High fees, unattractive returns, a reliance on paper based processing, and a blanket approach that offers few incentives for members to pay more into their Mandatory Provident Fund (MPF) portfolios: these are some of the issues that need to be addressed in a system which covers 73% of the employed population in Hong Kong, according to PwC’s new "Review of Hong Kong’s MPF System: Recommendations for Key Reforms."
Hong Kong is not immune to the global trends buffeting the pension landscape. The proportion of the population aged 65 and above is estimated to increase to 36% by 2064 (from 15% in 2014).
The ‘overall dependency ratio’ (the number of people aged under 15 and over 64 relative to the population aged 15-64) is projected to rise from 37.1% in 2014, to 83.1% in 2064.
According to PwC’s study, major shortcomings include the large amount of paper-based transactions, a one-size-fits-all approach and low levels of engagement among members.
Lower and higher income earners are discouraged from increasing their MPF investment because of a lack of incentives, such as limited tax breaks. In addition, comparatively high fees due to inefficient administration processes, and layering of investments, affect the total return on investment.
The 16-year annualized return on all MPF funds is 2.8%, compared to an annualized 5% return for the Hang Seng Index over the same period.
Inadequate financial literacy
Inadequate financial literacy – which could help MPF members make informed decisions about their portfolio – and a lack of post-retirement investment products also hinder the transformation of Hong Kong’s pension system.
“MPF serves as Hong Kong’s ‘second pillar’ of old age protection. The World Bank defines this as a mandatory, privately managed, fully funded contribution scheme,” says Marie-Anne Kong, Asset and Wealth Management practice leader, PwC Hong Kong.
“However, improvements to the system are overdue, given that it is 17 years since it was first implemented. If we don’t address these problems it may outlive its usefulness and not be fit for purpose in the near future.”
To enhance efficiency and streamline processes, PwC suggests introducing new technologies to construct a centralized database. This would contain a traceable record of all MPF members on a single platform shared by service providers, members, regulators and government departments, such as the Inland Revenue Department.
The centralized platform can also be used to streamline the on-boarding process via a Know Your Client (KYC) utility, which would provide faster and more efficient on-boarding, lower cost of operations and greater customer satisfaction.
Essential next step
“Making efficient use of technology is an essential next step for the MPF system,” says Albert Lo, Financial Services Consultancy partner, PwC Hong Kong. “It is currently far too dependent on paper processes. This pushes up costs and doesn’t enable members to track their investments easily.”
To meet the needs of different market segments, the study also suggests differentiating MPF members by income thresholds, limits on contributions, product selection or other criteria. This would enable the MPF system to continue in its objective of ensuring that workers with different income levels have suitable levels of contribution and an increased range of product choices.
“The one-size-fits-all approach is a major constraint on the effectiveness of the MPF system,” says Peter Sparshott, Pensions Management Consultancy partner for PwC UK. “The system needs to recognize the different aspirations and objectives of its members.”
PwC believes technology and segmentation can lead to cost savings in MPF accounts, improved engagement and even some consolidation in the industry. The regulators should revisit the investment options available to members from time to time.
“An improved pension system is necessary to reduce the risk of projected shortfalls and to ensure a profitably managed fund that can fulfill its financial obligations to members,” says Kong. “Policymakers have begun to take steps to address some of these issues. But for members to have confidence in the pension system, faster progress needs to be made.”