24 March 2019
Mandatory Provident Fund contributors have sustained losses since the pension plan was launched in December 2000. Photo: HKEJ
Mandatory Provident Fund contributors have sustained losses since the pension plan was launched in December 2000. Photo: HKEJ

Time to think of pension, not just MPF

I’ve lost count of the number of newspaper headlines I’ve read about the losses our 2.5 million working population have suffered from their Mandatory Provident Fund (MPF).

I have suffered paper losses since December 2000 when the MPF system was launched – and since then my pension plan has taken a hit every two or three years.

This year is an exception, however. It was not just a single blow but a double hit from China’s decision to devalue the renminbi last summer, which resulted in a 30 percent drop in the Hang Seng Index, and, of course, Brexit.

As of June 24, my MPF return was negative 4.53 percent, led by a more than 9 percent negative return from a European equity fund, according to Morningstar.

Mind you, that was before Britain’s decision to leave the European Union made its impact on global markets.

For now, global markets seem to have stabilized and the Hang Seng Index rebounded to 21,000 points.

Still, in these times of uncertainty, we can’t help but wonder: how can we survive after retirement?

That’s the reason why we have a pension plan: it is supposed to provide a reliable income stream after we retire and until we say adieu to the world.

But in order to have a decent pension, one needs to save a lot, especially now that our life expectancy is getting longer and many people may actually live past 100.

Perhaps we can learn something from the Dutch.

In the book What They Do With Your Money: How the Financial System Fails Us and How to Fix It, the Netherlands is described as having a superior pension system that has consistently outperformed those in the United States and the United Kingdom.

It’s not rocket science. The Dutch put their money into a single fund. Their actuary works out how much pension one can afford based on their own level of contribution.

The entire pool of money is given to pension institutions that are large and non-profit with low-cost operations to ensure everyone in the system receives a pension from the time they retire until they die.

David Pitt-Watson, executive fellow of finance at the London Business School, estimated that the Dutch system is able to offer 50 percent higher pensions than the British and Hong Kong systems, where individuals might buy annuities.

Because the Dutch system had proved to be effective for at least 70 years despite the ups and downs, Pitt-Watson said Hong Kong and China can adopt it if we can make sure it is handled by a sound fund management team with excellent experience, technical competence and motivation.

“Dutch-style pensions need to be managed by trustees if they are to be safe. You need to be very sure of that, and whatever happens pension accounts can’t be ‘raided’, which I understand is what happened in China,” he said.

“Ideally, if they are created at scale with the support of the government, they will allow much better pension arrangements.”

A deeper look into our pension mechanism can help protect us better from the uncertain investment environment and a longer lifespan that stands to expose us to more liabilities.

Or at least we can have a better option other than the traditional annuity system most common among Chinese – that is, getting rental income from property investment.

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EJ Insight writer

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