With an ageing population and almost no state-funded pension provision, a lot is riding on Hong Kong’s corporate pension schemes.
And they are falling short.
The World Bank’s widely cited ‘multi-pillar’ policy framework for pension provision suggests that countries with healthy retirement systems are supported by three pillars.
The first is a basic state-funded pension, reinforced by a ‘second pillar’ of corporate-run and earnings-linked pensions, alongside a ‘third pillar’ built from personal savings and specially designed financial products.
Hong Kong effectively possesses just the second – the Mandatory Provident Fund (MPF) scheme and the Occupational Retirement Schemes Ordinance plans set up voluntarily by employers – only began in 2000 and 1993, respectively.
Its first pillar comprises only paltry payments to the poor, while there is no real third pillar. Individuals may save money, but it’s typically diverted to shorter term purposes, not retirement, Sally Wong, chief executive of the Hong Kong Investment Funds Association, told AsianInvestor.
Unlike China, Hong Kong doesn’t have a state-funded pay-as-you-go pension system, in which current workers’ pension contributions are used to pay for the benefits of current retirees and authorities make up for the shortfall in the system with fiscal reserves.
The territory’s MPF scheme, a publicly regulated, privately managed pension plan comprises the bulk of outstanding retirement savings.
But the numbers say it won’t be enough. The Mandatory Provident Fund Schemes Authority (MPFA) says each scheme member had an average of HK$197,000 ($25,110) in their accounts as of December 2017. That barely equals a year’s median monthly salary of HK$16,800 in Hong Kong.
Fidelity International suggests retirees have at least 12 times their annual salary saved when they retire, in order to maintain a similar living standard.
The government hasn’t been entirely inert since introducing the MPF scheme. It is poised to scrap a system that allows companies to offset pension payments against dismissal and long-service payments – the so-called offset mechanism – and offer higher tax incentives to encourage workers to save more for their retirement.
These steps should, if completed, help increase the pool of savings for retirement. But they face opposition or criticism from powerful stakeholders, highlighting the challenges in reforming the retirement system in Hong Kong.
Yet even these changes, if made, may not be enough. Some believe Hong Kong’s administration needs to go bigger and bolder.
“The government’s … final goal [should be] to guarantee that every citizen, not only workers, who are over 65 can have a regular income to meet basic living expenses. This is very important,” Chow Wing-sun, a retired social work professor at the University of Hong Kong, told AsianInvestor.
PILLAR SUPPORT NEEDED
Hong Kong’s population is rapidly aging. The proportion of elderly persons aged 65 and over is projected to rise markedly from 15% in 2014 to 36% in 2064. Birth rates are low while life expectancies are getting longer, estimated at 87 years for males and 92.5 years for females in 2064.
A pension system propped up on three pillars would help to ensure people with different backgrounds have proper retirement arrangements. Chow, who has advised the government on retirement issues since the 1980s, and a group of scholars put forward a blueprint for a universal retirement scheme in Hong Kong. But the government rejected it, citing the heavy financial burden.
The South China Morning Post (SCMP) reported in 2015 that such a scheme would cost the government up to HK$7 billion a year, and would add about 2.3% to the government’s recurrent expenditure, to give every Hongkonger over the age of 70 just HK$3,000 a month.
The first pillar consists of government subsidies like the Comprehensive Social Security Assistance and Old Age Living Allowance. However, nearly one in three elderly in Hong Kong live in poverty even after taking into consideration those cash benefits, according to the 2017 Hong Kong Poverty Situation Report.
Any society whose contributory pension system is still maturing also needs a robust, tax-financed, non-contributory “social pension” to ensure a basic level of old-age income support. The benefits of such pensions in Hong Kong are too meager and need to be enhanced, Richard Jackson, US-based president of the Global Aging Institute, told AsianInvestor.
A third pillar is only now being built and is so far composed of a bit of everything, but its development is still in a very preliminary stage.
This story is adapted from a longer feature in the Dcember 2018/January 2019 edition of AsianInvestor magazine.