A New Plan.

Hong Kong's new Mandatory Provident Fund marks a big step for pensions, but the territory has a long way to go in providing for its retirees.

When Hong Kong's Mandatory Provident Fund starts collecting contributions Dec. 1, it will mark a significant milestone in the provision of pension benefits in the Special Administrative Region. But it is unlikely to mark the end of what is an evolutionary and potentially acrimonious project.

What starts on Dec. 1 is very different from what has preceded it. Under the new regime, all of the territory's work force--some 3.4 million people--will contribute 5% of their salaries, as will their employers, into various savings schemes that can be cashed in only upon retirement at age 65 or upon emigration. Compulsory contributions are capped at HK$1,000 (about $128) a month.

The new system makes the existing voluntary arrangements compulsory. It also represents a shift from current practice, in that it is designed to cover the entire working population. Previously, about one-third of the work force had some form of retirement protection.

All this comes at a time when Hong Kong's senior population is growing rapidly. Figures from the Mandatory Provident Fund Authority show that 10% of the population was 65 or older at the end of 1999. By 2013, the over 65 population will grow to 13%, and it will be 20% by 2036.

In short, the fund is nothing if not timely But it has been subject to criticism. Hong Kong's vocal and influential business community argues that the plan is a significant extra cost for businesses that already must compete from one of Asia's highest cost bases. In contrast, the criticism that goes largely unreported is the view that the plan is not enough.

MPF Criticized

Stuart H. Leckie, chairman of the actuarial and consulting firm Woodrow Milliman China, takes a minority position. He refers to the World Bank view that poverty in old age is prevented by three components: universal provision from the government, compulsory savings to generate a pension rather than a lump sum and individual savings.

"It's regrettable that the government didn't look at the three-pillar pension scheme," said Leckie, adding that it "stretched credibility" to say that the Mandatory Provident Fund answered all of Hong Kong's problems. "MPF should be an add-on, not the centerpiece," he said.

Leckie has many criticisms of the Mandatory Provident Fund: The sums involved aren't enough for financial security in old age; it is a lump sum, not a pension; there is nothing for those already retired; and there is no provision for those who have been caring either for children or for the elderly. In short, a substantial number of people in need will be left out, while those who already have jobs will have another source of savings created.

The Hong Kong government takes a different view. "With the introduction of the MPF, complemented by personal savings and CSSA, Hong Kong will have in place all three pillars for old-age protection," the fund authority said in a statement. Comprehensive Social Security Assistance, or CSSA, is a scheme that offers basic social security to the needy.

Some factors point to a middle ground between these polarized views.

Those employed by the government, such as civil servants and teachers, already are covered by occupational pensions. Traditional Chinese culture, which still carries some weight in Hong Kong, sees a lot of support, including financial assistance, as a family responsibility. Hong Kong also has a high savings rate, so while many people might lack formal pensions, they will have savings in terms of stock-market assets and property.

The government has tried to extend Mandatory Provident Fund provision. "Special industry schemes will be established for industries with high labor mobility such as catering and construction," according to a statement on the authority's Web site. Employees earning less than HK$4,000 month are exempt from contributions, while their employers are not. Whether this will create an effective means of support upon retirement isn't clear, and in an expensive city such as Hong Kong, a lump sum of 5% of meager wages won't go far, even with subsidized public housing.

But criticisms of the Mandatory Provident Fund go beyond its lack of comprehensiveness. There are fears that the scheme itself has some significant flaws that result from a failure to think through the consequences.

Bewildering Choices

The fund operates by having three types of schmes--employer-sponsored for large companies; master-trust for small and midsized enterprises; and industry for specific sectors, such as catering and construction. While individuals can choose their investments, those choices are bewildering--there are, for example, 45 master-trust schemes with 253 constituent funds.

Several implications spring from this. The first is that the sheer scale of choice increases the potential problems, especially within a new system. In turn, this increases the need to educate the public about what is going on. It's a steep learning curve, especially if the Dec. 1 deadline is to be met.

As part of its educational effort, the authority announced the launch of an "Investment Guide for MPF Scheme Members," which defines the scale of the task. The guide covers types and characteristics of constituent funds commonly found in Mandatory Provident Fund schemes, seven major considerations for prudent investment, calculation of the net asset value, as well as the definition and operation of a guarantee fund, according to the authority's announcement. The guide also includes an investment flow chart to help scheme members make investment decisions.

Complicating the situation are the marketing pitches of the private companies that individuals sign up with to manage their retirement funds. Earlier this year, when companies were allowed to market to and sign clients, there was a scramble that became a price war, with clients being signed on grounds such as lower interest rates and waivers of credit-card fees. While experts such as Leckie say the price war was "not disabling," he added that "some people will sign with MPF providers for wrong reasons."

Some 2 million people have to be signed up for the Mandatory Provident Fund in six months. "They're hoping for huge inertia afterwards," Leckie said of the providers, because if too many people sign up at once, the capacity of the companies to process the new business will be overwhelmed.

Avoiding the Plan

Many will see this period of administrative overload as an opportunity not to get into the system; rather than come forward and sign up during a period of widespread delays, they will wait until they are ordered to comply Many firms in Hong Kong are family-run, especially in catering and retail industries, and these businesses often are reluctant to take on extra taxes or costs. Again signaling its awareness of this weakness, the government has planned a drive the retail sector for this month, when it will give information, about, the Mandatory Provident Fund to some' 50,000 Shops in 18 districts.

Noncompliance in the scheme's early (days could be a significant concern, Leckie said, as some people can't get schemes started and others use the likely disruption as an opportunity not to start one.

And this is just the early days because few believe the scheme will be se up and workable without haying an impact on the rest of Hong Kong's asset-management industry. And some believe that the scheme will have to be altered to persist. Here, analysts point to Singapore's Central Provident Fund. Singapore started contributions at 5% from both, employers and employees, but the total contribution is now 30%.

"I would bet that sometime in the next decade we'll all be required to save for extra medical costs alongside MPF," Leckie said.

But this, in turn, raise a problem. The Mandatory Provident Fund is expected to have HK$800 billion of assets under management by 2030, and a medical-savings component would add to that figure. Some believe Hong Kong has implemented the retirement plan without thinking through the implications for investment and spending patterns in the broader economy.

Simon Hu, managing director of A.M. Best Asia-Pacific Ltd., noted that the local stock market is limited and, therefore, could limit returns and, ultimately, investment vehicles On top of this, both the local and regional bond markets aren't developed. "They have to have some strategic development in the bond market," Hu said.

It probably won't be the only sector where the consequences of the Mandatory Provident Fund are felt.

Michael Mackey is a Hong Kong-based correspondent.