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Reviewing the MPF System from an Outcome-based Perspective
Cheng Yan-cheeChief Corporate Affairs Officer and Executive Director
Mandatory Provident Fund Schemes Authority13 November 2018
The World Bank (WB)
Goal of Retirement Protection
To prevent old age poverty
1994 – Recommended a three-pillar approach
2005 – Expanded into a five-pillar framework
3
Protect the Aged
0. Non-contributory, publicly financed &managed system
3.Voluntary savings
1.Mandatory, contributory & publicly managed system
2.Mandatory, privately managed, fully funded contribution system
4.Informal support, other formal social programmes & other individual assets
1 2 3 4 5 68
10 1113
1820 21
2325
2830
32 33
0
5
10
15
20
25
30
35
19
81
19
92
19
93
19
94
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
08
20
10
20
11
20
16
Notes:1. “Year” refers to the year in which second pillar systems started operation. 2. Only DC systems are included. 3. Those jurisdictions with second pillar systems discontinued are excluded.
Sources: International Monetary Fund, International Labour Organisation, International Organisation of Pension Supervisors, Maldives PensionAdministration Office, Mesa-Lago, National Pensions Regulatory Authority, OECD, Scherman, Superintendence of Pensions, World Bank.
No. of Second Pillar Systems in the World
MPF in Line with the Global Trend
4
WB’s Outcome-based Assessment (OBA) Framework for Private Pensions
A framework to evaluate the performance of a private pension system (2nd Pillar)
5 key outcomes
Coverage
Sustainability
Security
Efficiency
Adequacy
6
For further details, please refer to Price W, Ashcroft J, Hafeman M. (2016). Outcome Based Assessment for Private Pensions: A Handbook. World Bank, Washington, DC.
Outcome 1: Coverage
Maximizing the proportion of the working-age population participating in private pension schemes and the proportion of retirees receiving such financial support in retirement
9
Outcome 1: CoverageEnrolment Rates of the MPF System
99% 100% 99%100% 100% 100%
68% 69% 70%
0%
20%
40%
60%
80%
100%
as at 30.9.2016 as at 30.9.2017 as at 30.9.2018
Enrolment Rates of MPF Schemes
Employers Employees Self-employed persons (SEPs)
The MPF System has very high enrolment rate
10
Outcome 1: CoverageCoverage of Private Pension Schemes in Different Jurisdictions
95%91%
85%* 84% 84% 81%74% 70% 67%
61% 60%
0%
20%
40%
60%
80%
100%
Cove
rage
(a
s a
% o
f E
mp
loye
d / W
ork
ing
Po
pu
lation
)
* Employed population covered under MPF schemes, ORSO schemes and other statutory pension or provident fund schemes
Coverage of Private Pension Schemes
11
Mandatory
Auto-enrolment/collective agreement
Outcome 1: CoverageFactors Contributing to High Coverage
Joined MPF schemes
73%
Joined other retirement schemes (e.g. ORSO) 11%
Exempt persons
13%
Not yet joined any MPF schemes
2%
Mandatory participation (except for exempt persons)
Labour force characteristics (mostly engaged in formal employment)
Geographical factors (densely populated)
Employed Population by Type of Retirement Schemes
Not covered by private pension schemes in Hong Kong, e.g. domestic employees and those aged above 65 or below 18
12
As at end Sep 2018
Outcome 2: Sustainability
Ensuring that the promised retirement income will be delivered without placing burdens on government, employers, or workers for financing any shortfalls
14
Outcome 2: SustainabilityMPF System: Sustainable by nature
• Universal coverage for employed population (except for exempt persons)
Mandatory
• Independent from Government’s revenue / public financial resources
PrivatelyManaged
• Dedicated assets to meet future pension benefits payable to members
Fully Funded
• Contributions are defined and made by employers and employees (a total of 10% of salary, subject to minimum and maximum relevant income)
DefinedContribution
15
Outcome 2: SustainabilityMPF Gaining Importance in the Economy
