Big change on the horizon for Hong Kong’s Mandatory Provident Fund
Author: Kate Whitehead | Date: 25 Jan 2017
Offsetting mechanism will be abolished, making severance and long-service payments more costly for employers
In his final policy address last week, Hong Kong’s chief executive Leung Chun Ying unveiled a plan to abolish the Mandatory Provident Fund (MPF) offsetting mechanism.
The MPF - Hong Kong’s state-funded retirement scheme - has come in for plenty of criticism since it was set up in December 2000. And the MPF-offsetting issue has long been disputed between the city’s business sector and employees.
“It’s a move that will mainly benefit blue collar workers. It’s not surprising the response from employers to the offsetting mechanism hasn’t been very positive because now they will have to pay themselves,” said Dr Jamie Cheung, programme director of the Masters of Human Resources Management at Hong Kong Baptist University.
Under the plan released last week, employers would no longer be allowed to use the money they put into employees’ retirement funds to offset severance and long-service payments. A cut-off date has yet to be set, but once in place there will be no retrospective effect.
The government will allocate a one-off HK$6 billion fund to share part of the expense with employers in the 10 years leading up to the abolition of the MPF offsetting mechanism. The fund will be handed out in the form of reimbursement and there will be no additional funding if the pot is exhausted early.
The government plans to speak to stakeholders over the next few months and release the final proposals in June.
What is widely perceived as inadequate provision for an ageing population has become a cause of serious public concern, particularly due to the city’s rapidly aging population and the fact that Hong Kongers have a long life expectancy. Hong Kong and Japan top the World Bank’s life expectancy chart, with both recording an average lifespan of 84 years.
A recent Mercer Hong Kong survey found that one-third of local firms are not satisfied with MPF providers, up 10 per cent in three years. The three key areas where employers were least satisfied were: fees, investment performance and employee communications.
“If the return on investment was good then people wouldn’t complain. The problem is that the fees are high and some providers charge more than others. The employer is free to choose the MPF scheme they want and the employee is stuck with that,” said Dr Cheung.
Beginning in April, a Default Investment Strategy in all MPF schemes will have three features: globally diversified investment, automatic reduction of investment risk as scheme members approach retirement age, and fee caps.
“Our survey has shown that reviewing scheme benefits against market levels, employee investment and retirement education, and investment options are among the top three areas that companies are likely to review over the next three years. Employers may find themselves lagging behind competitors if they are slow to action,” said Billy Wong, wealth business leader of Hong Kong, China and Korea at Mercer.
The survey found that 18 per cent of employers never discussed retirement plans with their staff and 59 per cent said they did only if there was a special need.
Dr Cheung noted that unlike the UK and the US, elderly Hong Kongers do not receive retirement payments from the state - senior citizens over 65 years old and on a low income are eligible for a monthly cash subsidy of about HK$2,200, known as “fruit money”. In the past, the elderly relied on their children to support them in their old age, but that is changing.
“The traditional thinking was that the children would support the older generation, but that expectation is being lowered. As family size get smaller, expectations for the younger generation to support their parents may not be as positive as before,” said Dr Cheung.