MPFA proposes easing rules for early withdrawals

Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA) has issued a white paper suggesting the government allow early withdrawal of MPF savings to pay for terminal illnesses.

The proposal is very modest in scope. The MPFA for now says it does not support adding flexibility to the MPF regime, such as allowing people to use the money before retirement for other medical treatments, unemployment benefits, purchasing a home or financing a child’s education.

However, this is the first time the agency has proposed easing the rules around which Hong Kongers can access their contributions, which for now are paid out as a lump sum when people reach the age of 65.

It suggests that the regime will become more flexible over time, which should make the MPF system more popular – although this will also mean money will exit the system earlier, depriving fund managers and administrators of annual fees on captive assets.

The funds industry needn’t worry for now. The MPFA report, Consultation Paper: Withdrawal of MPF Benefits, says, “…early withdrawal of MPF benefits would affect the eventual size of the retirement funds by not only the amount of the initial withdrawal but also the amount of investment return that would have been generated if the money had remained in the fund.”

It says proposals allowing early withdrawal should therefore be measures of the last resort. New measures should also account for the administrative costs, which could result in reduced returns for all scheme members.

However, these concerns are likely to be met, because the government is keen to enhance the popularity of MPF. Public hostility to a scheme that captures savings until age 65 was revealed last year when Hong Kong’s financial secretary, John Tsang, had to abandon a plan to provide economic support by injecting HK$6,000 into every member’s MPF account.

Instead the government wrote cheques for permanent residents, notes David Webb, a local governance activist. He says the government needs to make the system more popular before it can enact more difficult reforms, such as scaling lump-sum payouts.

The MPF system is unlikely ever to provide the full menu of early-withdrawal options as found in Singapore or Australia, because the contribution rates from employers and employees is relatively low in Hong Kong, at a combined 10% of labour costs, capped at HK$20,000/year per member.

But the government is aware of demographic and social pressures that make accessing MPF accounts more important to people. The government’s census expects the portion of people aged 65 or above to rise from 13% in 2009 to 28% in 2039. The decline in fertility rates means traditional dependence of elderly people on family is eroding quickly.