| "Retirement Income Policy in Hong Kong" (a research paper commissioned by the Hong Kong Investment Funds Association) |
Back |
BACKGROUND
The Hong Kong Investment Funds Association ("HKIFA"), a professional body that represents the fund management industry in Hong Kong, has commissioned Gadbury Group Limited to prepare a research paper - "Retirement Income Policy in Hong Kong" in early 2004.
The objective of the research paper is to develop an optimal model on retirement income policy in Hong Kong so as to enable Hong Kong people to be more well-prepared for retirement financially.
INTRODUCTION
Hong Kong is being affected by changing demographics. It shares with much of the world the challenges of having an ageing population. A continuing major task will be in designing and implementing policies to help ensure that Hong Kong's population will have income and capital as they move into retirement. The introduction of the Mandatory Provident Fund system ("MPF") in December 2000 was undoubtedly a major move towards the goal of providing security for old age in Hong Kong. As a mandatory system based on occupational savings, it has provided assurance of some financial support for around two thirds of the Hong Kong workforce, who were not either in a voluntary provident fund established under ORSO or in pensionable employment with the Civil Service. Over two million people are currently making MPF savings. With the MPF system in place, there have been no clear policy intentions to make any further provision for those not included in MPF or in the other existing systems. Nor have there yet been moves to develop MPF into an income producing system, rather than its existing lump sum payment structure.
This paper considers a number of aspects of this policy and makes suggestions that address what may be seen as limitations of the present structure. One important conclusion is that, if left unchanged, the current situation may result in substantial individual hardship which would in turn prove an added burden on the economy, for both the public and private sectors. Corrective measures in pensions take a long time to yield results. It is never too early to act.
There are about 40 recommendations being put forward in the Paper and they focus on increasing savings and finding ways to turn those savings into an income flow. This will involve using the existing savings mechanisms to keep money invested until it is needed, and then finding the means to turn those savings into income. The paper also looks at the matter of providing income for those who reach retirement age. Without such solutions, Hong Kong faces either steady increase in MPF contributions or the likelihood that many of Hong Kong's future retiring workforce will not have enough to see them through old age.
HIGHLIGHTS OF THE RECOMMENDATIONS
SUGGESTIONS BY HKIFA - SHORT TO MEDIUM TERM (I.E. FOR THE NEXT 3-5 YEARS)
|
|
Instead of using the current "lump sum" approach, the MPF system should consider adopting a flexible drawdown approach, along the lines adopted in Australia. What this entails is that on reaching a certain age, and each year thereafter, a scheme member should be allowed to draw down a proportion of his retirement fund, subject to age-dependent maximum and minimum percentages and/or cash limits. |
|
|
An overall review of the MPF regulatory approach, especially with respect to investments. At present, the approach is a prescriptive one, i.e. only instruments or vehicles that have been included or covered in the MPF legislation or Codes or Guidelines are allowed. A major shortcoming is that this does not allow sufficient flexibility for the industry to meet the rapidly changing investment markets. We would thus suggest a move to a principles-based approach which would allow the industry sufficient flexibility to leverage on new market developments so as to develop products that can help optimize returns. |
|
|
Voluntary contributions should not be subject to salaries tax, on the basis that balances are kept until retirement (maybe to set a cap). Currently, voluntary contributions in MPF are paid out at the end of employment, in a manner similar to ORSO benefits. It is suggested that as long as ORSO benefits and MPF voluntary contributions are kept until retirement age, they should not be subject to salaries tax - the objective is to enable the saver to develop his/her own retirement income pool. This would entail a review of the ORSO system, including to introduce mechanisms to ensure that ORSO benefits are retained until retirement age, immediate vesting, same retirement age as MPF, and similar provisions made for early withdrawal of ORSO benefits. |
|
|
Open up preserved accounts so that voluntary contributions can be made into it. At present, the MPF legislation is unclear on this and it would be useful if MPFA can provide clarifications so that these accounts can be used more efficiently and effectively for retirement planning purposes. |
RETIREMENT PROETCTION SEMINAR (May 15, 2004 at Conrad Hotel)
The full report, including findings and recommendations, will be presented at a seminar to be hosted on May 15. The seminar will also promote the concept of financial security after retirement and encourage the community to discuss the development of the post-retirement market.
Speakers include, inter alia, Mr. Tony Miller, Permanent Secretary for Financial Services and the Treasury (Financial Services) of Financial Services and the Treasury Bureau who will speak on the "MPF Experience and Future Developments"; Professor Nelson Chow, the Chair Professor of Social Work and Social Administrative of University of Hong Kong who will discuss the "Advice on Implementing Retirement Protection Policy for Hong Kong". Attached please find the seminar flyer.
(End - May 13, 2004)