Hong Kong’s compulsory savings scheme, the Mandatory Provident Fund (MPF), has long been criticised for doing too little to prepare MPF participants for retirement.
The current minimum and maximum income levels of HK$7,100 and HK$30,000 for mandatory MPF contributions translates into a monthly payment for Hong Kongers of between HK$355 and HK$1,500, given the designated 5% contribution rate. According to a December 2017 report by the Hong Kong Investment Funds Association (HKIFA), just 23% of Hong Kong employees believed they would have enough to provide for their retirement needs.
So it's no surprise that the Mandatory Provident Fund Schemes Authority (MPFA), the regulatory body overseeing the MPF scheme, is poised to review the income level requirements in July, with a proposal on the table to increase the minimum and maximum levels to HK$8,000 to HK$48,000.
In addition to raising the income level the government is proposing to introduce tax breaks on voluntary employee MPF contributions. Current regulations limit tax deductions to 5% of income up to HK$18,000 a year for mandatory MPF contributions only.
The offsetting mechanism, where employers can use their MPF contributions against long-service or severance payments to their employees, is also likely to be removed, though the government may yet subsidise a portion of these costs for employers for 10 years once the mechanism is shut down.
Despite the potential changes in the offing there is still room for further tweaking of the MPF formula by, say, allowing a wider range of investments or increasing the 5% contribution rate. So we asked industry participants, "What kind of reforms would you like to see for the MPF scheme?"
The responses by a pension funds company executive, two consultants, and a lawyer have been edited for clarity and brevity.
Lau Ka-shi, managing director and chief executive
I have been advocating [a relaxation of] the current investment restrictions to allow MPF constituent funds to invest in a wider universe of asset classes and regions to enhance risk diversifications and encourage product innovation in the MPF regime.
It is hard to say whether the proposed increase to HK$8,000 and HK$45,000 is enough. Yet, the increased cap can help members build a more substantial portfolio for retirement. No matter what the amount will be, it should be adjusted upwards progressively in two to three phases to ease the burden on employers, while in the long term the cap should be removed and the contribution rate increased ...
The offset arrangement does take away money from the retirement savings system. I understand that the government is determined to put forth a proposal that is acceptable to both employers and employees. However, with micro and small-to-medium-sized enterprises accounting for over 98% of the total business units in Hong Kong, we should be mindful to address the concerns of employers who will bear the financial costs after the subsidy period [ends]. It is a complicated issue and the government may need more time to arrive at a compromise ...
The industry is pleased, after many years of lobbying ... led by the Hong Kong Trustees’ Association, to see the government’s proposal on extending tax concessions to MPF voluntary contributions (TVC) and deferred annuity premiums (DAP) ... to encourage people to plan for and save towards their retirement. As the two products have different features (for example in terms of payment period and withdrawal requirements), instead of the proposed maximum tax deductible limit of HK$36,000 a year the authority can consider setting deductible amounts for MPF TVCs and DAPs separately. An industry proposal is to double up the amount to HK$72,000 with half designated for MPF VCs and the other half for DAPs.
Janet Li, wealth business leader for Asia
The investment scope of the MPF hasn't been looked at or expanded for a while and from an investment perspective more diversified investments can help with risk management ... [R]isk-adjusted returns will be better and so given the system has already been in place for 18 years now, it would be great if there are considerations into whether there will be scope to further expand the potential scope for MPF investments.
...[T]his will only happen after the government can complete the changes now proposed, including the changes in the contribution limit, the offsetting mechanism, as well as the eMPF (a centralised online MPF platform that could help bring down costs) ... There are quite a number of proposals that the MPFA has been putting out for the public to consider and to make enhancements too, so I think it's very hard to have so many balls in the air without dropping them.
For sure we welcome the proposals by the MPFA because I think it has been said for years that the amount of contributions into the MPF system is not sufficient for meeting retirement needs, so definitely we support the MPFA's change in increasing the limit to contributions so that it can help with the overall replacement ratios of individuals.
It's really hard to say if raising the limit does enough because it depends on how much each individual is saving for himself or herself ... [A]ccording to the World Bank Multi-Pillar System*... overall replacement ratios** need to make reference across the different pillars, like the first pillar, the second pillar which is MPF, and the third pillar which is private voluntary savings.
*In the report Social Protection Sector Strategy: From Safety Net to Springboard (2001), the World Bank envisaged publicly managed, unfunded plans as the first pillar of this system, with mandatory, privately funded plans making up the second pillar and voluntary, privately funded plans the third pillar.
** A person's gross income after retirement divided by their gross income before retirement.
Elvin Yu, principal
Everyone knows that the MPF, as of today's arrangement, doesn't save enough for the future retirement of most people ... [So] how do you get a higher retirement account balance? One way is raising the eligible MPF income ceiling so the 5% applies on [more than] just HK$30,000 ... That's one way.
The other way, which could be quite controversial ... but I think would be a good thing ... in the longer term, is to review the contribution rates. I don't want to compare with other pension systems elsewhere in the world, but 5% from the employers and 5% from employees, with a cap -- that is not enough.
The other thing also is to look at fees and returns because that is directly impacting the ultimate account balance. If the funds are performing well, then you save more with your same contribution amount. If the schemes are charging less, then net of returns, you know the rest. So fees and returns are also important elements to look at the broader topic of saving more for retirement. So it's important to have good governance on the investment managers to make sure they are doing a good job, not only aiming at generating better returns but also [in terms of] the risk control because at the end of the day this is retirement money.
... As we all know, the government, the regulators, the Legco, everyone, has their eyes on fees. Launching the Default Investment Strategy as a low fee option is a good move, but what else could drive fees down eventually?
So these are the questions that the MPFA needs to look at, and I'm sure they have different initiatives in the pipeline ... to address these.
Cynthia Chung, partner
[T]he MPF will need to actually have a better interface with the [Occupational Retirement Schemes Ordinance] scheme. At the moment people are using a lot of the Orso scheme because it has a lot more flexibility than the MPF. I'm not saying whether the MPF should be loosened to be more like the Orso, or the Orso should be tightened to be more like the MPF, but I think that the gap should be narrowed because you get people favouring the voluntary schemes, particularly the big employers, because the restrictions are so much lower, whereas the smaller employers will all go to the MPF, and it just doesn't balance out. If the idea is to encourage savings, I think this is something which the MFPA needs to think about so that there is no one scheme definitely preferable to the other.
I also think that there should be some tax incentive to encourage people to save more by making voluntary contributions to the MPF scheme. This could more effectively provide for future retirement.
For the offsetting mechanism, it's pretty clear that it would definitely go forward. I think the government -- at least this government -- is committed to do that. For people who get redundant or who's employment is being terminated it actually eats into their retirement fund.
From the employee perspective, it is of course better not to set off but because employers have been enjoying this offsetting for so many years, to all of a sudden take it away, the government would definitely need to phase it out. The latest proposal is to actually have the government subsidise some of this for a period of 10 years.
The government is devising a rather complicated scheme in terms of subsidising, so they would actually set up another savings account where the employer has to put some money in to save [for] the future liability. The smaller employers will be worst hit ... so they think that they should have more leeway and should have more support from the government.