Charles Brady, executive chairman at Anglo-American money manager Amvescap, says Hong Kong's Mandatory Provident Fund scheme may be the best framework in the world, and that the rest of the region should emulate it. "MPF is on the leading edge by linking a worker's pension to his ability to move while remaining invested in capital markets it's the right start."
He made his remarks to an audience of financial professionals at a lunch in Hong Kong hosted by the American Chamber of Commerce. Invesco, which is the US-based fund management arm of Amvescap, offers an MPF master trust scheme.
He believes the next step for Hong Kong is to work on investor education, which is a long-term project. It took the United States decades to build its pension assets, which ultimately resulted in the world's deepest capital market. In 1974 when the US introduced the Employee's Retirement Income Securities Act (Erisa), which also included tax incentives for savings under the 401(k) rule, there was a total of $430 billion in pension assets, another $36 billion in mutual funds and only 12% of Americans owned stocks. As of 2000, after a long slow start, US numbers have exploded: there is now $7.2 trillion in pension assets, another $8 trillion in mutual funds and 48% of the population own stocks.
Audience member Stuart Leckie of Hewitt Associates suggested MPF was not an ideal model, because it pays out in a lump sum, not an annuity. Brady replied that his point is that the framework in Hong Kong is good, but still needs to evolve. For example, he notes that in the US investors often have options including both lump sums or actuarial payouts, and that Hong Kong needs to develop these in line with tax incentives. He compared Hong Kong favourably with many European systems where companies' pension funds are grossly underfunded because money has been channelled to corporate balance sheets instead, leaving workers high and dry when companies fail.
Some audience members were also sceptical to the degree that MPF could be a model for other Asian governments. Douglas Henck of Sun Life Financial of Canada noted that when Hong Kong dreamed up MPF, it had the advantage of having current corporate pension obligations already funded. In China, however, one of the biggest challenges to the entire cycle of reform is the inability of most companies to meet any pension obligations.
Brady, who is not an expert on Chinese pension reform but is travelling this week to advise Beijing bureaucrats, did not have a ready response. He notes that, like in the US, these reforms will take place over a 20-30 year horizon, and that immediate problems won't be solved overnight.
The main challenge for Brady is that once a government establishes a sound framework, it must promote investor education. Americans 25 years ago were primarily savers, with little knowledge of defined contribution schemes, few investment options and a propensity to park money in conservative vehicles. But once people start to become genuine investors, the growth of pension systems creates changes throughout the economy: from the promotion of consulting and human resources to technology for achieving scale to changing legal and governmental structures.
It is incumbent upon most of the world to enact these changes, Brady argues. He states that just three countries, the US, the United Kingdom and Japan, with only 8% of the world's population, have 81% of the world's pension assets. As a result they have the world's most liquid capital markets. Population pressures are forcing other countries to introduce similar pension efforts: Brady says by 2050 China will have 330 million people over the age of 65 more than the total number of elderly in the world today.