Reviewing the MPF System from an Outcome-based Perspective

Reviewing the MPF System from an Outcome-based Perspective Cheng Yan-chee Chief Corporate Affairs Officer and Executive Director Mandatory Provident Fund Schemes Authority 13 November 2018

World Bank s Multipillar Retirement Protection Framework 2

The World Bank (WB) Goal of Retirement Protection To prevent old age poverty 1994 Recommended a three-pillar approach 2005 Expanded into a five-pillar framework Protect the Aged 0. Non-contributory, publicly financed & managed system 1. Mandatory, contributory & publicly managed system 2. Mandatory, privately managed, fully funded contribution system 3. Voluntary savings 4. Informal support, other formal social programmes & other individual assets 3

1981 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2010 2011 2016 MPF in Line with the Global Trend 35 30 25 20 15 10 5 0 No. of Second Pillar Systems in the World 23 20 21 18 13 10 11 8 1 2 3 4 5 6 25 28 30 32 33 Notes: 1. Year refers to the year in which second pillar systems started operation. 2. Only DC systems are included. 3. Those jurisdictions with second pillar systems discontinued are excluded. Sources: International Monetary Fund, International Labour Organisation, International Organisation of Pension Supervisors, Maldives Pension Administration Office, Mesa-Lago, National Pensions Regulatory Authority, OECD, Scherman, Superintendence of Pensions, World Bank. 4

World Bank s Outcome-based Assessment for Private Pension Systems 5

WB s Outcome-based Assessment (OBA) Framework for Private Pensions A framework to evaluate the performance of a private pension system (2 nd Pillar) 5 key outcomes Coverage Adequacy Sustainability Efficiency Security For further details, please refer to Price W, Ashcroft J, Hafeman M. (2016). Outcome Based Assessment for Private Pensions: A Handbook. World Bank, Washington, DC. 6

How Good is the MPF System in Defending Your Future 7

Outcome 1 : Coverage 8

Outcome 1: Coverage Maximizing the proportion of the working-age population participating in private pension schemes and the proportion of retirees receiving such financial support in retirement 9

Outcome 1: Coverage Enrolment Rates of the MPF System The MPF System has very high enrolment rate Enrolment Rates of MPF Schemes 100% 80% 60% 99% 100% 100% 100% 99% 100% 68% 69% 70% 40% 20% 0% as at 30.9.2016 as at 30.9.2017 as at 30.9.2018 Employers Employees Self-employed persons (SEPs) 10

Coverage (as a % of Employed / Working Population) Outcome 1: Coverage Coverage of Private Pension Schemes in Different Jurisdictions 100% 80% 60% 95% 91% Coverage of Private Pension Schemes 85%* 84% 84% 81% 74% 70% 67% Mandatory Auto-enrolment/ collective agreement 61% 60% 40% 20% 0% * Employed population covered under MPF schemes, ORSO schemes and other statutory pension or provident fund schemes 11

Outcome 1: Coverage Factors Contributing to High Coverage Mandatory participation (except for exempt persons) Labour force characteristics (mostly engaged in formal employment) Geographical factors (densely populated) Employed Population by Type of Retirement Schemes Not covered by private pension schemes in Hong Kong, e.g. domestic employees and those aged above 65 or below 18 Exempt persons Joined other retirement schemes (e.g. ORSO) 11% 13% Not yet joined any MPF schemes 2% Joined MPF schemes 73% As at end Sep 2018 12

Outcome 2 : Sustainability 13

Outcome 2: Sustainability Ensuring that the promised retirement income will be delivered without placing burdens on government, employers, or workers for financing any shortfalls 14

Outcome 2: Sustainability MPF System: Sustainable by nature Mandatory Privately Managed Fully Funded Defined Contribution Universal coverage for employed population (except for exempt persons) Independent from Government s revenue / public financial resources Dedicated assets to meet future pension benefits payable to members Contributions are defined and made by employers and employees (a total of 10% of salary, subject to minimum and maximum relevant income) 15

