A few simple policy changes can enable HK to improve its MPF offering for employees when they retire and give them a more stable and comfortable life. Oswald Chan reports from Hong Kong.
Hong Kong’s pension system notched up an overall index score of 61.9 points against more than 40 global indicators, with its “integrity” category coming out on top among the Asian economies surveyed, but its “adequacy” and “sustainability” categories were way behind, according to the 2019 Melbourne Mercer Global Pension Index.
The study, compiled by the Monash Business School of Australia’s Monash University and professional services firm Mercer, covered 37 retirement income systems representing more than 63 percent of the world’s population.
“The Mandatory Provident Fund contribution cap is a major hindrance because capping contributions at a low level cannot translate into a decent financial lump-sum amount for retirees, thus curbing the adequacy of the scheme,” warned Janet Li, a partner and wealth business leader for Asia at Mercer. The current monthly cap is set at HK$1,500 (US$193.5).
These findings suggest the younger generation may not have realistic expectations about retirement, raising concerns about (their) preparedness
Wina Appleton, Asia Pacific retirement strategist at JP Morgan Asset Management
“When adequacy deteriorates, the scheme’s sustainability will also be curtailed.
“If Hong Kong workers make more voluntary contributions to their MPF accounts, it would raise the pension scheme’s adequacy ratio in due course as MPF members leverage the power of compound interest,” she told China Daily.
Currently, both employers and employees in Hong Kong must contribute 5 percent of an employee’s salary to his or her MPF account.
“Adequacy” refers to whether pension assets are sufficient to cover retirement incomes and expenses. “Sustainability” gauges whether a pension system can effectively operate in the long term amid a rapidly aging population, rising old-age dependency ratio and, in some countries, substantial government debt. The two measures are interrelated.
US-based credit rating agency Moody’s Investors Service says Hong Kong faces soaring dependency rates, with more people who aren’t working outnumbering those in the labor force. An aging population will weaken economic strength as the share of the working population declines and productivity growth falls.
Moody’s predicts an aging population will lead to lower growth flows and reduced fiscal strength, as taxes and social security contributions decrease, and health and pension spending mounts.
“The adequacy of the MPF system certainly is not enough and the government should introduce more tax concessions for employers and educate more low-income earners so that they’re both willing to make more voluntary MPF contributions,” associate professor Billy Mak Sui-choi of Hong Kong Baptist University’s Department of Finance and Decision Sciences told China Daily.
Earlier this year, the SAR government said it will pay MPF mandatory contributions for low-income earners (residents with a monthly income of less than HK$7,100 and who are already exempt from mandatory MPF contributions). Mak hailed the move as a step in the right direction in targeting the adequacy of low-income earners’ retirement income protection.
About 66 percent of 1,035 surveyed Hong Kong employees (aged between 18 and 65 and who have at least one MPF account) are expected to have insufficient retirement reserves with an individual shortfall of HK$2.01 million — a record high since the AIA Desired Retirement Tracker was conceived in 2012. These underachievers will have to work for another 10 years until they’re 71, or slash their median monthly living expenses by HK$8,696 to have enough money for retirement.
Last year, JP Morgan Asset Management interviewed 500 local retail investors, aged between 30 and 60, who have at least five years’ continuous investment experience and liquid assets exceeding HK$200,000.
Younger respondents to the survey said they expected to save less for a retirement that they think will start at an earlier age than for previous generations. They’re also more reluctant to allocate cash and insurance for their retirement, suggesting they may not invest sufficiently to grow their wealth.
“These findings suggest the younger generation may not have realistic expectations about retirement, raising concerns about (their) preparedness,” Wina Appleton, Asia Pacific retirement strategist at JP Morgan Asset Management, said.
In the fourth quarter of last year, the Hong Kong Investment Funds Association commissioned a survey of nearly 1,000 local employees, who expected 14 percent of their post-retirement income to come from the MPF/ORSO (Occupational Retirement Scheme Ordinance). Only 9 percent of respondents’ financial assets currently come from the MPF/ORSO.
To bolster adequacy, Hong Kong Investment Funds Association pensions subcommittee chairman Terry Pan suggested an annual cap of HK$60,000 for tax-deductible voluntary contributions and another annual HK$60,000 cap for qualifying deferred annuity policies.
He also proposed matching contributions from the government and employers, as well as tax deductions for immediate family members when employees make voluntary MPF contributions.
In response to suggestions from the financial services sector, the government launched several policies to improve the city’s pension system’s adequacy. These include tax deductible initiatives for retirees making voluntary MPF contributions and purchasing qualifying deferred annuity policies in 2019.
However, the market response has been lukewarm. There were only 24,000 tax deductible voluntary contribution accounts by the end of December, according to the Mandatory Provident Fund Schemes Authority.
As of late last year, 4.36 million Hong Kong workers joined the MPF program, with the aggregate net asset value of all MPF programs amounting to HK$969.5 billion — a 19.2 percent increase from the previous year.
A slew of measures have been taken to make the pension system more sustainable, such as the public annuity program launched in 2018 and other financial products that allow pensioners to use their properties or life insurance policies as collateral to obtain a steady income in retirement.
At the end of 2019, the reverse mortgage program had attracted nearly 4,000 applications since its inception in 2011, with the average appraised property valued at HK$5.4 million. This translates into an average monthly payout of about HK$16,000, according to the Hong Kong Mortgage Corp.
There were 7,610 public annuity policies issued at the end of last year following the public annuity program’s launch, the HKMC said. This involved total premiums of HK$4.4 billion with an average premium per policy of HK$570,000.
Male and female applicants can each receive a monthly payout of HK$5,800 and HK$5,300, respectively, if they pay HK$1 million upfront to join the public annuity program.
The government is also strengthening the pension system’s sustainability by coming up with post-retirement financial solutions for retirees. In 2016, the MPFA made it easier for employees to withdraw their MPF investments by allowing designated members to choose from withdrawing their MPF benefits in instalments, taking out all their benefits in one lump sum, or retaining their MPF benefits in their accounts for long-term investment.
Despite all these measures, retirement industry experts believe the government should embrace a cross-departmental approach to tackle retirement.
“This is because the issue involves different government departments, for example, deferring the age of retirement is within the parameter of the Labour and Welfare Bureau. The regulation of MPF funds, individual financial investment products, the public life annuity program and private annuity plans is within the purview of various financial regulators of the MPFA, the Securities and Futures Commission, the HKMC and the Insurance Authority”, Li said.
The MPF system has been widely criticized for high costs and low returns that crimp the sustainability of the pension system.
To tackle high operating costs, in 2018 the government asked the MPFA to design, develop and operate a user-centric eMPF platform to standardize, streamline and automate the MPF program’s administration process.
The MPFA is expected to put the eMPF platform up for tender in the second half of this year, before launching it in phases from 2022.
Contact the writer at oswald@chinadailyhk.com
