IFA to tackle some, not all, retirement issues

At the beginning of the year, the Hong Kong Investment Funds Association (IFA) commissioned a paper to develop an optimal model on retirement income policy for the Territory, which on present trends faces a nightmare of demographic ageing. The Mandatory Provident Fund (MPF) system implemented in 2001 is widely viewed as a reasonable start, but totally insufficient to allow most Hong Kongers to retire in dignity and financial security.

The paper, done by the Gadbury Group, led by principal Jeremy Gadbury and fellow consultant Alan Taylor, provided a comprehensive blueprint of the fundamental changes necessary to meet the IFA's objectives. Subsequent interviews with fund management executives involved with the IFA reveal that while the industry body has taken aboard the more technical recommendations, it will not pursue the more sweeping policy suggestions.

The Mandatory Provident Fund Schemes Authority (MPFA), the main regulator, has until now been busy revising its code on disclosures regarding fees, marketing and other measures. But that work is drawing to a close. The industry may also be looking to seize the initiative, as that code revision was primarily driven by the MPFA. (MPFA officials declined to comment for this article.)

Although the Gadbury report is not public, Jeremy Gadbury did give a recent lunch address to the IFA in which he outlined his recommendations. He says his ideas would build on MPF's good start, rather than scrap it for something else, so he believes his starting position is conservative. Nonetheless he does call for fundamental changes at the policy level, including:

1. Abolishing the severance system under ORSO schemes (those corporate schemes under the Occupational Retirement Schemes Ordinance) and require beneficiaries' money remain invested until they turn 60;

2. Providing a basic retirement income from government coffers for everyone over the age of 65, because the MPF does not cover all citizens and is insufficient anyway; and

3. Tax credits for voluntary contributions.

Gadbury also made some more technical suggestions:

4. Allow an ongoing choice between MPF and a company's ORSO schemes, rather than tie employees to a decision forced on them in late 2000;

5. Provide more investment choice and bin constraints such as the requirement that at least 30% of every MPF portfolio invest in Hong Kong dollar assets;

6. Change MPF's lump sum payments to a drawdown or income process;

7. Mandate asset allocation shifts toward more conservative positions or capital-protected instruments when members reach certain ages; and

8. Require the authorities to publish more information and data about MPF and ORSO, including contributions and payments.

Sally Wong, executive director at the IFA, says the organization forwarded the report to the MPFA and the Financial Services Bureau in May, and its pensions committee is now brainstorming particular recommendations to push.

"There were a lot of proposals, some more doable than others," Wong says.

The policy ones fell into the difficult list. Universal retirement income, for example, and other proposals that would impact the already-strained budget finances are a non-starter. "But fine-tuning the MPF system can work," she says, although it is harder to tackle ORSO-related issues because that involves changing contractual agreements between companies and employees. The one major change the IFA is prepared to tackle is calling for voluntary contributions to be shielded from salaries tax.

Kerry Ching, head of institutional business at Invesco and the pension committee's chairwoman, says several recommendations appeal to the industry. "Especially voluntary contributions, holding retirement assets to a certain age and a flexible drawdown," she says. Fund managers particularly dislike the 30% investment rule.

"Our focus will be more on the technical areas," Wong says. "The rest is beyond us. It would need a lot more research about the fiscal implications."

She adds, however, that the IFA is not going for 'quick' solutions, noting even the more technical recommendations will take years to resolve.

Ching agrees, noting the government currently has other priorities and preoccupations. "This is a medium-term project," she says.

The IFA has drawn up five likely goals to pursue with regulators and the Legislative Council: flexible drawdowns, liberalizing MPF regulation with regard to investments and new market tools such as derivatives, ending salaries tax on voluntary contributions, ensuring ORSO benefits are retained until retirement, and opening preserved accounts (accounts for employees who have since left the company) to voluntary contributions.