Why Hong Kong’s MPF pension scheme is failing to provide citizens with proper retirement protection
Calls for reform are growing, with severe criticism of the MPF’s administrative complexity and rigidness. Numerous workers have seen their pension funds gnawed away by ‘low returns, high fees’ and other flaws in the scheme.
One morning in May, cleaning worker Lau Chung dragged herself to the head office of Hong Kong’s Mandatory Provident Fund (MPF) Schemes Authority in Kwai Chung.
Turning 65, the age that allows her to withdraw all her MPF cash, she wanted to find out how many pension accounts she had, and how much in savings, after working about 20 years as a cleaner.
She was worried because she knew 2018 was a bad year for workers in terms of their MPF. The compulsory scheme reported a return of minus 8.21 per cent, blamed on a slump in the Hong Kong and mainland China stock markets. It meant an estimated average loss of HK$20,000 for each worker.
“I’ve never been clear about these things,” said Lau, who is married with two children. “Nobody tells me how to manage my accounts.”
She was shocked to discover she had seven MPF accounts including her current one. The earlier six were held under different trustees, including AIA, Bank of East Asia and Manulife.
Earning about HK$8,800 (US$1,130) per month, Lau was laid off many times at the end of her contracts. Each time she started a new job, she had to open a new MPF account.
The authority could not tell her how much she had in total savings. “If I want to know the sum in each account, I need to apply to each trustee one by one,” she said. “Very troublesome.”
She learned she had about HK$30,000 (US$3,840) in one account, but was dismayed to find just HK$188 (US$24) in another – the result of a notorious offsetting mechanism which allows employers to deduct severance payments from their portion of MPF contributions.
The mechanism, which offset more than HK$36.5 billion (US$4.6 billion) as of the end of 2017 and wrote off 700 accounts in 2017 alone, will be abolished in 2022 with a government subsidy of about HK$30 billion to support employers.
Lau was aware of the nasty consequence of having several small accounts – her savings would be eaten away by the trustees’ high management fees. But she had no idea how she might have consolidated them.
“I don’t know who I can turn to,” she said. “I tried to call my fund manager but he seemed very reluctant to tell me how to bring all my accounts together. He never called back and I gave up.”
Like most ordinary workers, she had been clueless about making investment choices for her MPF savings and just took her employer’s advice to choose a low-risk fund.
t was clear to Lau after her trip to the authority that she would not be able to live on her meagre pension funds when she retired.
“I’ll continue to work until I can’t any more,” she said with a sigh. “Then I’ll rely on the old age living allowance of about HK$3,500 (US$448) per month. I have no other way.”
Like Lau, numerous workers have seen their pension funds gnawed away by the MPF’s “low return, high fees” and other flaws in the scheme.
Reality bites for employees
Calls for reform of the MPF have been mounting, with severe criticism of its administrative complexity, rigidness, unfair offsetting, and failure to provide adequate retirement protection for Hongkongers.
Introduced in December 2000, it covers 2.6 million employees and more than 280,000 self-employed people. As of end March, it had assets worth HK$893 billion (US$114 billion), including more than HK$640 billion (US$82 billion) in net contributions.
Over the past two decades, it has generated an average annual return of 4 per cent after fees, outpacing average yearly inflation of 1.8 per cent. It recorded its biggest loss of minus 25.9 per cent in the wake of the global financial crisis of 2008.
Under the scheme, employers and employees each contribute 5 per cent of the individual’s salary up to a combined maximum of HK$3,000 (US$385) a month. Workers earning less than HK$7,100 a month are exempted from contributing, but their employers must put in their share.
Employees then have a mind-boggling 476 choices of what to do with their money. There are six types of investment funds under 30 schemes provided by 14 MPF trustees.
For most workers, the reality has sunk in that their MPF savings are not enough for retirement. As of December 2017, the average outstanding balance for those aged between 60 and 64 was HK$227,000 (US$29,000).
Security officer Yu Mei-wan, 63, who earns HK$9,100 (US$1,165) a month working at a Tai Po shopping centre, knows her MPF savings are not enough to live on when she retires.
Despite 16 years of contributions, high service fees have kept her MPF savings flat at a total of about HK$130,000. Although she took her employer’s advice to choose a low-risk fund, she lost HK$6,171 (US$790) in 2018 – more than half her net contributions of HK$10,299 for the year.
Yu, who has two adult sons but values her independence, has two more years before she is due to retire.
