What role for MPF in any new arrangements?

2 March 2016

Darren McShane Chief Regulation & Policy Officer and Executive Director, Mandatory Provident Fund Schemes Authority. Chairman, International Organization of Pension Supervisors, Technical Committee

Issue is NOT :

MPF vs/or a public pension

Main Issue should be seen as :

What type of public pension can best supplement other pillars (including MPF)

Public Consultation on Retirement Protection by the Commission on Poverty (“CoP”)

2

Is there a preferred global methodology for retirement income security?

3

Yes there is – it has the following elements:

• retirement income sources should be diversified

• there must be a balance between individual responsibility and government provision

• pre-funding is better but PAYG inevitable at least transitionally

World Bank’s Five-Pillar Framework

In 2015, the World Bank expanded the three-pillar framework (introduced in 1994) into a five-pillar framework

Arrangement of pillars subject to local circumstances of jurisdiction

MPF is a second pillar system

4

Replacement rates in public pensions

41.3

-7

3

13

23

33

43

53

63

73

83

Ch

ile

Icel

and

Mex

ico

Isra

el

Au

stra

lia

Den

mar

k

Un

ited

Kin

gdo

m

Swit

zerl

and

Net

her

lan

ds

Est

on

ia

Irel

and

Jap

an

Un

ited

Sta

tes

Can

ada

Swed

en

Ger

man

y

Slo

ven

ia

Slo

vak

Rep

ub

lic

Ko

rea

New

Zea

lan

d

OE

CD

34

Po

lan

d

No

rway

Bel

giu

m

Cze

ch R

epu

bli

c

Fra

nce

Fin

lan

d

Hu

nga

ry

Gre

ece

Ital

y

Po

rtu

gal

Tu

rkey

Lu

xem

bo

urg

Au

stri

a

Spai

n

5

Source: OECD, Pensions at a Glance, 2015

Public Pension Systems vs. Private Pension Systems

Replacement rates total pensions

0

10

20

30

40

50

60

70

80

90

100 C

hil

e

Icel

and

Mex

ico

Isra

el

Au

stra

lia

Den

mar

k

UK

Swit

zerl

and

Net

her

lan

ds

Est

on

ia

Irel

and

Jap

an

US

A

Can

ada

Swed

en

Ger

man

y

Slo

ven

ia

Slo

vak

Rep

Ko

rea

N Z

eala

nd

Po

lan

d

No

rway

Bel

giu

m

Cze

ch R

epu

bli

c

Fra

nce

Fin

lan

d

Hu

nga

ry

Gre

ece

Ital

y

Po

rtu

gal

Tu

rkey

Lu

xem

bo

urg

Au

stri

a

Spai

n

6

Many better systems are highly reliant on private pensions

Source: OECD, Pensions at a Glance, 2015

27

95

57

71 64 64

39 21

21 13

73

5 4 3 15

23

5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chile France Netherlands Norway United Kingdom United States

Public Pension Funded Pensions Based on Rights Funded Pensions Based on Assets Other

Public Pensions vs. Private Pensions (As a % of Total Pension Income)

7 Source: OECD. (2014). Saving for retirement and the role of private pensions in retirement readiness.

Retirement income sources vary across countries

Evolution of Second Pillar Systems

1981: Chile implemented the first mandatory second pillar system

2014: Mandatory 2nd pillar systems were in operation in 32 jurisdictions

8

0

5

10

15

20

25

30

35

19

81

19

92

19

93

19

94

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

08

20

10

20

11

20

14

1 2 3 4 5 6 8

10 11 13

17 19 20

22 24

27 29

31 32

Evolution of Second Pillar Systems

Source: MPFA. (2015). Towards Retirement Security.

Evolution of Second Pillar Systems (cont’d)

0

500

1000

1500

2000

2500

Growth of Assets in Mandatory 2nd Pillar Systems

9

Total accumulated assets increased from US$411 billion in 1999 to US$2,018 billion in 2012

Notes: 1. The chart includes data of 24 jurisdictions from 1999 (or the year that the data is available) to 2012. These jurisdictions are

Australia, Bulgaria, Chile, Colombia, Costa Rica, Croatia (since 2005), Dominican Republic, El Salvador, Estonia (since 2008), Hong Kong (MPF schemes), Kazakhstan, Kosovo (since 2006), Latvia (since 2004), Lithuania (since 2008), Macedonia, Mexico, Nigeria, Peru, Poland, Romania, Russian Federation (since 2004), Slovakia (since 2007), Sweden (since 2002) and Uruguay.

