How to make MPF work harder in retirement protection: two behavioural-economics proposals

What are MPF’s shortcomings in retirement protection?

MPF’s shortcomings in retirement protection include high administration fees, portability problems, coverage limited to the employed, a low MPF contribution rate, low investment returns and twenty-to-thirty-year contribution periods. Hong Kong’s retirement protection rests on four pillars — support from children, savings, MPF and CSSA plus the Old Age Allowance. A decade after MPF’s launch, how many of these problems have been solved? With population ageing looming, reforming the system and optimising the four pillars will be a key research subject for the next twenty years.

How “lazy” are workers about managing their MPF?

The University of Hong Kong’s Public Opinion Programme telephone-surveyed 1,001 working people aged 18 to 65 earning at least HK$5,000 a month in March–April 2010 (response rate 65%). The most striking findings:

Behavioural-economics research shows this inertia is widespread — but it can be changed with the right measures.

Proposal 1: age-based default portfolios

Automatically assign an investment portfolio to each employee’s MPF savings when contributions begin; employees may change it later, though research shows few do. The proposal: the portfolio is set from day one according to the employee’s age — generally, the older the employee, the lower the portfolio’s risk — and it updates automatically every ten years, lowering risk each time. Employees are notified of every move in advance and may opt out.

Proposal 2: MPF contribution rate linked to pay rises

With over 40% of respondents saying they would raise contributions when income rises, the proposal links the employee’s MPF contribution rate to salary: if pay rises by a set percentage (say 10%), the employee contribution rate rises by a set percentage too (say 5%). The arrangement requires the employee’s prior commitment, and employees may change their decision at any time — but behavioural research shows that once committed, few reverse course.

These two proposals respond directly to the survey findings, aiming to make MPF play a bigger role in retirement protection; further local policy research is still needed to test whether they can fix MPF’s twin lows (low contribution rates, low returns) and whether they are workable. For the current contribution rules, see the MPF contributions guide.