“The government always tells us that the MPF is for our retirement,” she said. “How can this sum sustain my retirement? I think it’s only enough for two years of my living expenses.”
Looking to the day when her MPF savings dry up and she cannot find work, Yu said: “I am prepared to work like many ‘cardboard grannies’ in the city, scavenging for discarded boxes and other scrap.”
Gains swallowed by fees
Low-wage workers like Lau and Yu are not the only ones who have seen their MPF savings stagnate or shrink.
Even film producer and finance tycoon Checkley Sin Kwok-lam, 62, founder of the National Arts Entertainment and Cultural Group, has complained that he lost about HK$500,000 (US$64,000) last year and saw his total MPF savings reduced to HK$4 million (US$512,000).
Angry that the MPF had failed to hold fund managers accountable, he said: “This is outrageous. The loss of returns was almost 12 per cent last year. If this happened in a private company, the fund manager would have been sacked immediately.
“But under the MPF scheme, no matter whether fund managers gain or lose money, they still charge the same management fees.”
He criticised the MPF trustees for imposing unreasonable management, trustee, administration and custodian fees.
He urged the government to introduce investment products such as stocks and bonds with good global ratings, which MPF members could invest in directly without paying high management fees.
Simon Lee Siu-po, co-director of the international business and Chinese enterprise programme at Chinese University, said high management fees had dragged down the MPF’s rate of return.
He felt fees would fall with more competition, and if MPF members could transfer funds or merge their accounts easily, either electronically or by using their mobile phones. More investment education was needed to help people make informed choices, he said.
He also felt there should be a way to link management fees with the fund manager’s performance, but added: “I doubt the government will be brave enough to do this.”
Shareholder activist David Webb, who dubbed the MPF the “Mandatory Payment of Fees”, said the compulsory system should be abolished to allow people to freely make their own investment choices and let the needy rely on social welfare.
“The main problem with the MPF is that it exists – it doesn’t allow the employee to manage her own investments if she chooses,” he said.
Cheng Yan-chee, the MPFA’s chief corporate affairs officer and executive director, admitted the average rate of return of 4 per cent after fees was “so-so”, but emphasised the scheme was not created to make people rich.
He felt the contribution rate was too low and the ceiling should be increased to HK$2,400 per month for both employees and employers from the current HK$1,500.
“We should look at the MPF in the long term over 30 years. So far it has fared better than the average annual inflation rate of 1.8 per cent. I think it has fulfilled its function of providing basic retirement protection for people,” he maintained.
Acknowledging the high management fees, he said: “We understand the concern of the public over the cost of the MPF and agree there is room for reduction.”
However, the MPFA cannot cut the fees of privately managed investments. All it could do, he said, was to use various measures to exert pressure on trustees to reduce fees, but these means had been slow to come because, among other things, they required new legislation.
Of the options available so far, the Employee Choice Arrangement of 2012 allows employees to transfer their portion of contributions to a scheme of their choice while Default Investment Strategy funds, introduced in 2017, cap fees at 0.75 per cent, and a recently launched
MPF platform compares the fees and performance of all funds.
A centralised electronic platform will be rolled out in 2022 to provide a one-stop service that will become fully operational four or five years later.
Agreeing that trustees had a duty to safeguard members’ interest, Cheng said: “If we find some cases are unreasonable, we’ll seek an explanation from the trustee and may demand an adjustment.”
However, he urged MPF members to do more in managing their accounts.
“The biggest problem is that many people don’t care about their MPF for various reasons. They are either too busy or don’t know how,” he said.
“So far, I think, MPF members have failed to fully exercise their rights as consumers. We always remind them to keep a closer watch on their MPF. They need to use their feet to vote.”
However, Florence Cheung Man-wai, a member of the Alliance for Universal Pension, a pressure group calling for a non-means-tested scheme, said: “The MPF’s biggest flaw is that it only covers those who work and excludes others such as the disabled and housewives.
“We need a universal pension scheme to benefit every elderly person, with the MPF acting as an additional pillar to enhance people’s retirement protection.”
There have been calls for a Singapore-style Central Provident Fund scheme, but a spokesman for the Financial Services and the Treasury Bureau said the government had no plans to abandon the privately managed MPF system.
ll he would say was that the MPFA would review the list of approved investments from time to time, and that the government remained “open to any new proposals from the industry which could help strengthen the MPF system”.
Given the government’s position, economist Andy Kwan Cheuk-chiu, director of the ACE Centre for Business and Economic Research, warned the MPF’s flaws would not be rectified easily.