As at 30 September 2018, MPF assets reached $858 billion
Representing approximately 32% of Hong Kong’s GDP in 2017
Source: MPFA and Census & Statistics Department
13%
16%
12%
19%21%
18%
22%
24% 25% 25%26%
32%
0%
5%
10%
15%
20%
25%
30%
35%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
MP
F A
sse
ts (
as %
of G
DP
)
16
Outcome 2: SustainabilityPension Sustainability Index – Global
Hong Kong has one of the most sustainable pension systems globally
Source: Allianz Global Investors. (2016). Pension Sustainability Index 2016 (International Pension Paper 1/2016)
0 1 2 3 4 5 6 7 8 9
Thailand
China
Slovenia
Greece
Brazil
Italy
India
Malta
Japan
Spain
Cyprus
South Africa
Portugal
Croatia
Taiwan
Indonesia
Colombia
Ireland
Slovakia
France
Hungary
South Korea
Turkey
Romania
Bulgaria
Belgium
Austria
Russia
Poland
Germany
Singapore
Philippines
Argentina
Malaysia
Czech Republic
Peru
Luxembourg
Finland
Lithuania
Canada
Hong Kong, China
Switzerland
Mexico
United Kingdom
Chile
United States
Estonia
Latvia
New Zealand
Norway
Netherlands
Sweden
Denmark
Australia
Hong Kong ranked 14th out of 54 jurisdictions
Scale from 1 – 10. A jurisdiction with
an overall score of 1 represents the
greatest need for reform and 10
represents the least need for reform.
17
Outcome 2: SustainabilityPension Sustainability Index – Asia
Hong Kong: highly sustainable
Source: Allianz Global Investors. (2016). Pension Sustainability Index 2016 (International Pension Paper 1/2016).
0 1 2 3 4 5 6 7
Thailand
China
India
Japan
Taiwan
Indonesia
South Korea
Singapore
Philippines
Malaysia
Hong Kong, China
Scale from 1 – 10. A jurisdiction with an overall score of 1 represents the
greatest need for reform and 10 represents the least need for reform.
18
Outcome 3: Security
Minimizing the risk of loss or misappropriation of pension assets before they are withdrawn by members
20
Outcome 3: Security Safeguarding Interests of Scheme Members
Sound Legal & Financial System
Hong Kong’s sound legal framework and financial system serve as the backbone of the MPF System
“Strong and stable financial markets” (WEF, 2017)
Global Competitive Index 2017-18Ranking of Hong Kong (out of 137 economies)• Institutions 9• Macroeconomic Environment 6• Financial Market Development 5
21
Outcome 3: Security Safeguarding Interests of Scheme Members (Con’t)
Robust Supervision & Regulation of MPF
Trust arrangement: keep MPF scheme assets separate from those of employers/ MPF trustees/ other service providers
Stringent approval & registration criteria
On-going monitoring of MPFtrustees by the MPFA
Professional indemnity insurance to be taken out by MPF trustees
Compensation Fund
Four-tier Protection under the MPF System
22
Outcome 4: Adequacy
Ensuring people accumulate retirement benefits that could
protect them from poverty;
allow them to share in increased prosperity; and
protect them from a severe drop in living standards at retirement, taking account of other sources of financial support
24
Outcome 4: AdequacyModerate Contribution Rate
6.5%
9.5% 10.0% 10.0%
15%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Mexico Australia Chile Hong Kong Israel
% o
f W
age
s/Ea
rnin
gs
Moderate contribution rate, comparable to similar private pension systems
OECD (2017). Pensions at a Glance 2017: OECD and G20 Indicators.
Contribution Rates of Mandatory Private Pension Systems
25
Limitation of MPF
As a Pillar 2 system, the MPF System is intended to provide basic retirement protection for employed population
The different pillars need to work together to provide adequate retirement protection for the entire population
Maximum / Minimum Relevant Income (Max RI / Min RI) Levels
Employers and employees contribute a total of 10%, subject to a cap of $3,000 per month (Max RI at $30,000 / 90th Percentile Earning)
Employees earning <$7,100 per month need not contribute, only employers need to contribute (5%) (Min RI at $7,100 / half of Median Earning)
Max RI adjustment proposal : $30,000 to ???
