Hong Kong MPF: Low Contributions but More Retirement Savings
The TRS editor had variously goaded the writer to pen a piece on Hong Kong’s Mandatory Provident Fund, given that Hong Kong is rather similar to Singapore. This is not a comparison in transparency but which describes the features that make the MPF different from CPF.
MPF Authority is an administrator of the provident system. It does not manage investments and is not coerced by legislation to invest in government bonds. Therefore unlike Singapore, the government is unable to extract “hidden taxes” or excess returns. Hong Kongers can join as individuals, as part of an industry association or as a beneficiary of a company MPF account.The TRS editor had variously goaded the writer to pen a piece on Hong Kong’s Mandatory Provident Fund, given that Hong Kong is rather similar to Singapore. This is not a comparison in transparency but which describes the features that make the MPF different from CPF.
MPF Features
All employees have a one-time option to choose between joining MPF or an Occupational Retirement Scheme (ORSO) which is set up by the employer. The MPFA is mandated to process and monitor such schemes.
MPF members set up an account with an approved Trustee, into which contributions are paid. All returns less fees and charges are owned by the MPF member. MPF members choose investments from an approved list of products (a few hundreds). As such they can tailor their accounts to achieve returns according to their risk preference. They can switch products as they wish although frequent changes may be costly. MPF accounts cannot be used for housing, healthcare or any other purposes except for retirement.
Withdrawal is at age 65; however, full withdrawals are also permissible at early retirement. If the early retired return to work withdrawn funds needs to be paid back into MPF.
Rates of return
Average rate of return from inception reported by the MPFA is 5.5% after fees and charges. After adjusting for inflation, the rate of return is 4.8%. Since the asset allocation in each account is chosen by the member, there will be wide variations around the average rate. The chart gives the annual rate of returns over the past 10 years.
Who is better off?
MPF contributions are only 5% each from employer and employee and the salary ceiling is slightly lower than CPF’s $5,000 per month. To make a like for like comparison, the writer adjust a CPF member’s contribution down to MPF’s level and work out the fund balance at age 55 for a graduate starting at $2,800 a month and a non-graduate at $1,500 a month, rising at 4%pa. The projection are based on
- 10 year average rate of return for CPF
- the rates of return since inception for MPF which is lower than its 10 year rate
- the respective average 10 year inflation rates.
| MPF member graduate | MPF Membernon-grad | CPF Membergraduate | CPF membernon graduate | |
| At nominal rates | $428,283 | $261,334 | $291,961 | $179,363 |
| At real rates | $378,224 | $233,087 | $213,147 | $148,751 |
Some may argue against the adjustment in CPF to make like for like comparison with MPF. But remember after mortgage payments and allocations to Medisave, most CPF members are allocating not much more than 10% into their retirement funding anyway. The low contributions gave the Hong Kongers the flexibility to spend the rest of their disposal income on personal savings, housing and medical insurance as they see fit.
You can never run from risk
Others may argue “how about risk!” Good question. CPF members may enjoy the cosy comfort of their funds invested in Special SGS backed by the full credit of the Republic of Singapore while MPF members invested in equity and corporate risks. But, as can be observed from the table, CPF members are simply exchanging the risk of losses in their investments for the risk that their real rates of return and therefore savings are insufficient at a future date. When one is working, one can cover losses by increasing personal savings. Low contribution rates help in this aspect. But when one is near retirement only to find that the low “risk free” returns left insufficient funds, there is little option left.
Conclusion
It is instructive that when MPF was set up in 2000 the Hong Kong government did not copy CPF even if it gives them a monopoly over retirement savings. Instead, they preferred the British employment pensions model which kept contributions low and retirement savings for exactly that objective. For the SG government large contributions are just too much a temptation.
Chris K
* Chris K holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.