Market Views: Is it enough to scrap the MPF offset?

On October 10, Hong Kong chief executive Carrie Lam announced that the Mandatory Provident Fund’s (MPF) controversial offsetting mechanism, under which employers can withdraw money from the contributions they had paid into employees' pension plans to offset the cost of long-service or severance payments, would finally come to an end. It will be removed by 2024 at the latest.

In 2017 alone, severance or long service claims totalled HK$4.3 billion ($548.5 million), an increase of 12% from the previous year, and accounted for 2% of the $25.4 billion growth in MPF assets over that period.

In its place, the solution put forth by the Hong Kong government involves employers contributing 1% of their employees’ salary into a designated savings account set aside for long service and severance payments, until it reaches 15% of the annual relevant income of all their employees. The government would also provide employers with a subsidy for 25 years worth up to $3.7 billion, with $2.2 billion of that provided in the first 12 years.

We asked the chairman of an MPF trustee, the former chief executive of a pensions industry association, the CEO of a pension products distributor and sponsor, and a pensions consultant  for their reaction to the proposed end to the offsetting mechanism, and what other reforms they’d like to see made to the MPF system.

The responses have been edited for clarity and brevity.

Steward Aldcroft, chairman (based in Hong Kong)
CitiTrust

Offsetting (within the MPF) has become a highly contentious issue in the last few years, as many employers seek to get support from the Hong Kong government to meet their obligations when staff leave. The government’s approach appears to be to throw as much money at the arrangement as possible to try to make it go away, and quieten the noisy employers, particularly those in the medium and smaller sectors.

What has not been given much coverage, to date, has been the fact that most of these employers, in respect of the contributions they have made towards their employees' MPF, have also received tax benefits in the form of lower corporate tax, as the contributions could be offset against their profits. I think that if, under the proposed offsetting arrangements, the government were to tell employers that they would need to pay back the corporate tax benefit received, they may change their attitude on this issue.

Regarding other changes I would like to see to the MPF, the most important [change] is to increase the minimum rate of contribution to levels that are more likely to enable proper provision of retirement benefits. This would mean increasing the current levels to at least 10% of salary. I think there might also be a good case to say that for those over the age of say 50, the contribution rate needs to be 15% or more. To encourage this, the government needs to allow employees' tax benefits against personal contributions up to the 15% level, without the current artificial monetary cut-off.

Heman Wong, former chief executive (Hong Kong)
Pension Schemes Association

The long service severance pay offset was [introduced] in 2000 in order to bring in the employers and kick started the MPF system. Taking into account the offset, employers pay only a marginal 1% of their revenue [on average]. Finally, the government has negotiated to [change] the arrangement by paying HK$29.3 billion over a 25-year period through a two-tier subsidy system.  The next incentive could be tax-exempt voluntary contributions. 

But the MPF system is far from perfect. Most have hardly gained any pension investment knowledge. Comparing the MPF with Australian, European, Canadian and American pensions, we are still primitive and our returns after fees are so much lower. Our contribution rate of 5% is also very low.       

HK needs a fair, efficient and well-run MPF system to maintain prosperity and productivity. The middle class is most squeezed as it pays the most tax but enjoys hardly any social benefits. As the middle class dwindles, business prospects for entrepreneurs will fall. 

Those who helped build the MPF system have argued that the middle class, being the better-off class, should help to pay for pension benefits for the poor. Let us not forget MPF is a tax. Allowing employers to pay contributions subject to a capped amount based on median income is a form of tax relief. The median is misleading if the dispersion is large and skewed towards the low-income group. Even those who saved through MPF for 18 years, if they continue to save the same way for the next 20 years, they will have far less than they need for retirement. The contribution cap should be doubled.

*This segment has been updated with an additional sentence.

Lau Ka-shi, chief executive (Hong Kong)
BCT Group

Rather than the “best approach”, it is more important to get consensus in the society. The government has been putting efforts in reaching the compromise and relevant stakeholders must be able to “give and take”. The latest proposal (with a longer subsidisation period, larger amount of subsidisation and keeping the statutory formula at 2/3rd of monthly wages) could better address the concerns of many small and medium enterprises.

We welcome the government’s increasing role to provide a higher subsidy in order to remove the MPF offsetting mechanism, and they must work with the industry to develop a cost-effective solution that can achieve administrative efficiency.

We would expect to see more policies implemented to enhance the adequacy of the MPF system so that they can further improve future retirees’ well-being. [These include] measures such as the upcoming revision on minimum and maximum relevant income, contribution rate, and the impending tax deduction for MPF voluntary contributions. Meanwhile, the launch of eMPF (a centralised platform for scheme administration) could lead to further fee deduction over time.

Janet Li, wealth business leader for Asia (Hong Kong)
Mercer

Removal of the severance payment [SP] and long service payment [LSP] offset from MPF will certainly “restore” the retirement protection objective of the MPF system.  For effective implementation, it would be important for the government to provide more support. Financially, for employers who have been provisioning their SP/LSP liabilities in their balance sheet, this would have an accounting impact to their SP/LSP liability and expense, which should be assessed.

On the other hand, employers who have not been doing so should review the requirements of accruing their SP/LSP liabilities under the accounting standards. In addition, the cost implication of the additional 1% contribution happening concurrently with the proposed increase in maximum relevant income for MPF contribution announced earlier this year, should be assessed as part of budgeting by all employers.

We would like to see more contributions going into the retirement savings system in order to enhance retirement protection and the replacement ratio.