Min RI adjustment proposal : $7,100 to ???26
Outcome 4: AdequacyBasic Retirement Protection
The RI levels are reviewed regularly and adjusted when necessary to keep up with income changes of the workforce in Hong Kong
Adjustments to the RI levels are crucial for maintaining an appropriate amount of benefits for retirement saving purposes
27
Outcome 4: AdequacyBasic Retirement Protection
To encourage individuals to save more for their retirement, the Financial Secretary has announced tax concession for MPF voluntary contributions and deferred annuities
At the beginning of April 2019, individuals will enjoy concessions on their salary tax by making voluntary contributions to a tax-deductible voluntary contribution (TVC) account
Working with the Government on the relevant legislative changes
Formed a working group with MPF trustees to help them cater for these new TVC accounts
28
Outcome 4: AdequacyBasic Retirement Protection
0
100
200
300
400
500
600
700
800
900
1,000
Accrued Benefits Total Net Contributions Received
HK
$ B
illio
nOutcome 4: AdequacyMPF Assets
A growth of MPF assets since the inception of the System
MPF Accrued Benefits and Net Contributions (1.12.2000 – 30.9.2018)
Investment Returns(net of fees & charges)
$245.20 billion
Contributions(net of amount withdrawn)
$613.11 billion
$858 billion
29
1,974,000
1,547,000
1,227,000
985,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
Investment Horizon / Year
4.00
3.00
2.00
1.00
$
Investment Return / %
Projected Final
Accrued Benefits / $
Outcome 4: AdequacyProjected Accrued Benefits of Scheme Members over 40 Years’ Investment Horizon: Hypothetical Examples
Assumptions:• Nominal investment returns are 1%, 2%, 3% and 4% (net of fees and charges) throughout the relevant investment horizon• The monthly salary of 16,700 refers to the median salary of the employed persons aged 18 – 64 as at Q2 2018; no adjustment of monthly
salary throughout the relevant investment horizon• The employer and the employee each contribute 5% of the employee’s relevant income (i.e. 10% of the employee’s relevant income in total)• No adjustment to the existing statutory minimum and maximum relevant income levels, which are 7,100 and 30,000 per month respectively• Inflation rate is assumed as zero (i.e. inflation not accounted for in these examples)
30
Outcome 4: Adequacy
31
Nominal Investment Return / %
Monthly Salary / $
16,700 30,000
1.00 985,000 1,770,000
2.00 1,227,000 2,203,000
3.00 1,547,000 2,778,000
4.00 1,974,000 3,546,000
Projected Accrued Benefits of Scheme Members over 40 Years’ Investment Horizon
Assumptions:• Nominal investment returns are 1%, 2%, 3% and 4% (net of fees and charges) throughout the 40-year investment horizon• The employer and the employee each contribute 5% of the employee’s relevant income (i.e. 10% of the employee’s relevant
income in total)• No adjustment to the existing statutory minimum and maximum relevant income levels, which are 7,100 and 30,000 per month
respectively• No adjustment of monthly salary throughout the 40-year investment horizon• Inflation rate is assumed as zero (i.e. inflation not accounted for in these examples)
Outcome 4: AdequacyDistribution of Accounts by Range of Accrued Benefits
32
* 50 000 accounts had accrued benefits of more than $1,000,000
• It should be noted that as scheme members may have more than one account, the distribution pattern of scheme members’ MPF benefitsmay not be the same as the one shown in the Chart.
• As of December 2017.
