Comprehensively reviewing the Mandatory Provident Fund Scheme (2013/1/10)

President, the Mandatory Provident Fund (MPF) scheme is a retirement protection plan covering 70% of the working population or nearly 2.34 million employees and self-employed individuals in Hong Kong. However, the performance of MPF schemes has been far from satisfactory in the past 12 years since their implementation in 2000. The major criticism is the high fees and low returns of funds.

The relevant criticism is not made without sound justifications. The Consumer Council, in its report, revealed that 45% of the 341 MPF products offered by 15 MPF companies have recorded negative annualized returns for the past five years. According to a study by the Mandatory Provident Fund Schemes Authority (MPFA), the average fee-to-asset ratio of MPF funds in Hong Kong is 1.74%, the highest among the ratios in countries which have implemented similar pension schemes such as Australia, Mexico, the United States and Chile.

It usually takes 30 to 40 years for a retirement protection system to become mature. In comparison, the local MPF System is still relatively new. But as the MPFA said, it is time to conduct a comprehensive review of the scheme as it moves into the second decade.

In fact, the introduction of MPF semi-portability arrangement in November last year has lifted the curtain of the MPF System reform. Two months after its launch, there are 25 000 applications from employees who intend to make a transfer to other trustees through the arrangement. Some MPF trustees have planned to cut the fees of certain MPF products. It reflects that the mode of "semi-portability" has gained the support of MPF scheme members and succeeded in producing an effect of lower fees through enhanced competition.

President, the MPF System is designed for employees. Although they are the major beneficiaries, they are invariably the group of people who are most helpless. First of all, employees cannot choose not to make contributions or not to opt for investment choices under the system. Secondly, the employees are not allowed to select their trustees to make investment on their behalf although the money belongs to them. This is most unreasonable to the employees. The main purpose of implementing MPF full portability is to induce a downward adjustment of fees by opening up the market. More importantly, however, employees should be given the free choice in MPF investments.

In the original motion, it is suggested that the implementation of MPF full-portability arrangement be accompanied by new mechanisms, that is, a "one lifelong account" and something like "bank books" for employees. It has also mentioned the mechanism for offsetting employers' contributions against severance and long service payments. This implies a radical change to the existing MPF scheme which may have far-reaching implications. The authorities should ensure that extensive consultations will be conducted before implementing any new measures on the premise of forging a consensus among stakeholders.

President, the introduction of competition into the market may be a solution to the problem of high fees charged by MPF funds. However, the crux of the problem lies in the fact that the trustee companies operate on commercial principles with profit-making as their objective. It is believed that the MPFA's recommendations of introducing a public trustee and providing low-fee MPF products will constitute an incentive for the market to launch similar products. Therefore, these suggestions are worthy of consideration.

But given that a public trustee is different from other trustee companies in the private sector, the public will certainly have high expectations of the fees and returns. Under the existing social and political circumstances, it may end up in a situation where the Government has to provide subsidy in case of ineffective management. If the public trustee lacks professional investment experience, the deficits incurred may cause losses to employees, thereby giving rise to criticisms in society. The authorities should address various problems that may arise in a cautious manner.

As the second pillar of retirement protection in Hong Kong, the MPF can provide neither effective retirement protection to those low-income employees nor universal coverage for all Hong Kong people, thereby intensifying the call for study on the implementation of a universal retirement protection scheme. The Chief Executive, in his election manifesto, has proposed exploring the conduct of a comprehensive enhancement of the MPF sheme and setting up of an old age accumulation fund in the long term. I hope that the Commission on Poverty can launch a relevant study expeditiously by making reference to the National Social Security Fund (NSSF) in the Mainland or the Central Provident Fund in Singapore.

The NSSF in the Mainland, for instance, covers various insurance funds for basic old age pension, retirement, basic medical care, work-related injuries and maternity. Employees of state-owned enterprises, privately-run enterprises or foreign companies or even peasants have to make contributions to the funds when they have a job, whereby they can receive a monthly fixed amount of money after retirement and enjoy a certain amount of medical subsidy. Although the amount of subsidy is limited, the people basically do not have to worry about their retirement. Hong Kong can draw on the experience of the NSSF which has not incurred any deficit in any of its items so far. 

It usually takes years of preparation from the study to the implementation of old age pension funds or social security funds. In the short term, the authorities should consider including the Government's responsibility in the MPF System by exploring the possibility of setting a security line for the MPF System, thus enabling the Government to take on a certain commitment. 

President, I so submit.