2. Data as of December each year, except Australia (as of June).

Source: MPFA. (2015). Towards Retirement Security.

Evolution of Second Pillar Systems (cont’d)

Jurisdiction Year

2002 2012

Australia 68.7 91.4

Bulgaria 1.0 7.3

Chile 52.8 59.8

Colombia 6.4 18.2

Costa Rica 4.8 9.8

Croatia 1.1 16.3

El Salvador 7.4 28.8

Estonia 0.2 8.5

Hong Kong (MPF) 4.2 21.6

Mexico 4.6 14.1

Uruguay 8.4 19.4

10

Growth of pension fund assets has an increasing impact on the economies of different jurisdictions

Source: MPFA. (2015). Towards Retirement Security.

Pension Fund Assets as a % of GDP

Driving Forces for Development of Second Pillar Systems

Maintaining financial sustainability

Coping with the issue of ageing population

Actuarial fairness

Generating economic benefits

11 Source: MPFA. (2015). Towards Retirement Security.

Role of MPF in HK’s Retirement Protection Framework

12

HK’s Retirement Protection in the Context of the World Bank’s Five-Pillar Framework

13

Pillar World Bank Hong Kong 0 Non-contributory, publicly financed and

managed system that provides a minimal level of protection for retirement

Old Age Allowance Old Age Living Allowance Disability Allowance Comprehensive Social Security Assistance Scheme

1 Mandatory, contributory and publicly managed system

-

2 Mandatory, privately managed, fully funded contribution system

MPF schemes ORSO schemes Civil Service Pension System Grant Schools and Subsidized Schools Provident Funds

3 Voluntary savings Voluntary MPF contributions Top-up ORSO schemes Personal savings/investment Life insurance Annuities

4 Informal support, other formal social programmes, and other individual assets

Family support Public health care Elderly health care voucher Elderly care services Public housing Reverse mortgage Public transport fare concession scheme for the elderly

and eligible persons with disabilities

Source: MPFA. (2015). Towards Retirement Security.

Objective Help the employed population to save for retirement

Salient Features

Mandatory and Employment-based System

Help ensure that each working individual sets aside some retirement savings

Help ensure that each generation takes care of part of its own arrangements for retirement protection

Management by Private Entities

Schemes operated through market mechanism

Competition among private entities tends to increase efficiency, working to the benefit of members

Objective and Salient Features of MPF

14

Defined-contribution, Individual Account System

Mandatory contributions made to a member’s MPF account

Amount of a member’s accrued benefits subject to the amount of contribution plus any investment return

Members eligible to withdraw only savings accumulated in their own accounts upon retirement

Individual Savings as the Source of Financing

Fully-funded/vested: Assets originated from contributions - fully vested in member’s account

Financially sustainable: Not dependant on ability of 3rd party to pay

Availability of the MPF System could reduce stress on government pillars

Objective and Salient Features of MPF (cont’d)

15

Scope Limitations of MPF

As a second pillar system, the MPF System is intended to provide basic retirement protection for the employed population of HK

Deliberate scope limitations of MPF – applies only to the employed population - never intended to be the sole source of retirement savings even for employed persons

Stronger the MPF System = less reliance on public funds

Complementary to Other Retirement Protection Pillars

16

The Need for Different Pillars to Work Together

The pillars are complementary

Pillars need to work together to provide for total retirement savings adequacy for the population

No single pillar can be an effective solution on its own

Complementary to Other Retirement Protection Pillars (Con’t)

17

Retirement Savings Generated by the MPF System

18

Before MPF was implemented:

Only about 1/3 of HK’s employed population (about 1.1 million) were covered by any occupational retirement scheme

As at 31 December 2015:

85% of HK’s employed population (about 3.2 million) were covered by MPF or some other forms of retirement schemes