The amount of VC has grown substantially over the years
The Government’s proposal to introduce tax concession for VC will help further strengthen the retirement protection function of the MPF System
Outcome 4: AdequacyVoluntary Contribution
2,993(10%)
3,555(11%)
4,253(12%)
4,346(10%)
4,995(13%)
5,934(14%)
6,655(14%)
7,272(14%)
7,735(13%)
8,697(13%)
9,487(14%)
10,411(15%)
0
2,000
4,000
6,000
8,000
10,000
12,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
MPF Voluntary Contribution (% of Total MPF Contribution)HK$m
33
Outcome 5: Efficiency
Maximizing net-of-fee returns by improving investment performance subject to acceptable risks
35
MPF Landscape
30 MPF schemes privately managed by 14 active trustees (as at 30 Sep 2018)
9.6 million MPF accounts (as at 30 Sep 2018)
4.1 million contribution accounts and 5.6 million personal accounts
Administration cost and expenses accounted for 43% of FER – 2012 Study
Reasons for high scheme administration costs
35 million transactions yearly (high levels of manual and paper-based processing)
Lower industry co-operation to resolve industry-wide problems
36
Outcome 5: EfficiencyInvestment Return of MPF
Hinging on scheme members’ fund choice
(as at 30 Sep 2018)
Past 1 YearPast 5 Years -Annualised
Since 1 Dec 2000
Annualised CumulativeReturn
Volatility
Equity Fund 2.9% 5.9% 5.0% 138.2% 5.3%
Mixed Assets Fund 2.6% 4.2% 4.3% 112.6% 2.7%
Bond Fund -2.2% 0.2% 2.5% 55.0% 0.9%
Guaranteed Fund 0.7% 0.5% 1.1% 22.1% 1.1%
Money Market Fund –Other than MPF Conservative Fund
-0.1% 0.1% 0.5% 9.5% 0.2%
Money Market Fund –MPF Conservative Fund
0.3% 0.1% 0.7% 13.3% 0.1%
Rate of Return of MPF Funds
37
Outcome 5: EfficiencyFees and Charges
2.06 2.10 2.09
2.01 1.99
1.94 1.91
1.84 1.83
1.77 1.73
1.75 1.72
1.70 1.69 1.65
1.62 1.60
1.57 1.57 1.56 1.56 1.53 1.53
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
26%
%
(Over the time period)
The average Fund Expense Ratio (FER) of MPF Funds has decreased over the years
Average FER of MPF Funds (Jul 2007 – Sep 2018)
38
1,999,000
1,732,000
1,510,000
0
500,000
1,000,000
1,500,000
2,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
$
Investment Horizon / Year
FER at 0.95%
FER at 1.53%
FER at 2.10%
Outcome 5: EfficiencyImpact of Fees and Charges on Scheme Members’ Accrued Benefits
Estimated Final Accrued Benefits of Scheme Members
Key Assumptions• Gross investment return (before fees and expenses) is 5% per year• Each FER level remains constant throughout the 40-year investment horizon• Monthly salary is $16,700, which was the median salary of employed persons aged 18 - 64 as at Q2 2018; no adjustment of monthly salary• No adjustment to the existing statutory minimum and maximum relevant income levels, which are 7,100 and 30,000 per month respectively• Inflation rate is assumed as zero
A reduction in fees and expenses would improve significantly scheme members’ accrued benefits over the long term
Incr
ease
: $
22
2,0
00
(1
4.7
%)
Incr
ease
: $
48
9,0
00
(3
2.4
%)
39
Encourage consolidation of inefficient schemes & funds to achieve economies of scale
Outcome 5: EfficiencySupply Side Initiatives – Promoting Economies of Scale
51 51 49 48 47 46
40 40 38 3841 40 41 41
38 38 3632 32
0
10
20
30
40
50
60
14
15
16
17
18
19
20
No
. of
Reg
iste
red
Sch
emes
No
. of
Tru
stee
s
No. of Approved Trustees No. of Registered Schemes
40
* Includes an approved trustee which does not operate any MPF scheme and two MPF schemes which are pending termination.
