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Jason Krupp

The government  this month passed into law a significant change to the Mandatory Provident Fund (MPF) legislation, which will give Hong Kong's pension contributors a greater say in their retirement savings.
The Mandatory Provident Fund Schemes Amendment Bill 2009,  or portability bill, will effectively allow people to transfer the employee contribution of their pension savings to the provider of their choice on an annual basis, the goal being to get  the workforce to be more engaged and personally invested in their retirement savings.
Engagement, or share of mind, is a significant challenge for the retirement industry in Hong Kong.
With relatively small balances and low contribution rates, people view MPF contributions as a tax deductible rather than a nest egg for their golden years.
The bill, which will allow 60 per cent of savings in the system to be moved, is also expected to spur competition in the market as trustees compete to lure investors.
But will it bring about a transformation in the market? The answer from the provider standpoint seems to be yes, but not in the way the legislation originally intended.
The industry, both from the private sector and regulator sides, is battling with investor burnout and a notable lack of interest in long-term investment strategies.
Many within the industry feel that the additional choice will only appeal to a minority of people who are actively managing their retirement savings.
'Personally, I think there has been a rush into portability and it hasn't been thought through properly,' said Peter Crewe, senior vice-president and managing director of AIA Pension and Trustee.  
'I have personally advised delaying portability because I think the average MPF member's investment knowledge remains quite low, as was recently highlighted by the minibond issue. People are investing in products that they don't know anything about.' 
This sentiment was shared by Sheila Dickinson, senior vice-president at financial adviser ipac Hong Kong.  
'The essence of the bill is to give people more choice, which is good. But in reality how many people understand that choice? We see that a lot of people in the MPF system simply fill in paperwork when they join a scheme by ticking all the boxes, and that is it,' she said.
The bill only provides partial portability, meaning employees cannot transfer the employer contributions, which remain with the original trustee. This effectively doubles the amount of administration that already disaffected employees will have to deal with to manage their pensions.
And, while this disinterest is expected to erode as MPF balances grow over time, many providers feel that it would be more effective to increase the level of mandatory contributions in line with international levels.
Hong Kong has one of the lowest mandatory pension contributions rates in the world, and it is widely acknowledged that MPF savings alone are woefully inadequate to fund retirement.
Lau Ka-shi, chief executive and managing director of Bank Consortium Trust   and chairwoman of The Hong Kong Retirement Schemes Association, said: 'As an industry, we have been recommending a slow contribution increase and also moving the cap for almost two years now, but this hasn't even been talked about in Legco. The same with adding a tax incentive; we have been speaking about that for the past 10 years.'
Providers also note that portability will significantly affect their cost base. The legislation specifically states that the cost burden of providing additional choice is placed squarely on trustees, so employers and employees will not see a bump in fees.
Mr Crewe said: 'There has to be reinvestment into systems and infrastructure to support this halfway-house portability.
'And, of course, it is not just systems. We have to change ancillary materials as well as retrain and educate our staff and intermediaries, be they captive or individuals. So there are a lot of ancillary costs involved.
'The reality is that if you want to remain in this business you are going to have to incur these costs,' he said. 
An additional concern of providers was that while the portability bill was introduced to foster competition, it might have the opposite effect.
Ms Lau said: 'You have to understand that it may increase competition among providers, but not necessarily all providers, because it will have benefited the players with the bigger market share. Is this what you call competition? I have my doubts.'
Ms Lau said that the portability bill would change the business model for the industry in Hong Kong and that the investment required and lower margins might act as a disincentive for global finance companies to remain in the market.
Clearly the pension industry has reservations about the introduction of portability.
Whether these concerns are valid from the regulator or government's point of view has yet to be answered, as the Mandatory Provident Fund Schemes Authority declined to participate in this article.
Whether portability will spur employees to take ownership of their retirement savings or  it will turn out to be a stillborn piece of legislation will become clear in 18 months, when the changes are expected to take place in the market.



Industry unsure portability bill will be effective