The enrolment rates of relevant employees and employers are close to 100%

Coverage

19

0%

20%

40%

60%

80%

100%

3/2000 3/2001 3/2002 3/2003 3/2004 3/2005 3/2006 3/2007 3/2008 3/2009 3/2010 3/2011 3/2012 3/2013 3/2014 3/2015

En

rolm

ent R

ate

Employer Relevant Employee

Source: MPFA

As of December 2015:

Growth of Assets

20

MPF Contributions*:

$479 billion

Investment Returns#:

$112 billion

Total Asset Size:

$591 billion

* net of amount withdrawn

# net of fees and charges

Growth of Assets (cont’d)

21 Source: MPFA

Growth of MPF Assets

100

200

300

400

500

600

700

HK

$ b

illio

n

591

Growth of Assets (cont’d)

22

5,959

651

31

13,049

2,204 1,829

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mandatory Contribution Voluntary Contribution Special Voluntary

Contribution

HK

$ M

illi

on

Amount of Mandatory and Voluntary Contributions Received

Q4 2005

Q4 2015

Source: MPFA

Substantial growth of Voluntary Contributions and Special Voluntary Contributions over the past 10 years

Major Initiatives in the Pipeline

23

If a member does not make a fund choice, his contributions will be invested in the default fund(s) designated in the scheme

Currently, the default investment arrangements are not statutorily regulated

A mosaic of constituent funds and strategies in different schemes

Investment objectives, risk levels, fee levels and investment returns of existing default investment arrangements vary widely across different schemes

The Default Investment Strategy (“DIS”)

24

Existing Default Investment Arrangements

The DIS (Cont’d)

25

0

2

4

6

8

10

12

14

Mixed Assets Fund MPF ConservativeFund

Guaranteed Fund Target Date Fund Short-term Debt and Saving Fund

Diversified into different

constituent funds

No

. of

Sch

em

es

Default Fund

An amendment bill, mandating each trustee to provide a highly-standardised, fee-controlled DIS in every scheme, was introduced into the Legislative Council in Nov 2015

If a member does not make any investment choice, his accrued benefits will be invested in the DIS

Investing assets in a globally diversified manner

Gradually reducing a member’s exposure to relatively high risk assets according to his age

The DIS (Cont’d)

26

De-risking based on age

The DIS (Cont’d)

27

0%

20%

40%

60%

80%

100%

120%

49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

Inve

stm

en

t R

atio

Age

Core Accumulation Fund Age 65 Plus Fund

Fee Control Mechanism

The DIS (Cont’d)

28

Sponsor/Promoter

Trustee

Administrator

Investment Manager

Management Fees

0.75% of Net Asset Value

(To be adjusted in the

long term)

Custodian (non transaction-based)

Investment Arrangements

All members may choose the DIS

DIS CFs will also be made available as stand-alone CFs under the scheme for members’ selection

Implementation Schedule

Subject to completing the necessary legislative process and preparation work, the DIS would be introduced by the end of 2016

The DIS (Cont’d)

29

MPF involves numerous administration processes, e.g.:

processing of contributions received,

reporting of and following up with default contributions,

processing of fund transfer, and

withdrawal requests, etc.

Efficiency of scheme administration has a great bearing on the administration costs of the MPF System

Some short-term measures have been adopted:

getting trustees to offer low-fee funds,

working with trustees to merge less efficient schemes and funds,

Encouraging members to consolidate personal accounts, and

facilitating further automation and streamlining of administrative processes

Standardization, Streamlining and Automation of Scheme Administration

30

An independent consultant appointed to conduct a study on different options to streamline, standardize and automate scheme administration by means of a centralized electronic platform (the “eMPF”) as far as possible

Objectives of the eMPF:

lower the operating costs of MPF providers,

allow employers and members to deal with various MPF matters more conveniently and efficiently, and

Provide members with better quality services

Standardization, Streamlining and Automation of Scheme Administration (Cont’d)

31

Issue is how to best design public pension system not whether we should have MPF or government pension arrangement

A matter for the Government having regard to resources and consultation outcome

Important to understand the complementary nature of pillars – pillars must work together

A balance between public and individual responsibility

A well functioning pillar 2 system is a necessary part

Private pensions have scope limitations but some advantages over public pensions

Need to optimize all pillars – including MPF

In Summary

32

~ THANK YOU ~

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