After facing pressure for decades to introduce a comprehensive pension system, Hong Kong’s MPF system is often deemed a failure.
The scale of the reform facing the much-maligned system is immense and in the decades ahead, higher monthly contributions and an alignment with mainland China’s system can be expected.
The city’s rapidly ageing population will mean the need for reform will get ever greater as the years go by, along with a constantly-rising desire for financial security.
While the Mandatory Provident Fund is 15 years old, pensions in the city can be traced back nearly a century.
And as we are celebrating Asian Investor’s 15th birthday, it seems appropriate to take a look at the development of pensions and investment activity in Hong Kong from a longer perspective.
The oldest pension evidence I have come across relates to the Swire Group. The retirement benefits for Swire expatriates – known as Eastern Staff – were originally codified in a Trust Deed dated 1919.
Another early peculiarity relates to Hongkong Electric, where staff members were given double credit when calculating retirement benefits in respect of years worked during the Japanese occupation.
Then in the mid-1950s the UK government wrote to various colonies suggesting that it would be a good idea to have some form of retirement benefit, provident fund or pension system for the local population – this is the background to Singapore’s CPF and Malaysia’s EPF.
However, the Hong Kong government responded strongly to London, saying that Hong Kong was struggling to house, feed and find employment for hundreds of thousands of refugees from China, the average age of the population was only 22, and there was zero interest in pensions amongst the local population.
In subsequent years up to 1987 the Hong Kong government gradually introduced some forms of social security on a means-tested basis – this is when Comprehensive Social Security Assistance (CSSA) began to be developed as well as our “fruit money” payments.
Then, in October 1987, governor David Wilson, in his inaugural address to the Legislative Council, announced that the government would introduce legislation for the prudential regulation of corporate defined benefit and defined contribution schemes as well as consider the introduction of a community-wide retirement protection system.
The (very sensible) Occupational Retirement Schemes Ordinance (Orso) came into effect in 1993. But the government’s first proposal to introduce an old-age pension scheme was attacked from two sides: the Hong Kong banks and insurance companies argued that any accumulation of assets must be managed by the private sector and not by the government, while China argued this was an attempt by governor Chris Patten to give away all of Hong Kong’s reserves before the handover.
Patten was very keen to leave a socially desirable legacy in Hong Kong (as Churchill had done in the UK). But faced with opposition from both China and Hong Kong’s financial institutions, he simply capitulated by accepting what is now the MPF.
It took several more years before the (not very sensible) MPF legislation finally commenced on December 1, 2000 – fifteen years ago and just a few months after AsianInvestor was born.
Of course, the civil servants in Hong Kong have long enjoyed generous monthly index-linked pensions, which in practice followed the UK pattern, although the Hong Kong civil servants' pension system was replaced by a souped-up MPF for new entrants after 2001.
So in addition to wishing AsianInvestor every success as it matures out of its adolescent years, I predict firstly that MPF is not the end of the story. We will graduate towards a monthly pension benefit (i.e. some form of universal pension) and away from a lump-sum payout regime.
Secondly, I predict that in 2047 Hong Kong will be required to adopt China’s pension system under which the government-mandated benefits are monthly pensions, with contributions of 8% and 20% from employees and employers, respectively.
At that stage Hong Kong would finally be following the World Bank’s five-pillar model for old-age financial security. But until we have a monthly pension system financed by much higher contributions, such security will remain inadequate for Hong Kong’s rapidly ageing population.
Stuart H. Leckie is founder of Stirling Finance in Hong Kong