Making MPF Work Harder: Raising the MPF Contribution Rate and Age-Based Default Portfolios

Hong Kong’s ageing-population challenge is well known. In October 2011, then Chief Executive Donald Tsang delivered his final Policy Address, with retirement protection among the priorities. Under the World Bank’s framework, Hong Kong’s retirement protection rests on four pillars: CSSA and the Old Age Allowance, MPF, savings, and support from children. A decade after its launch, MPF was still criticised for low contribution rates and low investment returns — HKU scholar Chow Kei-lee proposed two new ideas that would cost the public purse nothing.

Why is the MPF contribution rate so low?

The MPF contribution rate has long been one of the scheme’s most criticised features. A March–April 2010 telephone survey by HKU’s Public Opinion Programme (1,001 MPF contributors) found only about one in ten made voluntary contributions; encouragingly, over 40% said they would start or raise voluntary contributions when their income rose — the willingness exists, but the mechanism does not.

Proposal 1: link the rate to salary

Using behavioural economics’ “commitment effect”:

1. When an employee’s salary rises by a set percentage (say 10%), their employee contribution rate rises by a set amount too (say 5%).
2. The arrangement requires the employee’s prior consent, and they may change their decision at any time.
3. The mechanism works both ways, with the current 5% rate as the floor.

Behavioural research shows that once employees commit, only a minority reverse the decision — an effective way to lift the overall MPF contribution rate.

Proposal 2: age-based default portfolios

The same survey revealed widespread investment inertia:

The proposal: when employees start contributing, their portfolio defaults to an age-based mix favouring long-term returns (generally lower risk at older ages), updating automatically every ten years; employees are notified in advance and may opt out. Research shows few actively change a default — inertia becomes an ally of better returns.

This idea is precisely the core logic of the default investment strategy introduced years later: using defaults to overcome investment inertia.

The author notes high fees and portability were already widely debated; for low-income earners and homemakers, whom MPF helps little, other retirement pillars must fill the gap. For the basics of MPF contributions, see the MPF education hub.