Hong Kong employers accused of restricting pension options

Hong Kong employers who are concerned about extra payment liabilities are only offering their employees low risk funds.

Some Hong Kong employers are choosing pension investment plans that include only low risk funds because of the fear that losses made by higher risk funds could increase their fund contribution obligation under the law, according to Lee Cheuk-yan, legislator and general secretary of the Hong Kong Confederation of Trade Unions.

Lee tells FinanceAsia his electoral office has been receiving complaints about employers exploiting the loophole by signing up with pension providers who offer investment plans that include only low risk funds, effectively leaving their employees no options but to invest in those funds.

From 1 December, both employers and employees will have to contribute 5% of the employees' salary for retirement under the city's Mandatory Provident Fund scheme. The accumulated amount, other than for retirement, can also be used to offset the employees' severance payment or long service entitlements. Therein lies the problem.

While the level of money for retirement depends on investment returns, the severance payment or long service entitlements is a fixed sum calculated by a formula. If the money from pension investments falls short of, say, the long service entitlements upon an employee leaving rather than retiring, then employers will have to pay the difference. For instance, if the long service entitlements are worth HK$300,000, but the pension accounts only have HK$250,000 because of unfavourable markets, employers will be required to pay an extra HK$50,000 to top it up.


Lee says the current situation is creating conflicts between employers and employees where employers concerned about the potential liabilities may choose MPF providers offering plans that only include low risk funds, such as bond funds, money market funds and capital preservation funds, which, investment experts say, may not be able to achieve returns higher than inflation.

"I have talked to the MPFA (Mandatory Provident Fund Authority, the scheme's regulator) this morning and they said that it's not possible for the employers to structure the MPF plan in a way that limits the choice of their employees. But the fact is we have received complaints that employers, together with certain providers, are giving their employees the choice of only low risk funds," Lee says.

Lee is right. It is indeed possible for a plan to offer only low risk funds. While the MPF Ordinance requires trustees to offer a plan of five funds, which consists at least one capital preservation fund, there is no requirement for high-risk funds, such as equities funds and balanced funds, to be included.


The whole kafuffle, however, could be a miscalculation on the employer's part. For although they are liable to foot the difference between the long service entitlements and the pension amount in the event of negative returns by high-risk funds, the employers could also benefit from it. According to a senior officer of community relations in the MPFA, if the pension amount is higher than the value of entitlements, then the employer can retain the extra money to the point where it equals the contribution they have made for their employees.

But Anthony Griffiths of the Hong Kong Retirement Schemes Association says this simplistic example could be misleading. “Employers could only ‘profit’ from high risk products producing high returns if they had a voluntary part of the MPF scheme that vested over a very long period, say in excess of 10 years,” he writes to PensionsAsia. “It would be easy for a reader, uninformed about MPF, to infer that the point made applies to the mandatory part of an MPF scheme. That is not the case since the mandatory part vests wholly in the employee and any excess balance above the employer's claim to offset severance or long service payments belongs to the employee,” he writes.