Hong Kong's compulsory retirement savings scheme is eyeing two important changes to the handling of contributions by members – one that would benefit asset managers and another they would prefer not to see.

The Mandatory Provident Funds Schemes Authority (MPFA) aims to raise the income level on which the contribution rate is applied (the ‘relevant income’), in a move that would result in a larger pool of pension assets to manage, and lower administration costs. 

However, the MPFA is also considering the idea of allowing individuals to use their retirement savings to buy a home. This would reduce the amount of money going into funds under the scheme.

CONTRIBUTIONS TO RISE

The Authority is reviewing the maximum and minimum relevant income levels for contributions, a process that takes place at least once every four years, the MPFA told AsianInvestor by email. It will make its proposal to the government in mid-2018, which is widely expected to include a higher contribution cap.

Employers and employees must each contribute 5% of an employee's monthly income to his/her MPF account, up to an income of HK$30,000 ($3,823), meaning the contribution cap is HK$1,500. Those figures could rise to HK$48,000 and HK$2,400 as a result of the latest review, MPFA said by email.

Pensions experts have welcomed the planned rise. It will mean employees have more savings for retirement and force MPF providers to lower fees, said Elaine Hwang, director of retirement at consultancy Willis Towers Watson (WTW) in Hong Kong.

One benefit of a growing pool of pension assets is that it means lower administrative costs, she told AsianInvestor. Total MPF assets stood at HK$843.5 billion as of December 2017. 

Higher contributions will increase the MPF asset pool, so the fund expense ratio (FER) – expressed as a percentage of asset size – will naturally fall, said Lau Ka-Shi, chief executive of Hong Kong-based pension and trust services provider BCT Group, told AsianInvestor.

The average FER of the 469 constituent funds under the MPF scheme is 1.56%, and the aim is to bring that below 1% in the coming years, Alice Law, chief operating officer at MPFA, said in February.

The Authority said it did not have an estimate for how asset growth would affect MPF products' FER.

HOME PURCHASE DEBATE

Meanwhile, MPFA touted the idea in November last year of allowing members to use their retirement funds to buy property, as is permitted under Singapore's equivalent scheme. MPFA chairman David Wong said in March that the Authority might propose this to the government in the first half of the year. If the change were to go ahead, it would effectively mean MPF managers have less money for investment.

But the proposal may in fact not come any time soon, as MPFA told AsianInvestor that it has more urgent tasks on its agenda at present.

The head of the Hong Kong Investment Funds Association, Sally Wong, said earlier this year that it opposed the proposal, arguing that pension savings should only be used for retirement purposes.

Hwang and Lau are more sanguine about the idea. Property can be regarded as a type of retirement protection, Hwang said.

It is a good concept, said Lau, but Hong Kong’s MPF system is still relatively young and the contribution rate is relatively low. The average asset size of MPF savers is now HK$200,000, which is not a lot compared to the amount of downpayment needed to buy property in Hong Kong, she added.

Hence Lau thinks there should be a cap on the amount that can be used for home purchase, to ensure some money is left over for retirement. In addition, she noted, there would need to be a monitoring mechanism in place to ensure MPF savings are indeed being used for buying a home, rather than for other purposes.