head of global fund services for Asia at Bank of Bermuda, a master trust.

Hui says the Bureau could also hire its own fund managers. ôWe need outside help either way, either getting third-party fund managers or hiring managers as civil servants,ö she says. That decision will be a mix of whatÆs efficient and cost-effective and what the government and Legco want.

In the meantime, the Bureau does have to establish an MPF plan for its 29,000 contract staff lacking pensions. In this, the Bureau is just like any other Hong Kong employer. It needs to follow due diligence of service providers, discuss terms of agreement and consult with the relevant staff. Providers are being judged on their cost, the number of choices they provide, their reporting and how readily staff can switch funds. Hui believes a selection will be made by October.

This may prove a useful warm-up to a full-blown provident fund scheme, but Hui says service providers wonÆt gain a leg-up with the MPF mandate. The Bureau has strict guidelines and any provident fund service providers would be selected in an open tender exercise.

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