MPF Assets (as % of GDP) Outcome 2: Sustainability MPF Gaining Importance in the Economy As at 30 September 2018, MPF assets reached $858 billion Representing approximately 32% of Hong Kong s GDP in 2017 35% 32% 30% 25% 20% 15% 13% 16% 12% 19% 21% 18% 22% 24% 25% 25% 26% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: MPFA and Census & Statistics Department 16

Outcome 2: Sustainability Pension Sustainability Index Global Hong Kong has one of the most sustainable pension systems globally Australia Denmark Sweden Netherlands Norway New Zealand Latvia Estonia United States Chile United Kingdom Mexico Switzerland Hong Kong, China Canada Lithuania Finland Luxembourg Peru Czech Republic Malaysia Argentina Philippines Singapore Germany Poland Russia Austria Belgium Bulgaria Romania Turkey South Korea Hungary France Slovakia Ireland Colombia Indonesia Taiwan Croatia Portugal South Africa Cyprus Spain Japan Malta India Italy Brazil Greece Slovenia China Thailand Hong Kong ranked 14 th out of 54 jurisdictions Scale from 1 10. A jurisdiction with an overall score of 1 represents the greatest need for reform and 10 represents the least need for reform. 0 1 2 3 4 5 6 7 8 9 Source: Allianz Global Investors. (2016). Pension Sustainability Index 2016 (International Pension Paper 1/2016) 17

Outcome 2: Sustainability Pension Sustainability Index Asia Hong Kong: highly sustainable Scale from 1 10. A jurisdiction with an overall score of 1 represents the greatest need for reform and 10 represents the least need for reform. Hong Kong, China Malaysia Philippines Singapore South Korea Indonesia Taiwan Japan India China Thailand 0 1 2 3 4 5 6 7 Source: Allianz Global Investors. (2016). Pension Sustainability Index 2016 (International Pension Paper 1/2016). 18

Outcome 3 : Security 19

Outcome 3: Security Minimizing the risk of loss or misappropriation of pension assets before they are withdrawn by members 20

Outcome 3: Security Safeguarding Interests of Scheme Members Sound Legal & Financial System Hong Kong s sound legal framework and financial system serve as the backbone of the MPF System Strong and stable financial markets (WEF, 2017) Global Competitive Index 2017-18 Ranking of Hong Kong (out of 137 economies) Institutions 9 Macroeconomic Environment 6 Financial Market Development 5 21

Outcome 3: Security Safeguarding Interests of Scheme Members (Con t) Robust Supervision & Regulation of MPF Stringent approval & registration criteria On-going monitoring of MPF trustees by the MPFA Professional indemnity insurance to be taken out by MPF trustees Four-tier Protection under the MPF System Compensation Fund Trust arrangement: keep MPF scheme assets separate from those of employers/ MPF trustees/ other service providers 22

Outcome 4 : Adequacy 23

Outcome 4: Adequacy Ensuring people accumulate retirement benefits that could protect them from poverty; allow them to share in increased prosperity; and protect them from a severe drop in living standards at retirement, taking account of other sources of financial support 24

% of Wages/Earnings Outcome 4: Adequacy Moderate Contribution Rate Moderate contribution rate, comparable to similar private pension systems 16% 14% 12% 10% 8% 6% 4% 2% 0% Contribution Rates of Mandatory Private Pension Systems 9.5% 10.0% 10.0% 6.5% Mexico Australia Chile Hong Kong Israel 15% OECD (2017). Pensions at a Glance 2017: OECD and G20 Indicators. 25

Outcome 4: Adequacy Basic Retirement Protection Limitation of MPF As a Pillar 2 system, the MPF System is intended to provide basic retirement protection for employed population The different pillars need to work together to provide adequate retirement protection for the entire population Maximum / Minimum Relevant Income (Max RI / Min RI) Levels Employers and employees contribute a total of 10%, subject to a cap of $3,000 per month (Max RI at $30,000 / 90th Percentile Earning) Employees earning <$7,100 per month need not contribute, only employers need to contribute (5%) (Min RI at $7,100 / half of Median Earning) Max RI adjustment proposal : $30,000 to??? Min RI adjustment proposal : $7,100 to??? 26

