There is one thing all pension industry experts agree on: Hong Kong needs to improve citizen education over investing and retirement if they are to save more.

Today, most citizens simply don’t understand the importance of saving over many years for retirement, and the impact compound interest can have on these amounts.

It’s also important to improve the public’s understanding about investment risk. The Mandatory Provident Fund (MPF) scheme suffered a 7.38% loss in the first 10 months of the year due to sell-offs in the global stock markets. In October alone, the 430 MPF investment funds tracked by Refinitiv Lipper lost an average of 5.63%, the worst monthly return since August 2015, the SCMP reported in November.

Workers with 20 or 30 years left until retirement will likely more than make up those losses in the years to come. But it could prove damaging for a person approaching retirement. They should have begun ‘de-risking’ their portfolios by investing into safer assets such as bond funds, or simply invest in target dated funds. Fail to do so and their retirement savings will have dropped a lot this year, leaving little time to recoup these losses.

However, it’s difficult to educate Hong Kong investors who are often sceptical of financial service providers.

According to the CFA Institute Global Trust Survey released in September, only 7% of Hong Kong respondents believe their advisers always put clients’ interests first, the lowest of all 12 surveyed markets. It also showed only one-third of Hong Kong retail investors completely trust the financial services sector.

Investor education and mending the MPF system would help Hong Kong, but ultimately the territory’s government needs to focus on reform.

The government should think about how the different pillars can complement each other and coordinate efforts across various government departments to give all citizens overall retirement protection, Janet Li, wealth business leader for Asia at Mercer and chairwoman of the Hong Kong Retirement Schemes Association, said.

Currently multiple bodies oversee retirement-related work. The Commission on Poverty and Elderly Commission help elderly living in poverty, the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF scheme, the Securities and Futures Commission focuses on investment products and education, and de facto central bank, the Hong Kong Monetary Authority has just introduced annuity plans for decumulation of pension assets.

Janet Li, Mercer

No organisation or body is coordinating between these agencies, to ensure their disparate efforts are enough to provide for all people in the society. If people agree that aging is such a big issue, society needs to come up with better solutions to improve the overall replacement ratio, Li said.

The MPF replacement ratio, or the percentage of a pensioner’s income compared to their earnings before retirement, is low. It’s estimated to be only 18% in 2050, assuming a real rate of return of 3% and real wage growth rate of 2.5%. If MPFA could get the real rate of return up to 5%, and with just a 1% growth rate in real wages, the replacement ratio would improve to 45%, according to a 2016 report released by the Global Aging Institute.

Reality could be a lot worse. The annualised return after fees since the inception of the MPF system in 2000 up to September 2018 was 4.1%, while inflation over the same period was 1.8% on average. In effect, the real rate of return was just 2.3%.

All numbers point to a frustrating situation. Building consensus isn’t easy, but the Hong Kong government should strengthen its resolve to fix a retirement problem that will only get more serious as time goes by.

Opinions may vary on exactly how to do so, but at the very least the government should aim to improve investor education and consolidate smaller funds, while the MPFA should be better empowered and tasked with improving fund performance.

Those changes won’t please everybody. But fail to pursue them, and Hong Kong’s entire society could end up suffering the consequences.

This story is adapted from a longer feature from the December 2018/January 2019 edition of AsianInvestor magazine.