MPFA Proposes Compassionate Mechanism

MPFA Proposes Compassionate MechanismTo Accelerate Local Fund Flow

As of the end of March 2011, a total of 2.27 million people in the working population participated in MPF scheme. For the past five years, the total asset value was doubled to HK$390 billion. Based on mandatory contributions to the proportion of 84%, the asset value per capita amounted to HK$1.66 million. As part of the local workforce has opted to permanently leave HK or even the labor market, by the end of 2010 there was net outflow of HK$8.2 billion from MPF assets, being a fresh high.

To address the current economic difficulties, Anna Wu, Chairman of the MPFA, introduced MPF Compassionate Mechanism to meet special needs of the public. It proposed that MPF participants are entitled the right to withdraw a certain percentage of contributions for paying mortgage down payment and meeting other kinds of individual needs such as studies, unemployment and even illness treatments in the future. Such “emergency money proposal” by MPFA has received favorable responses from the public. Siu Mei Fung, Managing Director of Gain Miles MPF Consultants Ltd, said that the MPFA intention of allowing such fund withdrawal is just for the sake of responding to the public need of emergency. Above all, withdrawals of fund before retirement definitely violated the ultimate purpose of setting up MPF in December 2000 as retirement protection.

In any case, the Government must clearly explain to the public and the industry whether MPF scheme is of the nature of social security or retirement plan? If the purposes of MPF degenerate, the seniors reaching the retirement age of 65 would possibly fall into the CSSA (Comprehensive Social Security Assistance) security net and cause a heavy burden to the Government. For MPF holders to be optional to withdraw funds for mortgage down payments and further studying, it inevitably affects the business agenda of MPF service providers in Hong Kong, leaving all investment schedules substantially in lost. However, some market participants think that such measure by MPFA would help boosting the property market and the long-term competitiveness of Hong Kong, and eventually there would be more advantages than disadvantages. Siu Mei Fung believes that there would be little effect on boosting the local economy as MPFA is expected to set a withdrawal limit at approximately 50% and the per capita amount of the accumulated contribution would not be much after such short period since MPF was set up.

2010 is the tenth anniversary of the implementation of MPF. Over the past decade, MPF put up an average performance by a cumulative return of 33.91%. For the year 2010 alone, the annual return posted 7.96% gain. For the accumulative figure over the past ten years or the year 2010, Equity Fund came out on top, followed by Balanced Fund. At present, there are six major fund categories and 178 authorized funds operated by 19 local authorized fiduciary organizations. However, the market has been criticizing for the high average Fund Expenses Ratio (FER) in the past years, directly eroding the returns. In fact, in the past three years, the FER has reduced significantly from 13% to 1.83%. In the current total asset value of HK$390 billion, the average annual expenditure of 1.83% would translate into an amount of HK$7.137 billion dollar, constituting a large sum of revenue for the local 19 MPF service providers to compete for.

She added that if an MPF holder considers himself an aggressive investors and sets a five-year investment period, she suggested he should select Equity Fund as his sole contribution. After all, the average price-earnings ratios of the US and Southeast Asia stock markets are still low, while the outlook of the enterprises in the regions remains positive. To a certain extent, short-term returns can be quite assured. However, it is worth noting that the MPF holders should avoid selecting Funds related to China market, which is policy dominated, and Funds of European market, which is shrouded in debt crisis, in order to make the returns more secured. The year 2011 marked a milestone for another decade for MPF. She believes an ideal proportion of the fund portfolio during the second half of the year should involve 30% of the U.S. stock funds and 70% of Southeast Asia stock funds.