Outcome 4: Adequacy Basic Retirement Protection The RI levels are reviewed regularly and adjusted when necessary to keep up with income changes of the workforce in Hong Kong Adjustments to the RI levels are crucial for maintaining an appropriate amount of benefits for retirement saving purposes 27

Outcome 4: Adequacy Basic Retirement Protection To encourage individuals to save more for their retirement, the Financial Secretary has announced tax concession for MPF voluntary contributions and deferred annuities At the beginning of April 2019, individuals will enjoy concessions on their salary tax by making voluntary contributions to a taxdeductible voluntary contribution (TVC) account Working with the Government on the relevant legislative changes Formed a working group with MPF trustees to help them cater for these new TVC accounts 28

HK$ Billion Outcome 4: Adequacy MPF Assets A growth of MPF assets since the inception of the System 1,000 MPF Accrued Benefits and Net Contributions (1.12.2000 30.9.2018) 900 800 700 600 500 400 300 200 100 0 Contributions (net of amount withdrawn) $613.11 billion Investment Returns (net of fees & charges) $245.20 billion $858 billion Accrued Benefits Total Net Contributions Received 29

Outcome 4: Adequacy Projected Accrued Benefits of Scheme Members over 40 Years Investment Horizon: Hypothetical Examples $ 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 Investment Return / % 4.00 3.00 2.00 Projected Final Accrued Benefits / $ 1,974,000 1,547,000 1,227,000 1,000,000 800,000 1.00 985,000 600,000 400,000 200,000-1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Assumptions: Investment Horizon / Year Nominal investment returns are 1%, 2%, 3% and 4% (net of fees and charges) throughout the relevant investment horizon The monthly salary of 16,700 refers to the median salary of the employed persons aged 18 64 as at Q2 2018; no adjustment of monthly salary throughout the relevant investment horizon The employer and the employee each contribute 5% of the employee s relevant income (i.e. 10% of the employee s relevant income in total) No adjustment to the existing statutory minimum and maximum relevant income levels, which are 7,100 and 30,000 per month respectively Inflation rate is assumed as zero (i.e. inflation not accounted for in these examples) 30

Outcome 4: Adequacy Projected Accrued Benefits of Scheme Members over 40 Years Investment Horizon Nominal Investment Return / % 31 Monthly Salary / $ 16,700 30,000 1.00 985,000 1,770,000 2.00 1,227,000 2,203,000 3.00 1,547,000 2,778,000 4.00 1,974,000 3,546,000 Assumptions: Nominal investment returns are 1%, 2%, 3% and 4% (net of fees and charges) throughout the 40-year investment horizon The employer and the employee each contribute 5% of the employee s relevant income (i.e. 10% of the employee s relevant income in total) No adjustment to the existing statutory minimum and maximum relevant income levels, which are 7,100 and 30,000 per month respectively No adjustment of monthly salary throughout the 40-year investment horizon Inflation rate is assumed as zero (i.e. inflation not accounted for in these examples)

Outcome 4: Adequacy Distribution of Accounts by Range of Accrued Benefits * 50 000 accounts had accrued benefits of more than $1,000,000 It should be noted that as scheme members may have more than one account, the distribution pattern of scheme members MPF benefits may not be the same as the one shown in the Chart. As of December 2017. 32

Outcome 4: Adequacy Voluntary Contribution The amount of VC has grown substantially over the years HK$m 12,000 10,000 8,000 6,000 4,000 2,000 0 2,993 (10%) 3,555 (11%) MPF Voluntary Contribution (% of Total MPF Contribution) 4,253 (12%) 4,346 (10%) 4,995 (13%) 5,934 (14%) 6,655 (14%) 7,272 (14%) 7,735 (13%) 8,697 (13%) 9,487 (14%) 10,411 (15%) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 The Government s proposal to introduce tax concession for VC will help further strengthen the retirement protection function of the MPF System 33

