What to do about the MPF?

New ideas raised at a seminar organised by AsianInvestor.
The asset management industry in Hong Kong debated a number of ideas on how to improve the Mandatory Provident Fund (MPF) system and the territoryÆs retirement regime at a seminar held Wednesday (July 26) that was sponsored by AsianInvestor magazine.

Mercer Human Resource Consulting presented arguments from its proposal for reviewing the MPF, based on the winning entry of a competition held earlier this year by AsianInvestor.

The majority of the audience agreed that the MPF is a viable starting point for meeting Hong KongÆs retirement needs (perhaps because so many of their jobs depend on the MPF), but comments revealed the current system has flaws and weaknesses.

The Hong Kong governmentÆs central policy unit has commissioned the University of Hong Kong to review retirement issues, a task led by Professor Nelson Chow who spoke at the event but declined to comment on the review.

ôMPF is a remarkable success, but there is certainly work needed to transition the existing system to become more efficient,ö says Phil Shirley, private equity M&A leader at Mercer. ôIt is here to stay, but for MPFÆs ongoing success, it needs to focus on realistic and practical changes.ö

Among the chief concerns surrounding the MPF voiced by delegates was looking after the retirement needs of lower income groups in Hong Kong and weighing up the benefits of proposed tax incentives to employees from this demographic.

ôThere is a concern on the benefits of MPF for lower income groups,ö says Chua Hoi-Wai, business director (policy advocacy and international networking) at the Hong Kong Council of Social Service. ôIncome disparity should be addressed and there needs to be more incentives for lower income groups to save.ö

Adds Mike Button, principal consultant at Watson Wyatt: ôLower income groups are the least able to save for retirement, and proposed tax incentives would definitely not help this demographic that doesnÆt really pay tax.ö

Several delegates also noted the lack of dialogue between regulators and industry consultants as an impediment to the growth of the retirement system.

ôThere needs to be more dialogue going forward and the question of where we take the retirement system from here will have to include input from banks, consultants and businesses,ö says Peter Wong, former chairman and executive committee member of the Hong Kong Retirement Schemes Association. ôNo one seems to be taking responsibility for retirement at the moment.ö

The most cutting indictment of the current MPF system was offered by David Webb, corporate governance activist and editor of Webb-site.com, who argues that the MPF should be abandoned unless regulators remove open platforms and start allowing individuals to choose the fund manager and their investment preference.

ôMPF should be scrapped as it doesnÆt achieve its objectives and gets rid of free choice,ö he says. ôThe problems of MPF will become more and more obvious unless there is more personal choice on fund selection and gatekeeper fees are removed.ö

Penny Pan Hing, consultant at Stirling Finance, highlighted the issue of MPFÆs investment performance. The Mandatory Provident Fund Schemes Authority (MPFA) has recently said overall MPF annualised returns over the past five years have been 6.99%. But the methodology was criticised as incomplete and inaccurate, and she suggested ways the MPFA can improve on providing data.

MercerÆs plan calls for increasing the current level of employer contribution to 8% from 5% over a six-year timeframe. It suggests a series of 1% employer contribution increases every two years, with employers given a two-year warning period ahead of each change to allow companies to hold back on salary increases. On top of this proposal, Mercer also recommends increasing the normal retirement age from 65 to 70 years of age, in line with global standards.

If implemented, Mercer anticipates the proposal will see dramatic rises in the level of income in both high- and mid-point investment plans, with the benefits for the latter investment funds growing from the current 35% of pre-retirement income to 60%.

In terms of retirement benefits to MPF members, Mercer believes lump sum payments do not provide security and that an income scheme would be far more beneficial to the system. The firm proposes a drawdown concept of accumulated mandatory contribution within maximum and minimum rates.

The advantages of a drawdown system, it claims, will provide employees with greater flexibility of income level and continued investment choices. It will also provide a catalyst for additional voluntary contributions from individuals.

On the investment side, Mercer was quick to point out that core funds should provide MPF members with more opportunities to exceed inflation over the longer term. In its opinion, improvements can be made in the form of growth funds and also through a more consistent platform for communicating risks and expected retirement income to employees.

Mercer also believes that default strategies, wherein the risk of individuals making inappropriate investment choices is minimised, would also assist the MPF scheme to achieve greater efficiencies going forward.

Many speakers were eager to point out that the MPFA should look closely at the World BankÆs five-pillar pension framework going forward. Others stressed that the regime need to focus more efforts on the mostly elderly Hong Kong citizens receiving assistance from the Comprehensive Social Security Assistance Scheme (CSSA).
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