2024 RT Amination Banner.gif

China Daily

HongKong> Opinion> Content
Published: 00:58, August 09, 2022 | Updated: 10:06, August 09, 2022
MPF account holders need protection from unbearable risks
By Ho Lok-sang
Published:00:58, August 09, 2022 Updated:10:06, August 09, 2022 By Ho Lok-sang

There are currently 13 Mandatory Provident Fund schemes trustees offering 27 MPF schemes to about 4.5 million scheme members and 330,000 participating employers. The aggregate net asset value of all MPF schemes exceeded HK$1.17 trillion ($150 billion) in March 2021, with an annualized internal rate of return (net of fees) of 3.7 percent since the establishment of the MPF system in December 2000. 

The net rate of return at 3.7 percent is not superb, but if it were a steady annual rate, members probably would still think it is not a bad scheme. Unfortunately, returns are highly erratic. Over the first six months of 2022, MPF Ratings reported the worst first-half return since the MPF schemes’ inception. The cumulative loss over the period was 13 percent. The average MPF member account balance is expected to have fallen to HK$230,500 at the end of June, a decline of HK$27,200, or 10.55 percent compared with the end of last year.  

Since practically every employee in Hong Kong holds an MPF account, protecting account holders from the volatility of the market will greatly contribute to Hong Kong people’s well-being. Unfortunately, the Hong Kong Special Administrative Region government so far has not put in place any effective way to reduce the volatility of the returns. Observers may say that financial markets are inherently volatile. Those who prefer less volatility can choose low-risk, fixed-income-asset-intensive portfolios. Many Hong Kong employees who are risk averse do exactly this, but they discover that over the long term this strategy yields far lower returns than portfolios with a larger concentration in stocks. Chances are that they may not even beat inflation. 

Our MPF accounts are very much like the 401(k) plans in the United States. Ibbotson, a consulting unit of Chicago-based fund tracker Morningstar Inc., published a research report that highlighted the huge variations in fortunes for retirees having invested and taking out their investments in different years, even when there is substantial overlap in their holding periods. For a similar hypothetical portfolio comprising 60 percent stocks and 40 percent bonds that rebalances at the start of each year, the researchers found that $100,000 invested in 1925 would have yielded about $1 million 30 years later, while the same amount invested in 1927 would have grown to only about $760,000 by 1957. An initial $100,000 investment made in 1964 would have yielded $1.47 million in 1994, while that investment made in 1965 would have grown to about $1.78 million in 30 years.    

I had proposed, in my book Public Policy and the Public Interest, published by Routledge, that the government can help smooth out the erratic returns in the following way. The government can offer a “risk of return insurance” that guarantees a minimum rate of return (say at 2 percent after inflation) for all years for all cohorts. It taxes “excess returns” whenever a year brings returns higher than the guaranteed real rate of return, and uses the proceeds to subsidize “short returns” whenever a year brings returns that are lower than the guaranteed real rate after inflation. 

Since practically every employee in Hong Kong holds an MPF account, protecting account holders from the volatility of the market will greatly contribute to Hong Kong people’s well-being

This way, regardless of how the market performs, MPF account holders can be sure that their assets in real terms will continue to grow. In a good year, returns are high, but only excess returns are taxed, so account holders will continue to collect good returns, though not as high as prior to the tax. In a bad year, any shortfall in returns will be made up for by the government (through its authorized insurance arm or agency). 

The availability of such insurance — and I would propose that this insurance is mandatory for all MPF account holders — would mean that employees no longer need to sacrifice their need for higher returns for fear of the volatility. Since those who are most risk averse typically are lower-income employees who already suffer from rather small MPF asset holdings, they are also those who can least afford tiny or even negative real returns on their investment, which they presently need to endure because they are wary of the volatility of the stock market. 

The proposed “returns insurance” is, of course, not a typical insurance policy. A true insurance policy essentially pools the risks of people seeking protection, so those who eventually discover that the feared contingency never occurred are effectively subsidizing those who are affected by the feared contingency. Since the market typically affects members in very similar ways, with members’ returns rising and falling together, in a bad year it is not possible that there are enough high return members to subsidize the returns of low or negative return members. The “cross subsidization” that occurs is inter-temporal. The government has to collect sufficient taxes during the good years to subsidize inadequate or negative returns in bad years. As such, the government may have to take up some residual risk. However, if the guaranteed returns are based on what is observed over many decades, the risks of a net loss over the long run are likely to be small. 

Finally, I think Hong Kong needs more inflation-protected fixed income products. Perhaps on top of the Green Bond program, the SAR government should promote more inflation-protected bonds.

The author is director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily. 

Share this story

CHINA DAILY
HONG KONG NEWS
OPEN
Please click in the upper right corner to open it in your browser !