Hong Kong funds eye pension plan

六月 21, 2011
Joe Chan
A plan to revise contri­bution requirements for Hong Kong’s Mandatory Provident Fund (MPF) system could provide a tailwind to asset flows, funnelling as much as an additional HK$2.4bn ($308m) a year into the market for fund managers.

The government has proposed raising the ceiling for monthly income subject to mandatory MPF contribution requirements, from HK$20,000 to HK$25,000, meaning employees and employers would each have to contribute 5 per cent of a slightly larger slice of pie.

That change, planned for June 2012, would affect 514,500 employees, according to a government statement. If all of those participants sit at or above the cap of HK$25,000 – a generous assumption – the new requirement would increase their contributions by HK$257.25m a month, or HK$3.09bn a year.

Those potential inflows would be tempered by the exclusion of other investors from the system.

Lower-income earners receive a break under the plan, with the threshold for contribution requirements set to rise from HK$5,000 in monthly income to HK$6,500. That change, planned for November, would exclude 180,900 individuals, though employers would still need to pay their 5 per cent, according to the government.

The loss of employees’ contributions could cost the MPF system as much as HK$58m a month, or HK$696m a year.

Estimates of an additional HK$2.4bn in flows are probably high, since employees may not be clustered closely around the minimums and maximums, notes Naomi Denning, managing director of investment services for Asia Pacific at Towers Watson.

The distribution of income in Hong Kong would affect that analysis. Roughly 45.3 per cent of Hong Kong’s households had monthly income above HK$20,000 in the fourth quarter of 2009, while 34.8 per cent had monthly income above HK$25,000, according to the most recent data available. If individual distributions proportionally reflect household distributions, the asset-flows estimate could be as low as HK$1.8bn.

Fund managers give the MPF system mixed reviews from a business standpoint. Its HK$378.28bn in member accounts offers a steadily growing pool of reliable assets. But account sizes are relatively small across 422 funds offered through 41 registered schemes.

Account sizes for employees at the low end of the income range – between HK$5,000 and HK$6,500 in monthly income – are likely to be even smaller in future, says Ms Denning. But average account sizes would increase under the government’s plan as high earners contribute more.

Industry groups have stressed the importance of using the MPF system as just one pillar of retirement savings, with a strong supplement of voluntary investments.

From a retirement standpoint, raising the maximum is a “positive step”, but it should not give investors a sense of “false comfort” that their MPF investments are sufficient, says Sally Wong, chief executive of the Hong Kong Investment Funds Association.

“Based on some estimates, MPF can probably achieve a replacement ratio of 25-30 per cent, and to maintain the same standard of living post-retirement, one needs to achieve a ratio of 70-80 per cent,” she says.

“Thus, there is still a huge gap and employees should save more – eg, through voluntary contributions under MPF or through other channels to make up the shortfall.”

The MPF system came under fire in March from Templeton Asset Management’s Mark Browning, co-chief executive for Asia, during a panel at Fund Forum Asia in Hong Kong.

“MPF and CPF [Singapore’s Central Provident Fund] are actually holding the retirement industry back in terms of pensions, and in themselves, they are inadequate to pensioners’ needs,” he said.

However, Mark Konyn, chief executive at RCM Adia Pacific, described both the MPF and CPF systems as “truly positive” for both investors and fund managers. “I think it would be too early to draw a significant conclusion that they are not working, or they are a failure, or they are bad for the industry,” he said during the same panel.

“I think they are starting to build a base of knowledge around long-term investing and saving.”

Scott Johnson is a reporter on Ignites Asia, a Financial Times publication, where this article first appeared


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