Authorities are introducing new measures to enhance the Mandatory Provident Fund (MPF), which, apart from personal savings, is the main pillar of Hong Kong’s pension system.
Retirement benefits have been a cause for public concern in Hong Kong for years. But the issue, in fact, is rather new to human society.
Only about 200 years ago, the life expectancy of an average European was around 30, while back in the 1950s most Chinese on the mainland could only live up to 40.
However, as people are getting better nutrition today and the healthcare systems in the developed world continue to improve, it is not uncommon for people to live beyond 80 or even 90 years of age.
In Hong Kong, the current life expectancy is 82 for men and 87 for women. As most people in the city generally retire between the age of 60 and 65, most people will continue to live for another 20 years after their retirement.
While many people work throughout their lives, the majority of our population spend some 40 years at work, although some work for a shorter period of time, mostly on an on-and-off basis, such as housewives.
In Hong Kong, about 73 percent of those between the age of 20 and 65 have full-time jobs. As such, most people work for around 30 years during their lifetime.
It might seem a bit long, but if we consider that within those 30 years, the average individual not only has to support themselves and their families, but also has to prepare for their own retirement and medical expenditures, then in fact they don’t have that much time.
Hong Kong’s life expectancy is among the longest in the world, yet our birth rate is among the lowest. As the birth rate continues to drop, it is not difficult to imagine that in the decades ahead, the size of our workforce will continue to shrink.
Even if the government is determined to raise taxes to pay for pensions, it is very likely that we won’t have enough taxpayers to support that extra spending.
If the cross-generational safety net is not going to work, then what we should do now is promote personal savings among our fellow citizens from a young age.
In Hong Kong, contributions by employers and employees under the current MPF scheme only make up about 10 percent of the salary, which is nowhere near Singapore’s 37 percent.
However, one can certainly expect an enormous backlash against any proposal to raise the current percentage of contributions from both employers and employees because the MPF scheme itself has already grown so unpopular among the working population over the years because of its low returns and high administrative fees charged by fund trustees.
According to the Mandatory Provident Fund Schemes Authority, since 2010, the average annual yield of the fund net of charges and inflation is around 2.55 percent. As this does not compare favorably even with some low-risk funds available in the market, there is certainly much room for improvement.
According to official statistics, back in 2007, the administrative charges of the fund constituted 2.1 percent of the total amount. Although the charges came down to 1.69 percent last June, after the Employee Choice Arrangement (ECA) came into effect, they are still rather high by international standards.
Since the MPF has already accumulated more than HK$500 billion in total assets — nearly double the amount in 2007 — the administrative charges should come down further.
So is there any way we can expedite that?
A review of the ECA shows that it does drive down the MPF administrative charges, though not significantly.
As such, we believe the administrative charges can be pushed down further if the current ECA can be expanded.
The MPF is made up of contributions from both employees and employers. At the moment, employees are only allowed to transfer their own contributions to a new scheme managed by another fund manager freely.
But if employees can also decide where to put the money regarding the portion contributed by employers, this will certainly generate more competition in the market, which in turn is likely to drive down administrative fees.
On the other hand, the government can also consider setting up a central provident fund to compete with the existing fund houses in the private market to drive down administrative charges.
The article first appeared in the Hong Kong Economic Journal on Mar 31.
Translation by Alan Lee
[Chinese version 中文版]
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