His advice: “Hongkongers should get smarter about their MPF investments and diversify their plans for retirement protection.”
Try telling that to workers like cleaner Lau and security guard Yu.
Turning 65, the age that allows her to withdraw all her MPF cash, she wanted to find out how many pension accounts she had, and how much in savings, after working about 20 years as a cleaner.
She was worried because she knew 2018 was a bad year for workers in terms of their MPF. The compulsory scheme reported a return of minus 8.21 per cent, blamed on a slump in the Hong Kong and mainland China stock markets. It meant an estimated average loss of HK$20,000 for each worker.
“I’ve never been clear about these things,” said Lau, who is married with two children. “Nobody tells me how to manage my accounts.”
She was shocked to discover she had seven MPF accounts including her current one. The earlier six were held under different trustees, including AIA, Bank of East Asia and Manulife.
Earning about HK$8,800 (US$1,130) per month, Lau was laid off many times at the end of her contracts. Each time she started a new job, she had to open a new MPF account.
The authority could not tell her how much she had in total savings. “If I want to know the sum in each account, I need to apply to each trustee one by one,” she said. “Very troublesome.”
She learned she had about HK$30,000 (US$3,840) in one account, but was dismayed to find just HK$188 (US$24) in another – the result of a notorious offsetting mechanism which allows employers to deduct severance payments from their portion of MPF contributions.
The mechanism, which offset more than HK$36.5 billion (US$4.6 billion) as of the end of 2017 and wrote off 700 accounts in 2017 alone, will be abolished in 2022 with a government subsidy of about HK$30 billion to support employers.
Lau was aware of the nasty consequence of having several small accounts – her savings would be eaten away by the trustees’ high management fees. But she had no idea how she might have consolidated them.
“I don’t know who I can turn to,” she said. “I tried to call my fund manager but he seemed very reluctant to tell me how to bring all my accounts together. He never called back and I gave up.”
Like most ordinary workers, she had been clueless about making investment choices for her MPF savings and just took her employer’s advice to choose a low-risk fund.
t was clear to Lau after her trip to the authority that she would not be able to live on her meagre pension funds when she retired.
“I’ll continue to work until I can’t any more,” she said with a sigh. “Then I’ll rely on the old age living allowance of about HK$3,500 (US$448) per month. I have no other way.”
Like Lau, numerous workers have seen their pension funds gnawed away by the MPF’s “low return, high fees” and other flaws in the scheme.
Reality bites for employees
Calls for reform of the MPF have been mounting, with severe criticism of its administrative complexity, rigidness, unfair offsetting, and failure to provide adequate retirement protection for Hongkongers.
Introduced in December 2000, it covers 2.6 million employees and more than 280,000 self-employed people. As of end March, it had assets worth HK$893 billion (US$114 billion), including more than HK$640 billion (US$82 billion) in net contributions.
Over the past two decades, it has generated an average annual return of 4 per cent after fees, outpacing average yearly inflation of 1.8 per cent. It recorded its biggest loss of minus 25.9 per cent in the wake of the global financial crisis of 2008.
Under the scheme, employers and employees each contribute 5 per cent of the individual’s salary up to a combined maximum of HK$3,000 (US$385) a month. Workers earning less than HK$7,100 a month are exempted from contributing, but their employers must put in their share.
Employees then have a mind-boggling 476 choices of what to do with their money. There are six types of investment funds under 30 schemes provided by 14 MPF trustees.
For most workers, the reality has sunk in that their MPF savings are not enough for retirement. As of December 2017, the average outstanding balance for those aged between 60 and 64 was HK$227,000 (US$29,000).
Security officer Yu Mei-wan, 63, who earns HK$9,100 (US$1,165) a month working at a Tai Po shopping centre, knows her MPF savings are not enough to live on when she retires.
Despite 16 years of contributions, high service fees have kept her MPF savings flat at a total of about HK$130,000. Although she took her employer’s advice to choose a low-risk fund, she lost HK$6,171 (US$790) in 2018 – more than half her net contributions of HK$10,299 for the year.
Yu, who has two adult sons but values her independence, has two more years before she is due to retire.
“The government always tells us that the MPF is for our retirement,” she said. “How can this sum sustain my retirement? I think it’s only enough for two years of my living expenses.”
Looking to the day when her MPF savings dry up and she cannot find work, Yu said: “I am prepared to work like many ‘cardboard grannies’ in the city, scavenging for discarded boxes and other scrap.”
