MPF needs a radical overhaul

One of the most striking features of the public response to this year's budget was the open hostility shown towards the Mandatory Provident Fund.

As soon as the proposal to deposit $6000 in each person's MPF account was announced, it was greeted with hoots of derision. The attitude seemed to be one of general contempt.

Presumably - hopefully - someone in the Financial Services and Treasury Bureau is asking themselves why that was the case and is drawing up a policy paper to repair the situation. Let's give that unknown person a hand.

The MPF scheme was introduced a decade ago to provide for the livelihood of working people after retirement. This would be achieved by the employer and employee each setting aside a modest amount each month (equivalent to 5% of salary each, but in effect capped for both at $1000 per month) to be invested in a fund of some sort. The sums compulsorily saved in this way, together with investment gains, would result in a handy lump sum when the individual ceased work.

Now that we have 10 years experience of the scheme in practice we can see that it manifestly does not work. The first reason is that there have not been any significant investment gains.

Many Hong Kong people are experienced at making investment decisions and they can see for themselves - and they certainly feel - that they could have done better on their own behalf than the authorized service providers have done for them. Strike One.

Secondly there is the issue of fees charged by the financial institutions. These have run at about 2% per annum - which seems high compared to other markets - and have easily swallowed up any investment gains. So the banks have done well, but the intended beneficiaries have not. Strike Two.

Finally, there is the issue of who gets to choose the service provider. Up to now, that power has been given to the employer, not the person whose retirement is being catered for. Inevitably a suspicion has arisen to the effect that employers choose a service provider on the basis of favours they can receive in other areas of their relationship rather than in the best interests of the employee. Strike Three.

It is of course not the Government's fault that the stock market has not shown much growth over the past ten years, so Strike One we just have to write off to happenstance.

But the Government is responsible for Strikes Two and Three which are intimately connected. The fees are high because the employers do not have to pay them - they are deducted from the savings of employees. Hence there has been no real competition between the service providers, at least as regards costs.

The absolute proof of this has emerged very recently. Because of the prospect starting next year of employees having at least some say in the choice of service provider, the financial institutions are bringing to market new products with fees running at less than 1%. The mere prospect of a modest degree of competition has achieved major results.

This brings us to the reforms to the MPF that the Administration has in mind, and whether they will be adequate to restore its reputation.

Starting from July 2012 (a date already twice postponed) it is proposed that employees be allowed to have a say in choice of service provider. But even this improvement has been watered down because the selection will only be in respect of that part of the MPF savings made by the employee himself. His employer will continue to make the choice in respect of the contribution that he makes.

This is a clear case of too little, too late.

We know from the budget reaction that a major overhaul is needed, not minor fine tuning. The "justification" put forward for the employer retaining the power of choice is that he can offset his Long Service Payment obligation by the amount he has contributed to the MPF account of the individual, so he should be entitled to ensure the money does not end up in a risky investment product.

That is not a strong enough reason to deny the employee the right to choose who looks after his pension, and anyway there should be other ways to safeguard the employer's position. We should also double - if not abolish completely - the cap on contributions. No doubt there are many other solid suggestions for improvement. We need to bring them out into the open and achieve serious reform.

Left as it is, or with only minor changes, the present scheme is looking increasingly like a terminal patient on life support.

Is there a doctor in the house?