Outcome 5 : Efficiency 34

Outcome 5: Efficiency Maximizing net-of-fee returns by improving investment performance subject to acceptable risks 35

MPF Landscape 30 MPF schemes privately managed by 14 active trustees (as at 30 Sep 2018) 9.6 million MPF accounts (as at 30 Sep 2018) 4.1 million contribution accounts and 5.6 million personal accounts Administration cost and expenses accounted for 43% of FER 2012 Study Reasons for high scheme administration costs 35 million transactions yearly (high levels of manual and paper-based processing) Lower industry co-operation to resolve industry-wide problems 36

Outcome 5: Efficiency Investment Return of MPF Hinging on scheme members fund choice Past 1 Year Past 5 Years - Annualised Annualised Since 1 Dec 2000 Cumulative (as at 30 Sep 2018) Return Volatility Equity Fund 2.9% 5.9% 5.0% 138.2% 5.3% Mixed Assets Fund 2.6% 4.2% 4.3% 112.6% 2.7% Bond Fund -2.2% 0.2% 2.5% 55.0% 0.9% Guaranteed Fund 0.7% 0.5% 1.1% 22.1% 1.1% Money Market Fund Other than MPF Conservative Fund Money Market Fund MPF Conservative Fund Rate of Return of MPF Funds -0.1% 0.1% 0.5% 9.5% 0.2% 0.3% 0.1% 0.7% 13.3% 0.1% 37

Outcome 5: Efficiency Fees and Charges The average Fund Expense Ratio (FER) of MPF Funds has decreased over the years % 2.20 2.10 2.00 1.90 1.80 1.70 Average FER of MPF Funds (Jul 2007 Sep 2018) 2.10 2.09 2.06 2.01 1.99 1.94 1.91 1.84 1.83 1.77 1.73 1.75 1.72 1.70 1.69 1.65 1.62 1.60 26% (Over the time period) 1.60 1.57 1.57 1.56 1.56 1.53 1.53 1.50 38

Outcome 5: Efficiency Impact of Fees and Charges on Scheme Members Accrued Benefits Increase: $222,000 (14.7%) Increase: $489,000 (32.4%) A reduction in fees and expenses would improve significantly scheme members accrued benefits over the long term $ 2,000,000 1,500,000 1,000,000 Estimated Final Accrued Benefits of Scheme Members FER at 0.95% FER at 1.53% FER at 2.10% 1,999,000 1,732,000 1,510,000 500,000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Investment Horizon / Year Key Assumptions Gross investment return (before fees and expenses) is 5% per year Each FER level remains constant throughout the 40-year investment horizon Monthly salary is $16,700, which was the median salary of employed persons aged 18-64 as at Q2 2018; no adjustment of monthly salary No adjustment to the existing statutory minimum and maximum relevant income levels, which are 7,100 and 30,000 per month respectively Inflation rate is assumed as zero 39

No. of Trustees No. of Registered Schemes Outcome 5: Efficiency Supply Side Initiatives Promoting Economies of Scale Encourage consolidation of inefficient schemes & funds to achieve economies of scale 20 19 18 51 51 49 48 47 46 40 40 38 38 41 40 41 41 38 38 36 32 32 60 50 40 17 30 16 20 15 10 14 0 No. of Approved Trustees No. of Registered Schemes * Includes an approved trustee which does not operate any MPF scheme and two MPF schemes which are pending termination. 40

Outcome 5: Efficiency Supply Side Initiatives Retirement Solutions for Achieving Better Saving Outcomes Default Investment Strategy (DIS) Ready made strategy balancing long-term risks and returns Fee caps Globally diversified investment NAV in DIS and DIS Constituent Funds: $30 billion (4% of MPF System NAV) (as at end Sep 2018) No. of MPF accounts in DIS or DIS Constituent Funds 8.01m 1.59m (17%) DIS Non-DIS (as at end Jun 2018) All MPF accounts 41