Gains swallowed by fees
Low-wage workers like Lau and Yu are not the only ones who have seen their MPF savings stagnate or shrink.
Even film producer and finance tycoon Checkley Sin Kwok-lam, 62, founder of the National Arts Entertainment and Cultural Group, has complained that he lost about HK$500,000 (US$64,000) last year and saw his total MPF savings reduced to HK$4 million (US$512,000).
Angry that the MPF had failed to hold fund managers accountable, he said: “This is outrageous. The loss of returns was almost 12 per cent last year. If this happened in a private company, the fund manager would have been sacked immediately.
“But under the MPF scheme, no matter whether fund managers gain or lose money, they still charge the same management fees.”
He criticised the MPF trustees for imposing unreasonable management, trustee, administration and custodian fees.
He urged the government to introduce investment products such as stocks and bonds with good global ratings, which MPF members could invest in directly without paying high management fees.
Simon Lee Siu-po, co-director of the international business and Chinese enterprise programme at Chinese University, said high management fees had dragged down the MPF’s rate of return.
He felt fees would fall with more competition, and if MPF members could transfer funds or merge their accounts easily, either electronically or by using their mobile phones. More investment education was needed to help people make informed choices, he said.
He also felt there should be a way to link management fees with the fund manager’s performance, but added: “I doubt the government will be brave enough to do this.”
Shareholder activist David Webb, who dubbed the MPF the “Mandatory Payment of Fees”, said the compulsory system should be abolished to allow people to freely make their own investment choices and let the needy rely on social welfare.
“The main problem with the MPF is that it exists – it doesn’t allow the employee to manage her own investments if she chooses,” he said.
Cheng Yan-chee, the MPFA’s chief corporate affairs officer and executive director, admitted the average rate of return of 4 per cent after fees was “so-so”, but emphasised the scheme was not created to make people rich.
He felt the contribution rate was too low and the ceiling should be increased to HK$2,400 per month for both employees and employers from the current HK$1,500.
“We should look at the MPF in the long term over 30 years. So far it has fared better than the average annual inflation rate of 1.8 per cent. I think it has fulfilled its function of providing basic retirement protection for people,” he maintained.
Acknowledging the high management fees, he said: “We understand the concern of the public over the cost of the MPF and agree there is room for reduction.”
However, the MPFA cannot cut the fees of privately managed investments. All it could do, he said, was to use various measures to exert pressure on trustees to reduce fees, but these means had been slow to come because, among other things, they required new legislation.
Of the options available so far, the Employee Choice Arrangement of 2012 allows employees to transfer their portion of contributions to a scheme of their choice while Default Investment Strategy funds, introduced in 2017, cap fees at 0.75 per cent, and a recently launched
MPF platform compares the fees and performance of all funds.
A centralised electronic platform will be rolled out in 2022 to provide a one-stop service that will become fully operational four or five years later.
Agreeing that trustees had a duty to safeguard members’ interest, Cheng said: “If we find some cases are unreasonable, we’ll seek an explanation from the trustee and may demand an adjustment.”
However, he urged MPF members to do more in managing their accounts.
“The biggest problem is that many people don’t care about their MPF for various reasons. They are either too busy or don’t know how,” he said.
“So far, I think, MPF members have failed to fully exercise their rights as consumers. We always remind them to keep a closer watch on their MPF. They need to use their feet to vote.”
However, Florence Cheung Man-wai, a member of the Alliance for Universal Pension, a pressure group calling for a non-means-tested scheme, said: “The MPF’s biggest flaw is that it only covers those who work and excludes others such as the disabled and housewives.
“We need a universal pension scheme to benefit every elderly person, with the MPF acting as an additional pillar to enhance people’s retirement protection.”
There have been calls for a Singapore-style Central Provident Fund scheme, but a spokesman for the Financial Services and the Treasury Bureau said the government had no plans to abandon the privately managed MPF system.
ll he would say was that the MPFA would review the list of approved investments from time to time, and that the government remained “open to any new proposals from the industry which could help strengthen the MPF system”.
Given the government’s position, economist Andy Kwan Cheuk-chiu, director of the ACE Centre for Business and Economic Research, warned the MPF’s flaws would not be rectified easily.
His advice: “Hongkongers should get smarter about their MPF investments and diversify their plans for retirement protection.”
Try telling that to workers like cleaner Lau and security guard Yu.
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