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LegCo To Consider Hong Kong Pension System Reforms

Tuesday, January 8, 2013

The Legislative Council (LegCo), during a meeting on January 9, will debate a motion on comprehensively reviewing Hong Kongís Mandatory Provident Fund (MPF) scheme, to improve its effectiveness.

The MPF was implemented in December 2000. At present, there are over 3m employee contribution accounts and around 4m preserved accounts in Hong Kong, and, as at September 2012, the net asset value of approved constituent funds under the MPF scheme reached HKD412.4bn (USD53.5bn).

All employed individuals aged 18 to 65 and normally residing and working in Hong Kong are required to join an MPF scheme. Subject to the maximum and minimum levels of income of, currently, HKD25,000 and HKD6,250 per month respectively, an employer will deduct 5% as a mandatory contribution to a registered MPF scheme, as well as also contributing an equivalent amount.

For employees, the mandatory contributions are tax deductible, subject to the maximum amount of HKD15,000 per year, while, for employers, the MPF contributions are tax deductible to the extent that they do not exceed 15% of employees' yearly emoluments.

The motion to be debated will allege that the current condition of the MPF scheme is of major concern. Worries have been expressed over the high MPF administration fees, the lack of supervision over fund performance, the erosion of contributions by intermediaries and sponsors, and the use of the accrued benefits derived from employers' contributions to offset severance payments and long service payments, all of which directly affect employees' retirement protection.

Therefore, LegCo will be urged to instruct the government to study the implementation of a universal integrated retirement protection system in addition to the MPF Scheme, so as to make up for the inadequacies in the MPF system.

However, in the meantime, LegCo may look for the enactment of legislation to abolish the mechanism whereby the accrued benefits derived from employers' contributions under the MPF scheme are used to offset long service payments and severance payments; and to set a ceiling for the fund expense ratio (FER) of MPF funds and require trustees to set out the actual amounts and ratios of various fees and FER in the annual reports issued to employees.

The implementation of a full portability arrangement for the MPF scheme could be recommended to enable employees to choose trustees on their own, establish "one lifelong account" for employees and credit the MPF accrued benefits derived from employer's and employee's contributions to this account, so as to prevent them from having multiple preserved accounts due to change of jobs.

To strengthen the regulation of MPF investment products, it is also suggested that the sales practices of intermediaries should be regularly reviewed, that substandard MPF funds should be eliminated, and that a monitoring system be established under which the total amount of fees charged by MPF funds is linked to performance. It is also proposed that sponsors of MPF schemes should be regulated to enhance the monitoring of scheme sponsors' performance and profits, and to establish a clear tripartite relationship among Scheme sponsors, intermediaries and contributors.

Finally, a public trustee could be set up to operate a separate MPF scheme, charging lower administration fees and providing low-risk capital preservation funds which are guaranteed to be inflation-linked, for employees to choose, so as to achieve the objective of increasing competition to make other trustees lower fees and improve performance.