Published by Asia Asset Management – 18th Oct 2018
Hong Kong has to speed up pension reform by raising the compulsory 10% contribution rate to the Mandatory Provident Fund (MPF) in order to improve the adequacy of the city’s retirement system, according to two senior executives from US asset manager Principal International.
Luis Valdes, president and chief executive officer of Principal International, says the gap between pension income and retirement needs in many Asian countries, including Hong Kong, has been worsening because of low fertility rates and ageing populations.
In an interview with Asia Asset Management (AAM), Mr. Valdes describes Hong Kong’s retirement regime as “financially sustainable, but not sufficient”.
He notes that the compulsory contribution rate for MPF, the city’s largest defined-contribution public pension plan, is only 10% of an employee’s monthly salary. This, he says, is relatively low compared to similar schemes elsewhere, such as the 401(k) plan in the US.
Employers and employees each have to contribute at least 5% – subject to an upper limit of HK$1,500 (US$192.3) – of an employee’s monthly salary to the MPF. They can also voluntarily contribute more.
Employers can claim tax deductions for compulsory contributions up to a maximum HK$18,000 per employee. Voluntary payments are also tax deductible provided contributions don’t exceed 15% of an employee’s total salary.
According to Mr. Valdes, the 10% minimum contribution is no longer enough to meet retirement needs when inflation is taken into account, so the government should learn from the experience of countries such as Chile and raise the limit.
Although he acknowledges this would be a politically controversial move, he argues that the government can minimise social resistance by implementing it on a gradual basis.
Mr. Valdes also says Asian governments should introduce more tax incentives to encourage voluntary contributions to pension plans. He says such voluntary payments can be allocated to riskier assets.
Meanwhile, Doug Fick, head of the Hong Kong Group at Principal International, believes management fees in the MPF market can drop further as the government presses ahead with digitising the scheme.
“We’ve lowered our fees numerous times over the past few years. As we continue to digitise (our business), we’ll continue to look at our fees and make sure that those fees represent what it costs us to deliver the business,” Mr. Fick tells AAM.
He also predicts there is unlikely to be more mergers and acquisitions (M&A) anytime soon in the MPF market as providers are waiting for regulatory issues such as new contribution limits and tax incentives to be sorted out. The government has not set a timeline for this.
There have been a number of M&As in the industry in recent years, including in 2015 when Principal Financial Group, the parent of Principal International, acquired rival AXA’s MPF and Occupational Retirement Schemes Ordinance businesses in Hong Kong for HK$2.6 billion. The deal transformed Principal Trust, a subsidiary of Principal Financial Group, into the sixth largest MPF provider in the city.
There are currently 15 MPF providers in Hong Kong. As of end-June 2018, these companies managed a combined HK$851.9 billion of MPF assets, according to figures from the Mandatory Provident Fund Schemes Authority.
Principal Financial Group currently has approximately $666.6 billion of total assets under management.
