(Next Magazine, 2017/5/11, A002, Second Opinion, Bill Stacey)
MPF stifles competition and breeds complacency
In an earlier column I mentioned the MPF as an example of the risk of a complacent government. The diligent team at the MPF Authority wrote back, objecting to that characterization and citing the default investment scheme (DIS) as a desirable reform. This is an edited version of my response.
Don’t think that by talking about complacency and the MPF, I was suggesting that the MPFA has not been active. On the contrary, the MPFA has vigorously sought to extend its role and influence. The complacency that I was talking about was the unwillingness to consider root-and-branch changes to a system that was basically misconceived.Firstly, why is a mandatory retirement system needed at all? Hong Kong people have long proved capable of supporting themselves and their families through prudent financial management. They understand their risk appetite like no centralized scheme can. They jealously guard their returns. Only individuals can decide for themselves when it is time to save for a downpayment on a house, when to put aside separate money for retirement, and when it is prudent to shift asset allocation conservatively.
The MPF has hindered the development of private services advising on retirement. It has largely eliminated companies using attractive private pension schemes as an employment benefit. It has bred complacency. Contributions to the MPF will not be adequate to build an endowment that anyone can live off in retirement. Yet because the MPF is in place and the government has thereby assumed responsibility for retirement income, too many people stop thinking about retirement except in terms of what is mandatory.
Secondly, the DIS was a distraction. The focus should have been a real and easily implementable choice and control over your own retirement savings, not a “default” option. The system creates captive single providers to each employer, and in turn provides individuals with a menu of options so restricted, so difficult to change, and so costly to operate that good performance is almost impossible. An alternative would be a US 401K style of system where individuals control their own money and make their own investment choices. Why not allow 100% of the money to be in bank deposits? Why not allow extensive use of ETF’s with low fees? Why not allow “self managed” funds like those available in Australia? Why not allow individuals to choose their own provider that stays with them, no matter who the employer might be?
Thirdly, the rules that the MPFA has put in place create bureaucratic requirements for all providers and employers that drive up costs. Existing providers are within their rights to charge what the market will bear, but the MPF scheme has created many barriers to entry and left many providers without economies-of-scale, and the changes in recent years have added hugely to operating costs, with little offset for those making the investment. DIS simply makes it even harder for anyone to make money by helping Hong Kong people invest and prepare for retirement. Whilst the DIS fees are lower, they are not low! The 0.75% default compares unfavorably with the 0.15% for low-cost corporate bond ETFs in the United States.
Fourthly, the DIS has been established at the peak of a 30-year bull market in bonds. At that peak, the default scheme imposes more investment in bonds that will grow with age to 80% of the funds for those over 65. That would have been very prudent and low-risk for the last 30 years, but could well be disastrous over the next 30, if interest rates rise. DIS is not necessarily a low-risk option. Risk depends not just on the allocation to equities, but also on the duration of the bonds.The MPFA should think very carefully about how to introduce more competition and real choice, and make individual investors central in the system. Recent “reforms” have only strengthened the case for restoring investment freedom and eliminating the MPF.
The Lion Rock Institute