Outcome 5: EfficiencySupply Side Initiatives – Retirement Solutions for Achieving Better Saving Outcomes
Default Investment Strategy (DIS)
Ready made strategy balancing long-term risks and returns
Fee caps
Globally diversified investment
NAV in DIS and DIS Constituent Funds: $30 billion (4% of MPF System NAV) (as at end Sep 2018)
1.59m(17%)
8.01m
All MPF accounts
DIS
Non-DIS
No. of MPF accounts in DIS or DIS Constituent Funds
(as at end Jun 2018)
41
Use of digital technology to enhance operational efficiency
Outcome 5: EfficiencySupply Side Initiatives – Streamlining & Simplifying Processes
42
Trustees
• Facilitating Transfer of Benefits Across Schemes
Intermediaries • Promoting Electronic Submission of Statutory Returns
• ePASS (Electronic Portability Automation Services System)
• ePayment for MPF Transfer
• Data Submission using Enhanced TrusNet Platform
• eService for Intermediaries
• Promoting Electronic Submission of Statutory Returns
Outcome 5: EfficiencySupply Side Initiatives – Governance Charter
On 24 May 2018, all 14 MPF trustees pledged their commitment to a Governance Charter advocated by the MPFA, recognizing the importance of good governance and fiduciary responsibilities in protecting the interests of scheme members and providing value for money services
To introduce the implementation of good governance to trustees in phases over the next 12 to 18 months:
Phase 1 – seek MPF trustees’ support of the governance principles and the elaborations underpinning each principle.
Phase 2 – assess whether MPF trustees’ existing governance framework and arrangements are in adherence with the Governance Principles
Phase 3 – provide guidance or training for MPF trustees on the expected standards underpinning each of the Governance Principles43
Outcome 5: EfficiencySupply Side Initiatives – Enhancing Scheme Administration
44
Smart Digital Platform
Digital, flexible and user centric platform
One-stop access
Smart Administration
Standardization, streamlining and automation
Central hub for processing ER and EE’s instructions and transactions
Paperless
Outcome 5: EfficiencySupply Side Initiatives – Enhancing Scheme Administration
45
Development of eMPF is crucial to the reform of the MPF System
Objectives of eMPF:
Enhance members’ experience
Build an open architecture to bring competition
Further fee reduction to the overall MPF System
Pave the way for future MPF reform
Outcome 5: EfficiencyDemand Side Initiatives – Strengthening Employees’ Control
Employee Choice Arrangement (ECA)
Strengthening employees’ autonomy to opt to transfer the accrued benefits derived from employees’ mandatory contributions to the scheme of their own choice
Helping to increase members’ power as consumers
$193 billion of MPF benefits can be transferred under ECA as at end Dec 2017
46
Provision of a centralized database containing key information about MPF schemes and funds
Outcome 5: EfficiencyDemand side Initiatives – Enhancing Information Disclosure
47
Fund Performance Platform (FPP)
Outcome 5: EfficiencyDemand Side Initiatives – Consolidation of Personal Accounts
49
e-Enquiry of Personal Account (ePA) (28 Apr 2017)
As at 31 Oct 2018, over 75,000 scheme members have completed the registration process and activated the ePA service
Help scheme members manage MPF personal accounts (PAs) by providing easy access to the following information
• Whereabouts of their MPF personal accounts
• A contact list of all trustees
• Fees and returns of MPF funds
• The latest MPF news
307,000 applications on consolidation of PAs (May 2017 – Sep 2018)
About 70% of all MPF assets ($590 billion)* can be transferred freely between MPF schemes, including:
• 5.49 million personal accounts - $370 billion
• 3.98 million contribution accounts - $214 billion(* as at end 2017)
Enhancing member engagement through promotional and publicity activities
TV, Facebook Messenger Bot, roving exhibition, MPFA website and mobile apps, seminars, workshops, publication materials, etc
Outcome 5: EfficiencyDemand Side Initiatives – Engagement and Education
50
52
Major Challenges
Outcomes Performance of the MPF System
Coverage• Very high enrolment rate
(100% for both employers and employees; 70% for SEPs)
Sustainability• Sustainable by design
(mandatory, privately managed, fully funded and defined contribution)
Security• Safeguarded by the sound legal and financial systems as
well as regulatory and supervisory regime of MPF
Adequacy• One of HK’s retirement protection pillars• Level of adequacy will improve as the System matures
Efficiency• Strive for greater efficiency and lower costs of the MPF
System
Conclusion