Hong Kong's Mandatory Provident Fund (MPF) rules should be relaxed to encourage more voluntary savings into the system and build more assets, a top financial advisory body has proposed.

Although it remains unclear to what extent these recommendations will be acted upon, they could yet boost northward capital flows into mainland Chinese shares and shakeup Hong Kong's investment scene. 

Widely criticised for not enabling adequate contributions to fund a reasonable retirement and for its high fees, the city's MPF pension system has been in place for nearly two decades. Employees have to pay 5% of their monthly income into an MPF scheme and employers must match these contributions. The combined payments, though, are capped at HK$3,000 (US$382) per month.

While additional voluntary contributions to MPF schemes are allowed, they are not widely adopted. For the period July 1 to September 30 last year, only 17% of MPF contributions were voluntary, data from the report shows.

Investment restrictions need to be reviewed and re-aligned in light of current market conditions to attract voluntary contributions from sophisticated investors, the Financial Services Development Council (FSDC) said in a report released last week.

“The MPF Schemes Ordinance rules on permissible asset classes were set a long time ago [in 2000] and at present there is no periodic assessment of their continuing suitability,” FSDC said. 

Among its recommendations is that the scheme should consider adding Chinese stock exchanges as recognised exchanges and Hong Kong-domiciled funds authorised by the Securities and Futures Commission, while also allowing a higher asset allocation to Real Estate Investment Trusts (Reits).

As it stands now, there are 467 constituent funds for the 32 schemes registered under the Mandatory Provident Fund Schemes Authority (MPFA). They fall under six fund types: equity, bond, mixed assets (bond and equity) and guaranteed fund, plus two different types of money market fund. 

Total assets stood at HK$858 billion as of September 30.

The three types of equity funds allowed are single market, regional market or global market. They invest mainly in stocks listed on stock exchanges approved by the MPFA and at present do not include Chinese stock exchanges.

WELCOME STEP

FSDC's recommendations to improve the MPF system, which covers 73% of Hong Kong's working population, have been well-received by market participants.

The expansion of asset classes would allow MPF scheme members to have more investment choices and increase their incentive to pay more into the MPF system, Shirley Lam, chief executive of the Pension Schemes Association (PSA), told AsianInvestor.

FSDC’s suggestion to review and expand the permissible asset classes could help to promote the MPF market's development and strengthen Hong Kong’s role as an Asian investment fund hub, Lam added.

Given the high degree of integration between the Hong Kong and Chinese economies, the fact Chinese A-shares are presently excluded from the MPF scheme is striking. 

Half of the constituent companies in the Hang Seng index are now mainland companies. So why stop access to direct investing? Stewart Aldcroft, senior fund industry adviser at Citi in Hong Kong, told AsianInvestor.

It would also make sense to include more Reits, which tend to be more stable investments capable of giving a reasonable income, Aldcroft added.

Hong Kong's pension fund industry is booming but it is also seen lagging other markets when it comes to investing in alternatives more generally. That could yet hurt its performance in the long run.

For now, the PSA's Lam said it would be good to begin with the FSDC's three proposed adjustments – on A-shares, Hong Kong-domiciled funds and Reits – and then reviewing subsequently to see if there is demand from pension savers for riskier asset types like alternatives.

EARLY WITHDRAWAL?

Another proposed measure designed to increase voluntary MPF savings raised the issue of flexible withdrawals.

The Hong Kong government proposed in December to enhance the maximum annual limit for tax-deductible voluntary contributions (TVC), including deferred annuity premiums, to HK$60,000 per taxpayer from an originally proposed HK$36,000.

But these voluntary contributions are subject to the same withdrawal restrictions as mandatory contributions, meaning members would not be able to access those funds until retirement, the report noted. As a result, workers may not be sufficiently incentivised to increase their contributions, particularly those just starting their careers, it warned.

To address that, the FSDC recommends studying possible early-withdrawal mechanisms.