Hong Kong Funds Eye Pension Plan as Contribution Ceiling Rises

(Editor’s note: this report was originally in English and is rewritten in Chinese per this site’s practice.)

A plan to revise MPF contribution requirements could funnel up to HK$2.4 billion a year of extra flows to fund managers. The MPF contribution rate stays at 5%, but it would apply to a bigger slice of pie — though low-income exemptions temper the headline number.

What is changing?

The ceiling rises from HK$20,000 to HK$25,000; the floor from HK$5,000 to HK$6,500. The government proposes raising the monthly income ceiling for mandatory MPF contributions from HK$20,000 to HK$25,000 — employees and employers each paying 5% of a slightly larger slice. Planned for June 2012, it affects 514,500 employees; if all sit at the cap, contributions rise HK$257.25 million a month, or HK$3.09 billion a year. The offset: the contribution floor rises from HK$5,000 to HK$6,500 in November, excluding 180,900 earners from employee contributions (employers still pay), costing up to HK$58 million a month or HK$696 million a year. Net: about HK$2.4 billion in new annual flows.

How reliable is the HK$2.4 billion estimate?

Probably high — it depends on income distribution. Towers Watson’s Naomi Denning, managing director of investment services for Asia Pacific, notes the estimate generously assumes everyone clusters at the caps. In Q4 2009, 45.3% of households earned above HK$20,000 monthly and 34.8% above HK$25,000; if individual incomes mirror households, flows could be as low as HK$1.8 billion.

What does the industry think?

A steadily growing asset pool — but small accounts across many funds cut both ways. The system’s HK$378.28 billion offers reliable, growing assets, yet 422 funds across 41 schemes mean relatively small accounts; low-end accounts (HK$5,000–6,500 earners) may shrink further, though average sizes rise as high earners pay more. HKIFA chief executive Sally Wong calls raising the maximum a “positive step” but warns against “false comfort”: MPF’s replacement ratio is only 25–30% versus the 70–80% needed to maintain living standards — a huge gap for voluntary contributions and other savings to fill. At a fund forum, Templeton’s Mark Browning slammed MPF and Singapore’s CPF as holding pensions back; RCM’s Mark Konyn called both “truly positive”, saying it is too early to declare failure.

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