Hong Kong's pension system rests squarely on privately funded provision, so meeting the retirement needs of its population, particularly its most vulnerable, remains an onerous challenge, participants at a symposium held by the Mandatory Provident Fund Schemes Authority (MPFA) heard on Monday.
Based on the World Bank's widely cited "multi-pillar" policy framework for pension provision, countries should ideally offer a basic state-funded pension reinforced by corporate-run and earnings-linked pensions and a third pillar built from personal savings and specially designed financial products.
But Hong Kong is one of the very few developed economies without a government-funded first pillar, KP Luk, chairman of the Pension Schemes Association, said. So it is heavily reliant on private pension provision.
Luk is also head of Hong Kong defined-contribution business at fund manager Fidelity International.
Everyone looks at the MPF as the solution to retirement but it was never meant to be the only solution. It’s only one of the pillars, Bernard Chan, convenor of the non-official members of the executive council in Hong Kong, said.
A pension system propped up on three pillars would help to ensure people with different backgrounds have proper retirement arrangements.
However, the reality is that the Hong Kong government has rejected proposals to build a universal retirement scheme, citing the heavy financial burden. In addition, a third pillar is only now being built and is so far composed mainly of annuity plans offered by the Hong Kong Mortgage Corporation and insurance companies.
This means the MPF system plays a central role when it comes to providing for the future retirement needs of Hong Kong population. And yet each scheme member had only HK$197,000 ($25,110) accumulated in their accounts as of December 2017, on average, suggesting many Hong Kongers could live in poverty or depend on government subsidies in their old age.
So to ensure that MPF assets are fit for purpose, the MPFA has proposed to increase the maximum contribution made by MPF members. The government has also said it will introduce tax deductions on voluntary contributions made to MPFs.
To increase adequacy in the MPF system, the simple answer is to increase contributions. But in practice that can run against basic needs and wants; tax exemptions will not incentivise people to save more for their retirement if they are struggling to make ends meet, Luk said.
The funding challenge facing Hong Kong is made all the worse by the city's success. Hong Kong luckily, but also unfortunately, has one of the longest life expectancies in the world, which means Hong Kongers have a higher longevity risk, or risk of outliving their pension assets, Luk said.
A widely held perception is that the fees asset managers charge for managing MPF assets are too high. So to help drive down costs the government has said it will launch eMPF in 2022.
The MPF system is nearly half way to maturity since its launch in 2000. Now it needs a digital transformation to deliver simpler and user-centric services at relatively lower fees, Alice Law, managing director at the MPFA, said at the symposium.
The government last year announced the setting up of a working group to steer the development of the electronic infrastructure needed to automate the administration of MPF schemes.
It is too early to say what the impact of an eMPF will be on the fund expense ratio, which now stands at 1.53%, MPFA said in an emailed reply to AsianInvestor. But it is anticipated that an eMPF in the long term will reduce administrative costs for trustees and employers through open competition, bring in more efficient processes, improve the infrastructure, and simplify account management, making room for further fee reductions, the MPFA said.
That promises to improve the investment return for MPFs, although by global standards Hong Kong is by no means an outlier.
The real average annual investment rate of return after expenses for pension schemes over the last 10 years is 3.3% for in Hong Kong, while the average is between 3% and 4% globally, Pablo Antolin, principal economist and head of the private pensions unit at Organisation of Economic Co-operation and Development (OECD) told AsianInvestor on the sidelines of the event.
Story updated to reflect Alice Law's new job title.