27 October 2016
The Mandatory Provident Fund looks promising from a long-term perspective. Photo: HKEJ
The Mandatory Provident Fund looks promising from a long-term perspective. Photo: HKEJ

How our MPF compares with other pension funds

It was only in 1995 when Hong Kong passed a law setting up a pension fund. There have been no amendments or revisions to the legislation since then.

Indeed, the city has lagged far behind other developed economies and emerging markets in this regard.

For example, Lee Kuan Yew, the first prime minister of Singapore, provided the vision for such a fund, and the city state established the Central Provident Fund in 1953. Mainland China set up its pension plan in 1951.

Both China and Singapore put their pension funds in the financial market, thus enabling them to benefit when their economy took off. As a result, their pension funds have generated stable and long-term returns.

In contrast, Hong Kong’s economic growth had almost peaked when the local authorities decided to set up a retirement fund. The Mandatory Provident Fund (MPF) was launched in 2000 during the height of tech bubble.

It was such a bad timing. The market picked up until 2003, and hit a new high in 2007. But that was followed by another eight-year-long financial crisis.

As a result, most MPF investors have seen their portfolios remaining at the same level when they started.

Nevertheless, the MPF is not that bad when you look at it from a long-term perspective.

China’s moves to further open up its financial market and internationalize its currency could provide long-term growth momentum for stock markets on both sides of the border. That would generate stable return for investors in the long run.

Meanwhile, it’s shown that the participation rate of those aged 65 or above in the labor force has dropped considerably. The pension fund is believed to be one of the key reasons behind that trend.

In OECD nations, the labor force participation rate of that age group declined to 6 percent in 2010, compared with 19 percent in 1960.

The participation rate is also on the decline in Southeast Asia, the Middle East and South Asia, albeit at a modest pace.

Currently, the average retirement age ranges from 55 to 62 across the world. Many nations have delayed the retirement age due to rising life expectancy.

The average person lives another 18 years after retiring in 2010, but they may live another 20 years if they retire in 2050. Most people would consider working longer to save more because they expect a longer life after retirement.

Also, the ratio of retirement expenses in relation to the GDP continues to rise. The ratio is expected to surge to 9.6 percent in 2030 from 3.8 percent in 1960.

Every nation is scrambling to cope with rising healthcare costs amid an aging population. The government also has to deploy more resources to build nursing homes and other facilities for the elderly.

Renminbi expectations. The inclusion of renminbi in the International Monetary Fund’s SDR basket has stoked market speculation on yuan appreciation. However, we believe the redback faces more downside risk in the short term.

Rising expectations for a Fed liftoff would prompt capital flight from emerging markets, and Chinese yuan will suffer. Global central banks have no immediate need to increase yuan-denominated assets. Fund managers won’t automatically buy yuan assets following the IMF move.

The People’s Bank of China said on Tuesday the long-term goal is for a clean float, which entails little intervention, a shift from the current system of a managed float.

PBoC vice governor Yi Gang also hinted that there is room for widening the two-way trading band of the renminbi against the US dollar.

This article appeared in the Hong Kong Economic Journal on Dec. 3.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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