Reduce MPF Operating Costs and Review Contribution Rate

Speech of the Hon KP Chan to Move Amendment to the Motion on Comprehensive Review of the Mandatory Provident Fund at the Legislative Council on December 1st:

It has been 10 years since the launch of the Mandatory Provident Fund (MPF).  For 10 years, the MPF has also been a subject of controversy regarding high fees, low returns and little benefits to the underprivileged.  All these comments deserve our attention for a comprehensive review at its 10th anniversary.

The most frequently criticized drawback of the MPF is its inadequacy for the low-income, the underprivileged and those approaching retirement.  Admittedly, these are inherent to the design of the scheme.  The MPF is meant to be a retirement benefit for the employed.  No matter how the scheme might be improved, it would not cover those who are not working.  As low-income workers do not contribute much, they would hardly save enough for post-retirement expenses.  Therefore, I have been urging the Government to consider a universal retirement protection system in complement as a matter of urgency.

As to the MPF itself, since it is a large scale obligatory plan, operational issues would appear from time to time and they have to be redressed properly.  Having 10 years of experience, it is good timing to review and improve the MPF comprehensively.

First, let us look at some facts.  Up to September 2010, total MPF contributions amounted to HK$345 billion from 2.45 million members including employees and self-employed.  The average balance per account was about HK$140,000.  Of course, returns on individual funds varied.  On average, the annualized net return after deducting management fees for the period of 1 December 2000 to 30 September 2010 was 5.1 percent.  I reiterate that this average return is arrived after deducting fees.  May I also remind that we have survived two financial crises in the last 10 years?  In the years ahead, I am sure that the MPF would prove itself as one of the pillars in retirement protection for workers.

My first Amendment today calls for simplification of MPF management and administration without affecting rights of members with a view to reducing operating costs and in turn administrative fees.

High operating costs of the MPF arise from its mode of operation.  Apart from tedious monthly routines of receipt, investments and repayment of contributions, service providers also have to meet increasing regulatory requirements of the MPFA.   Accordingly, system development costs are high and manpower is large.  For instance, shortening of the contribution window in 2008 from 30 days to 10 days after wage due date has led to considerable increase in manpower of MPF operators to follow up with employers on contributions payable.  Another related example is additional manpower of service providers for recovery of contributions in arrears and subsequent manual posting to members’ accounts.  Thus, administrative fees may only be reduced through comprehensive review of MPF management and administrative procedures.  Notwithstanding, I should point out that MPF administrative fees have been coming down:

Year Ending/To Month

Annualized Average Fee Rate

March 2008

March 2009

March 2010

October 2010





Lately, a leading MPF service provider is launching an Index Fund that charges administrative fees as low as 0.7 percent.  Other leading service providers are also launching funds that charge fees ranging from 0.79 percent to 0.99 percent.  They show that the new MPF Portability Scheme as well as simplification and automation of work procedures will provide room for reduction of fees through competition.

My second Amendment is on contribution rate in order to ensure the MPF would sufficiently meet post-retirement expenses.  The original intent of the MPF is to provide retirement protection to workers.  However, it is now found that contributions of members might be insufficient to meet post-retirement needs.  Many critics attribute the problem to a low contribution rate of only 5 percent and thus the aggregate contribution plus investment returns would not adequately support retirement.  Therefore, the simplest way seems to be adjusting the contribution rate together with both the upper and lower limits of MPF contribution.  However, it must be handled with care because MPF contributions of employee and employer are sensitive subjects and any change in practice would inevitably be controversial.

The original Motion calls for abolition of the provision that allows employers to offset severance and long service payments against MPF contributions, but retaining the eligibility of workers for such payments under the Employment Ordinance.  I support a review of the existing arrangement but any change would need the mutual agreement of employees and employers.  On the offsetting provision, employees and employers have different concerns.  I ask both parties to consider the proposal with mutual understanding and mutual reconciliation.  Employers should consider the interest of employees, and employees should also consider the capacity of employers.

On the other hand, the Amendment moved by the Hon Paul Tse recommends that any review of the MPF should include its abolishment.  As I pointed out earlier, MPF would not provide retirement protection for everybody but it does help workers save for retirement.  The MPF has its merit and should not be abolished.  Above all, we have gained considerable experience in its first 10 years and the community has already spent considerable manpower and financial resources on it.  If abolished, there would be undue wastage and thousands of workers in the industry would lose their jobs.

I have recently read the autobiography of the Hon Leung Yiu-chung.  Although he stood against the MPF in 1995 after a prolonged struggle of mind, let me quote and share his words with you today: “Notwithstanding, I have to admit that the MPF does have its merit.  At least, young workers are offered a scheme of saving for retirement and this should bring positive benefits to them and society.” I fully endorse his view.

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