Outcome 5: Efficiency Supply Side Initiatives Streamlining & Simplifying Processes Use of digital technology to enhance operational efficiency Facilitating Transfer of Benefits Across Schemes epass (Electronic Portability Automation Services System) Trustees epayment for MPF Transfer Promoting Electronic Submission of Statutory Returns Data Submission using Enhanced TrusNet Platform Intermediaries Promoting Electronic Submission of Statutory Returns eservice for Intermediaries 42

Outcome 5: Efficiency Supply Side Initiatives Governance Charter On 24 May 2018, all 14 MPF trustees pledged their commitment to a Governance Charter advocated by the MPFA, recognizing the importance of good governance and fiduciary responsibilities in protecting the interests of scheme members and providing value for money services To introduce the implementation of good governance to trustees in phases over the next 12 to 18 months: Phase 1 seek MPF trustees support of the governance principles and the elaborations underpinning each principle. Phase 2 assess whether MPF trustees existing governance framework and arrangements are in adherence with the Governance Principles Phase 3 provide guidance or training for MPF trustees on the expected standards underpinning each of 43 the Governance Principles

Outcome 5: Efficiency Supply Side Initiatives Enhancing Scheme Administration Smart Digital Platform Digital, flexible and user centric platform One-stop access Smart Administration Standardization, streamlining and automation Central hub for processing ER and EE s instructions and transactions Paperless 44

Outcome 5: Efficiency Supply Side Initiatives Enhancing Scheme Administration Development of empf is crucial to the reform of the MPF System Objectives of empf: Enhance members experience Build an open architecture to bring competition Further fee reduction to the overall MPF System Pave the way for future MPF reform 45

Outcome 5: Efficiency Demand Side Initiatives Strengthening Employees Control Employee Choice Arrangement (ECA) Strengthening employees autonomy to opt to transfer the accrued benefits derived from employees mandatory contributions to the scheme of their own choice Helping to increase members power as consumers $193 billion of MPF benefits can be transferred under ECA as at end Dec 2017 46

Outcome 5: Efficiency Demand side Initiatives Enhancing Information Disclosure Provision of a centralized database containing key information about MPF schemes and funds Fund Performance Platform (FPP) 47

Outcome 5: Efficiency Demand side Initiatives Enhancing Information Disclosure 48

Outcome 5: Efficiency Demand Side Initiatives Consolidation of Personal Accounts e-enquiry of Personal Account (epa) (28 Apr 2017) As at 31 Oct 2018, over 75,000 scheme members have completed the registration process and activated the epa service Help scheme members manage MPF personal accounts (PAs) by providing easy access to the following information Whereabouts of their MPF personal accounts A contact list of all trustees Fees and returns of MPF funds The latest MPF news 307,000 applications on consolidation of PAs (May 2017 Sep 2018) About 70% of all MPF assets ($590 billion)* can be transferred freely between MPF schemes, including: 5.49 million personal accounts - $370 billion 3.98 million contribution accounts - $214 billion (* as at end 2017) 49

Outcome 5: Efficiency Demand Side Initiatives Engagement and Education Enhancing member engagement through promotional and publicity activities TV, Facebook Messenger Bot, roving exhibition, MPFA website and mobile apps, seminars, workshops, publication materials, etc 50

Conclusion 51

Conclusion Outcomes Coverage Sustainability Security Adequacy Efficiency Performance of the MPF System Very high enrolment rate (100% for both employers and employees; 70% for SEPs) Sustainable by design (mandatory, privately managed, fully funded and defined contribution) Safeguarded by the sound legal and financial systems as well as regulatory and supervisory regime of MPF One of HK s retirement protection pillars Level of adequacy will improve as the System matures Strive for greater efficiency and lower costs of the MPF System 52 Major Challenges

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