Watershed Moment

It is easy to criticise governments for being incremental in their approach to issues. Easy, but often unfair. Society has a problem, the government and the community together work out a solution. Later there is general recognition that the original framework did not address some important aspects of the situation, or other circumstances have changed. Rather than scrapping the whole structure, and running the risk of throwing out the baby with the bathwater, one or more patches are added to cover over the cracks. The repair may not be perfect – things done by governments seldom are – but at least the show can roll forward for a few more years.

But every now and then it comes to pass that the jacket has become more patches than original fabric and it is time for a wholesale re-jigging – a whole new coat if you like. I think we have now reached such a moment with respect to the Mandatory Provident Fund (MPF), Long Service Payments (LSP) and the controversy over offsetting arrangements. The system of long service payments was introduced many years ago as some sort of recognition that if a working person was engaged for a prolonged period by the same employer (over five years) then he had earned some share in the success of that company or organisation over and above his salary. Thus a formula was worked out involving years of service times a proportion of pay to give rise to a lump sum. The question of whether the entitlement thus earned was intended for ultimate retirement, or to cover the employee’s living expenses during periods of subsequent unemployment, was left unanswered.

Given the situation of Hong Kong’s economy at the time, that was maybe a reasonable arrangement. But as time went by, society grew more settled, Hong Kong became a permanent home for most people rather than a jumping off point to somewhere else. In the process we also became more wealthy, and what was acceptable in one era ceased to be so. Attention turned to the reality that we would have large numbers of citizens who would grow old here at the end of their working lives. Part of the answer to this situation was the MPF: employers and employees would each pay an amount equivalent to five percent of salary into a kitty which upon retirement of the employee would become his property and would go some way towards providing for living expenses in old age.

Employers complained about the alleged double liability for both MPF and LSP and demanded an offset, that is whatever they contributed to the employee’s MPF funds could be used in whole or part to meet LSP obligations. Given the realities of Hong Kong’s political system, not surprisingly the employers got their way, an outcome which has been a bone of contention with labour advocates ever since.

It is easy to criticise the MPF: indeed I have said before in this column that I think it was deeply flawed, in particular the high level of charges that were permitted. Where service providers in other more competitive markets made do with half a per cent or so to cover administrative overheads and make a reasonable profit, in Hong Kong only two per cent would suffice. While those at the top of the financial services pile prospered, the ordinary working stiff saw his final returns substantially reduced.

But let us take a step back and ask a basic question: what do our workers really need now in the twenty-first century which is appropriate to current circumstances? In my view, they need two things: a decent retirement pension for when they cease work; and some kind of insurance to cover living expenses for periods during their working lives when they are temporarily unemployed and looking for a new job.

The first of these must be covered by a much better MPF scheme, and we should not cease in our efforts to improve arrangements. Once money has been paid in, it stays there until the employee retires.

The second should be provided by a new unemployment insurance scheme funded by a levy on both employer and employee, say one percent per month. By getting the MPF service providers to collect it as part of their ongoing work, we could minimise administrative work and costs. Perhaps to get the new scheme started the government could inject a few billion from the future fund. If the levy gradually accumulates a surplus, then it could return the injected sum.

Meanwhile the LSP system has outlived its usefulness and should simply be scrapped. It is neither fish nor fowl and only confuses matters. There will still be some tidying up to do: making sure the new insurance scheme can’t be gamed by the unscrupulous; making a suitable arrangement for employees whose LSP entitlement exceeds the amount paid into their MPF pot by their employer, and so on. But our outgoing chief executive could do us all a real favour – and burnish his legacy – if he nailed this issue once and for all.