Hong Kong’s retirement savings scheme, the Mandatory Provident Fund (MPF), may be deeply flawed, but fundamental reform would better than scrapping it, argued Richard Jackson, president of the Global Aging Institute, speaking at the Asia Pacific Pensions Forum this week.
Hong Kong chief secretary Carrie Lam, addressing the same event, agreed changes were needed, adding that one alternative under consideration – a universal flat-rate pension – might not be feasible in the city.
Last year the GAI conducted a study of pensions in Asia, which found a consistent pattern that they relied on under-developed social security and the involvement of extended family supporting elders.
However, “by an overwhelming majority” Asian families are rejecting the idea of family support for retirement, and there isn’t much agreement on what would replace it, noted Jackson.
In Hong Kong, 66% of retirees who responded to the GAI survey said they had received no pension from the MPF, but were relying on payouts from life insurance policies. “Hong Kong’s pension systems are inadequate,” noted Jackson.
But while some think the MPF system should be scrapped, he said that would be “a colossal mistake”. Savings-based pension systems provide a larger retirement income than universal benefits, he noted.
However, Hong Kong’s scheme is in need of reform, he said. For one thing, contributions are far too low; a combined employer/employee 10% contribution is not enough. There should also be a tax-based approach to cover those who fall outside the system.
Jackson said policy-makers would face problems in making changes, not least the lack of consensus on the balance between government and individual responsibility for retirement provision.
The contrast with Singapore was striking, he added. There, “everyone agrees that the individual is more crucial than the government [when it comes to retirement saving]”. Ultimately, however, Hongkongers’ lack of confidence in financial service providers is a major impediment to progress.
According to the GAI research, there is broad public support for pension reform in Hong Kong. Seven out of 10 say they would support higher taxes for measures to improve retirement incomes for the elderly and increased contributions to MPF.
Lam agreed the MPF must be improved. She suggested fees should be reduced and safeguards in place to ensure individual accounts remained intact and contributions were maintained over the long term.
She also commented on the debate as to whether Hong Kong should introduce a “universal benefit” system that provides a basic pension for everyone. The crucial question is whether Hong Kong can afford such a benefit, said Lam.
The government estimates that a universal pension would cost HK$2.295 trillion ($296 billion) over the next 50 years, she noted. To fund this, it would have to raise taxes, “which would harm Hong Kong’s competitiveness as a place to live and work”.
“What we and future governments have to consider, is whether measures for long-term retirement provision are sustainable,” said Lam. By current forecasts, she added, Hong Kong would face a fundamental imbalance in state receipts and expenditures by 2030.
Meanwhile, retirement provision is a pressing issue in Asia beyond Hong Kong. Among Asian countries, Singapore, Korea and Thailand would see the greatest falls in their working populations in the next 20 years, said Robert Palacios, global leader on pensions and social insurance at the World Bank in Washington, DC.
“The challenge [for funding contributory pensions] is how you increase the labour force participation rate; only by raising participation of older people and women,” he noted.
Palacios suggested the debate about pensions needed to be broader, to make it more meaningful for people as they go through various life stages. He proposed looking at phased withdrawal, taking into account life expectancy and investment returns, combined with some form of ‘longevity insurance’ for those who outlive their savings.
He put the lack of an annuity market in Hong Kong down to the market’s immaturity in terms of pension development, combined with the prohibitively high price of annuities.