Published by Asia Asset Management – 12th Oct 2018
The Hong Kong government plans to scrap the so-called offsetting mechanism in the city’s Mandatory Provident Fund (MPF) that allows employers to use their portion of contributions to cover long service and severance payments by providing them with a HK$29.3 billion (US$3.76 billion) subsidy.
Hong Kong Chief Executive Carrie Lam says in her annual policy address in the city’s legislature on October 10 that the government is targeting to secure approval from the Legislative Council by 2022, and implement the plan in 2024.
Employers and employees are compulsorily required to contribute at least 5% of an employee’s monthly salary to the MPF, Hong Kong’s largest public retirement plan. Employers are now using their contribution to offset their employees’ long service and severance payments.
Ms. Lam says in her speech that it’s time to settle an issue that “has beleaguered wage earners for years and to accord better retirement protection to employees”.
She proposes paying out the HK$29.3 billion subsidy to employers over 25 years in order to partly compensate them for the cost of lay-offs and long service payments./p>
Under the plan, employers will be required to contribute 1% of their employees’ salary into a designated savings account that they have to set up for payments related to lay-offs.
The government will shoulder 50% of the cost for the first three years, after which will the sum will be reduced by 5% a year up to the twelfth year. Additional funds will be provided to employers if funds in the designated saving account and the subsidy are insufficient to cover the cost, according to the full report of the plan posted on the government’s website.
Elaine Hwang, director of retirement at investment advisory firm Willis Towers Watson, says it’s “very difficult to justify whether the HK$29.3 billion subsidy is enough or not as the 25-year subsidy period is very long with a lot of economic uncertainties.”
“However, the initiative will be beneficial to the MPF industry as there will be more money in the (MPF) accounts. The larger size of the fund pool means that MPF trustees will have more room to reduce their management fees,” Ms. Hwang tells Asia Asset Management (AAM).
Henry Shin, chief executive officer of Hong Kong-based Convoy Financial Service Limited, welcomes the government’s proposal, saying it will help improve flexibility and awareness in managing MPF contributions.
“We believe the new proposal will further strengthen retirement protection in Hong Kong,” Mr. Shin tells AAM.
But Doug Fick, head of the Hong Kong Group at MPF provider Principal International Inc., says dropping the offsetting mechanism “is only one part of a very complex multi-pillar (pension system) problem that needs to be solved”.
Mr. Fick tells AAM that that there is “still a lot” the government has to do to improve the income replacement ratio of Hong Kong retirees.
The MPF scheme had HK$851.9 billion of total assets at the end of June 2018, according to figures from the Mandatory Authority Fund Schemes Authority.
