As Hong Kong’s Mandatory Provident Fund system enters its third decade this month, it’s timely to look back at the progress – or lack thereof – of the scheme. From the time it was launched on December 1, 2000 after decades of planning, the system was beset with controversy given its design and features as a privately-managed scheme.
Central to this are the low contribution levels and high fees and charges, such that the HK$225,000 (US$28,846) average account balance now is grossly inadequate to fund a member in retirement in the face of greater life expectancy in one of the world’s costliest cities.
Hong Kong recently surpassed Japan in the league tables for longevity; women in the city can live, on average, to 87.3 years, and 81.3 years for men.
There have been calls made at various times to raise contribution levels from the current 10% of salaries – 5% each by the employer and employee – but there hasn’t been much movement on this over the years. It’s fair to say that this will remain on the back burner for now, especially at a time of economic stress from the ongoing coronavirus pandemic.
To its credit, the system’s regulator, the Mandatory Provident Fund Schemes Authority, has implemented a number of reforms to address some of the concerns, including reducing fees and charges, always a controversial area even at the best of times. The average total fund expense ratio has dropped from 2.1% annually in December 2007 to 1.45% in October 2020, though this is still seen as relatively high in the global context. Another measure that should help boost member balances was the introduction of tax-deductible voluntary contributions in 2019, an initiative that’s expected to gather momentum in the years ahead (see our MPF Special Report on page 11).
One notable weakness of the system concerns the offsetting mechanism of severance and long-service payments, where an employer is permitted to use its mandatory MPF contributions to offset these payments when an employee is terminated. Employees and employee representatives have been lobbying for the removal of this concession to employers for years to no avail, although the government has shown some willingness to move the ground in the past few years.
A more recent initiative by the MPFA – the eMPF platform – is also controversial. The platform, as the MPFA states, aims to standardise, streamline, and automate the existing administration processes. Much paperwork continues to dog the MPF system and the administrative burden has been heavy for many SMEs. It is hoped that the implementation, slated for 2023, should go some way towards reducing fees and charges, a major constraint on long-term performance.
To be sure, the 20-year MPF system is young by any measure and covers only half of a person’s average working life, so there is still much work to do to refine it in order to make it more relevant for an ageing population.