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Hong Kong:
MPF update
The introduction of the MPF is possibly heading towards its final stages. Just as it does so, several critical amendments have been introduced and a number of weaknesses remain which threaten the soundness of the system. The most recent amendments include:
- The introduction of a new, compulsory investment vehicle, the capital preservation product. Its investment guidelines are framed to allow rates of return similar to retail bank accounts to be achieved. Restrictions on the fees that trustees can impose are expected to force the independent trustees - significant players in the existing retirement schemes market - to be excluded from the MPF, leading to a much-feared monopoly of the two to three largest insurers.
- The prohibition of any transaction fee for transfers.
- The inclusion of casual workers under the MPF.
These issues will contribute significantly to the costs and risks of providing retirement plans under the MPF and may result in higher fees and lower end-benefits. The number of MPF providers could also fall, reducing competition, further raising fees and lowering investment performance. It is important to maintain all prudential controls in the MPF to ensure the security of employees’ benefits, but it is equally important to retain freedoms wherever possible to ensure full competition and better overall benefits for employees.
If the MPF is not implemented before the May 1998 elections, it is widely felt it may change shape completely under the newly elected body, with all options, such as the Old Age Pension Scheme and a Central Provident Fund, revisited. All parties are keen to achieve the 1 April schedule and remove the cloud of uncertainty which has existed for nearly three years. However, despite the substantial amounts of time and energy expended on the MPF thus far, it would be a social and economic disaster if it were rushed through with major flaws remaining, many of which would be difficult to unravel.
The whole MPF situation is further complicated by the current economic climate. Many employers are struggling to survive let alone show a profit. The added imposition of 5% employer MPF contributions will almost certainly lead to some companies becoming unviable and job losses in most others. This in turn will lead to greater demand for social welfare programs for the unemployed, a problem not previously known in Hong Kong.
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