The annual budget of Hong Kong chief executive CY Leung’s administration – announced by new financial secretary Paul Chan on Wednesday – carried some surprises, including a far-larger-than-expected surplus.
One thing it didn’t feature? Any concrete steps to get more people saving for retirement.
This marked the latest in a recurring set of missed opportunities by the administration of the special administrative region to tackle its fast-emerging demographic problem.
“We were obviously very interested to see what government proposals there were on offsets and further development on universal pensions, but the government just said it was reviewing these areas,” said Elaine Hwang, director of retirement for Hong Kong at consultancy Willis Towers Watson.
“In terms of the MPF [Mandatory Pension Fund scheme], we heard suggestions about increasing incentives on employee contributions, but it didn’t happen,” she told AsianInvestor.
Hong Kong’s population is ageing fast. A survey by Hong Kong’s Census and Statistics Department in 2015 estimated that 15% of the city’s 7.2 million populace was over 65 in 2014, but that this ratio would grow to 26% by 2029 and 32% by 2054.
Yet even as the number of elderly rises, the city has maintained a relatively basic pension system. The MPF scheme requires employed individuals to set aside up to HK$1,500 ($193) of their monthly incomes for pension savings, which is then matched by their employers and invested into designated pension fund operators.
Further contributions are allowed, but they’re voluntary in nature. Unlike in countries like the US or UK, no financial or tax incentives exist to encourage employees to save more for their retirement.
That’s a problem. A survey by independent financial advisory firm Convoy Financial on behalf of Hong Kong University in 2016 revealed that people wanted to retire at 60, yet 90% of respondents realised the MPF alone wasn’t enough to pay for their retirement costs, with the payments only covering 6.4 years of post-working life, on average.
And Hongkongers live a very long time. The average life expectancy of the territory’s population stood at 81.4 years for men and 87.3 years for women in 2015.
Education and incentives
These demographics are well understood. And yet, despite indicating that it is considering how best to get working people to save more, Hong Kong’s government once again opted not to include any sort of incentive to get people to put more aside than the bare minimum.
For Hwang, the decision to not do so is a missed opportunity.
“Some people feel that in Hong Kong we have a relatively small number of people paying tax, so perhaps this [tax incentives to save more for retirement] would have less impact on the general public," she said. "But it’s still worth considering giving tax advantages to encourage people to save."
Hong Kong may have a relatively small tax base, only accounting for about 37% of its 3.5 million working population, or 1.3 million people. But getting even a portion of this number of people to save more for retirement would help the government reduce the dangers of huge problems among the elderly poor in the coming decades.
One way to get people more engaged in this concept would be to boost public approval of MPFs and Orso, a voluntary retirement scheme that employers can use instead of MPF, and which covers about 15% of the city’s workforce.
As things stand, neither scheme is very popular, particularly the MPF scheme. It has been dogged by poor returns and complaints of overly high fees charged by fund providers. This led the government to tell providers they must introduce low-cost default funds that can charge no more than 0.75% of assets from April 1 this year—less than half the average 1.64% fee.
Still, says Hwang, more needs to be done.
“The public image is not good for these systems, and the government says it will do more to improve and educate employees to save more and manage their finances better for life after retirement,” she said. “I’d like to see more in terms of how they manage that.”
But there is some hope. Ayesha Lau, head of tax services for Hong Kong at KPMG, said the new budget made reference to the creation of a new tax policy unit within the Department of Finance. The idea is that this unit would reach across all government divisions to work out how taxes can be used to incentivise economic development.
The government’s willingness to conduct such procedures is already evident in its plan to help private equity funds. In his speech, Chan proposed exempting any tax on the profits of “onshore privately-offered open-ended fund companies”, in what seems a bid to stimulate private equity funds in the city.
The new policy unit would be well advised to consider similar measures around stimulating pension savings. “Offering a tax incentive [to encourage more pension savings] might be a bit of a cost now, but you save so much expenditure later on,” Lau told AsianInvestor. “And hopefully the tax unit will look at this. Previously there wasn’t a centralised body to do so.”
Doing so would be not only wise for the future of Hong Kong’s own finances. The territory is obsessed with maintaining its appeal, but that will fade if it must support mounting numbers of old, impoverished people who failed to save enough and need a state-supplied pension.