Since its creation in 2000, Hong Kong's Mandatory Provident Fund (MPF) pension scheme has never been far from the media spotlight. In particular, the MPF has been criticised for its administrative complexity, for not providing adequate retirement protection and for charging high fees. At a recent HKICS Members’ Luncheon, held on 5 September at the Hong Kong Bankers Club, Anna Wu, Chairperson, Mandatory Provident Fund Schemes Authority (MPFA), discussed some of these issues and some of the long-term structural reforms she hopes will address them.

Does the MPF provide adequate retirement protection?

Ms Wu said the MPFA recognises that the current MPF contribution rate is low and the system's adequacy for retirement remains a serious concern. She pointed out, however, that the MPF system was never meant to be the only financial provision for retirees. The government's strategy is based on a three-pillar approach to protect the aged as set out in the World Bank report of 1994, Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth:

1. a publicly managed, tax-financed social safety net
2. a mandatory, privately managed, fully funded contribution scheme, and
3. voluntary personal savings and insurance.

Ms Wu said that the MPF was designed to form the second pillar of this approach, but all three pillars are needed to provide sufficient protection for the community. For example, the MPF is an employment-based retirement protection system. It covers anyone in employment (except exempt persons) between the ages of 18 and 65, but there are many categories of people who are not in formal employment, and this is why the establishment of the first and third pillars is critical.

Another adequacy issue concerns 'leakage' – the pre-retirement withdrawal of MPF benefits. As you might expect, this is only allowed under very limited circumstances since the MPF is designed to ensure adequate benefits are in place after retirement. However, a widely discussed problem here is the 'offsetting’ arrangement which permits employers to withdraw the MPF benefits derived from their contributions to make up for severance or long-service payments. This loophole can result in major leakage from the MPF and has been targeted for reform for some time. The restrictions on pre-retirement withdrawal of MPF benefits have also been criticised as being overly rigid and the MPFA is working on allowing scheme members to withdraw their MPF benefits early on the grounds of terminal illness. This proposal gained 92% support in a consultation in 2011. The MPFA is also working on giving scheme members the option to withdraw their accrued benefits upon retirement in stages rather than as a lump sum payment. This proposal gained 89% support from consultation respondents.

Are MPF fees too high?

This issue has attracted public concern and Ms Wu said the MPFA has been looking for ways to drive trustee fees down. She confirmed that the MPFA has looked at the option of capping trustee fees, but this poses major technical and policy challenges. Less invasive reform options currently being implemented, or on the drawing board, include the following. • Increasing automation. The MPFA is encouraging trustees to use electronic means for enrolment, contributions and transfers between schemes. This would reduce administrative costs but there are challenges involved – some employers and employees, for example, may not be computer literate. • Enabling portability. The MPFA proposes to give employees the chance to transfer benefits derived from their mandatory contributions from the scheme chosen by their employer to one of their choice once every calendar year. Ms Wu said that the goal is to give full control back to employees over all their benefits, but the 'offsetting’ arrangement discussed above is clearly an obstacle. The government has invited the MPFA to map out the implementation of full portability by early 2016.