Road to universal retirement protection

The Mandatory Provident Fund (MPF), as a form of retirement protection, was launched in December 2000. It is an employment-based, privately run plan under supervision of the Mandatory Provident Fund Schemes Authority (MPFA).

Since its inception, the MPF management fee has been criticized as very high while the returns are insufficient for providing a satisfactory retirement income.

The recent budget furor magnified the shortcomings of the MPF and sparked renewed calls for universal retirement protection that covers the entire population, not just the working population. The public outcry resulted in the cancellation of the government’s plan to inject HK$6,000 into every individual MPF account. Financial Secretary John Tsang opted instead for an HK$6,000 cash handout to eligible citizens.

Speaking to China Daily in an exclusive interview, MPFA Chairperson Anna Wu said the MPF was a result of extensive debates in the community over a few decades. It reflects a consensus showing a preference over a central provident fund or a universal retirement protection plan.

She noted Chief Executive Donald Tsang’s recent comment that it is difficult to run a universal retirement protection scheme without broad consensus in society. The MPFA has in the meantime introduced measures to enhance employee protection. Yet since there are strong voices calling for universal retirement protection, the government needs to respond.

"This is an unavoidable issue. The incumbent chief executive and the next chief executive must consider it thoroughly," she said. "It looks like the chief executive will do something but meanwhile we are striving to improve the scheme."

Wu recalled there were vigorous debates about universal retirement protection prior to 1997. Some held that citizens born, raised and resident in Hong Kong, should be entitled to retirement protection.

There were however worries that universal retirement protection funded by taxation would create a heavy financial burden. "Many people worried about ‘cross subsidization’, meaning the younger generations eventually would be called upon to subsidize the older generation," she said. "This particularly would be a heavy burden on young couples who would become the ‘sandwich’ class to raise their children and support the elderly at the same time."

In the end, the pre-1997 Legislative Council adopted a mandatory provident fund with accrued benefits for employees.

"The MPF is a semi-government and semi-private sector scheme based on a retirement protection model provided by the World Bank," she explained. "It provides partial but not full protection, as people should have personal savings while the government provides welfare such as public housing and health services."

Wu is aware of the criticism that management fees are too high, while money accruing in individual accounts is not enough to provide for retired life.

She quoted examples in foreign countries that retirement protection schemes take 30-40 years to mature. "In Hong Kong, the MPF scheme is only 10 years old. Due to the short time, the accrued amount is small," she said. "Also, the fees are expensive because the plan is run by commercial organizations."

The MPFA has asked those organizations to lower the management fees. "When the MPF was launched 10 years ago, the companies put in huge capital investment for training and computer systems," she said. "Now there is room for fee reductions since they have fully recovered their investment. We also ask them to simplify work procedures to minimize cost."

At present, employers and employees each contribute 5 percent of staff salaries to the fund, with the intermediary agencies chosen by the employers. To give employees more choices, employees will be allowed to choose intermediaries to supervise their part of contributions in a plan popularly known as the "semi-free travel plan".

She said: "Choices by employees will generate competition among the intermediaries to lower the management fees. In the longer term, we will consider a ‘total free travel plan’ to allow employees to choose intermediaries for all contributions".

The proposal has been submitted to the relevant panel of the Legislative Council (LegCo). The government plans to introduce a bill to LegCo, in the hope that it will be passed within the 2011-12 legislative session.

The MPFA also proposes to raise the lower salary limit from HK$5,000 to HK$6,500 and the upper limit from HK$20,000 to HK$25,000. The LegCo passed the lower limit on June 29, leaving the upper limit to be decided later.

Since the minimum wage, with its hourly rate of HK$28 has come into effect, people earning HK$5,824 per month have become subject to MPF contributions. "Knowing this will reduce their take-home pay, we find it necessary to revise the lower limit," she said.

Wu is optimistic the LegCo will pass the resolutions. "Those who veto the new lower limit will incur serious political consequences," she said. The MPFA at first proposed to raise the upper limit to HK$30,000, she revealed. Though the business sector is not pleased, she believes the community is capable of bearing with the new arrangement.

The MPFA has heard calls from employees to permit withdrawal of money in individual accounts before 65. The age restriction as it stands, is stipulated by law, she said, but the MPFA is considering a mechanism for partial release in special circumstances.

For instance, some citizens may urgently need money when they are out of work, or have to pay housing mortgages, unexpected medical costs or university education for their children. "We are doing a study on whether payment may be released to employees before 65 on compassionate grounds and if yes, how much shall be released," Wu said.

"We do not agree to withdrawal in full because this defeats the purpose of retirement protection. We also oppose withdrawal by account holders who become unemployed, because those people should seek social security in such circumstances."

MPFA ‘has nothing to do’ with HK$6,000 payout fiasco

Anna Wu believes that, as a member of the Executive Council or a member of the chief executive’s cabinet, she is obliged to abide by "collective responsibility" and "confidentiality" rules. She also reckons that, as part of the political team, Executive Council members have a duty to promote and, at times, defend government policies. One example is members’ participation in the political reform "Act Now" campaign last summer.

She is unwilling to comment on Financial Secretary John Tsang’s sensational U-turn which scrapped the HK$6,000 injection into Mandatory Provident Fund (MPF) accounts and opting instead to distribute the money in cash to eligible citizens. Wu did stress that the MPFA had no direct relation to the chaos.

She also declined to say whether the Financial Secretary had discussed with her, his proposal to inject the funds into the MPF or his subsequent withdrawal of the proposal.

She said she fully understands the fury and frustration of those who opposed the HK$6,000 injection, preferring instead to receive an immediate handout in cold cash.

Through her two years as a cabinet member, Wu said she understands that Hong Kong politics is so torn apart that the administration has no steady support in the Legislative Council, yet political parties who hold the votes cannot be the ruling party.

"This will prompt them to act like the ‘opposition party’ and this is a big headache," she observed. "We shall discuss the viability of a coalition. Otherwise, the government and the legislature will go separate ways. This is very difficult for the government, because it has to beg for votes and bargain with political parties every time it launches new policies."

Wu recalled that in the 2008-09 Budget, Tsang announced an injection of HK$6,000 into the accounts of MPF holders earning less than HK$10,000 a month to help the low income group. This year, the injection was extended to all the HK$2.5 million MPF account holders including the big earners.

The injection, like the electricity allowance, was well-received then and was considered an innovative idea, she said.

But this year’s proposed injection fuelled a strong backlash of public opinions.

"Many people who do not have MPF accounts, such as housewives, were unhappy because the injection would only benefit working people," she commented.

"The law stipulates that MPF account holders can only withdraw money at 65. But since inflation is riding high and has caused food prices to soar, people are dissatisfied and they want instant money to solve their immediate needs."

"It is necessary to understand why the people were furious," she said. "If we look back, it was the unbalanced distribution that sparked people’s fury. It had no direct relation with the MPF, which is only a means of money distribution to the people, but people blamed us at the same time as blaming the government."