1. The changing landscape of retirement savings
Hong Kong
Mandatory Provident Fund (MPF) Scheme

2. Agenda Context and overview of the Hong Kong MPF Scheme
Selected key MPF reforms and learnings
Employee Choice Arrangement (ECA)
Default Investment Strategy (DIS)
eMPF
MPF scheme performance to date
Conclusion

3. Demographic shifts created many challenges for
Hong Kong
Rapid Ageing
Low Fertility
Longevity
In 2016, 17% of population is above 65, this figure will almost double to 30% by 2030
Hong Kong fertility rate declined from 1.9 births per woman in 1981 to a historical low of 0.9 in 2003, before rebounding to the level of 1.2 to 1.3 in recent years
The fertility rate in Hong Kong is the fourth lowest in the world based on 2017 data
2016 Life expectancy
Man: 81.3
Female: 87.3
2066 Life expectancy
Man: 87.1
Female: 93.1
February-23-19

4. Impact on public finances
Economic growth will be dragged by insufficient labour force
Impact on public finances
February-23-19

5. Hong Kong Retirement Schemes
World Bank 3-Pillar
(1994)
World Bank 5-Pillar
(2005)
Hong Kong Retirement Schemes 1
Mandatory
publicly
managed pillar
Non-contributory "zero pillar" that provides a minimal level of social protection.
Publicly-funded social assistance schemes
The framework 1
Publically managed mandatory contributory plan
Nil 2
Mandatory
privately
managed pillar 2.
Privately managed, mandatory occupational or private contributory plan
Mandatory contributions to the MPF schemes (Dec 2000)
Other occupation-based retirement schemes 3
Voluntary retirement savings 3
Voluntary contributions or savings to occupational or private plans
Voluntary contributions to the MPF schemes
Retirement savings-related insurance, etc 4
Public services, family support and personal assets
Public housing, healthcare and welfare services, family support and
Personal assets (e.g. self-owned properties).
February-23-19

6. MPF Scheme structure and service providers
The MPF System is a privately managed retirement system.
MPF trustees are the major operators of MPF schemes, there are other service providers who take part and play different roles in the MPF System.
A company or a natural person approved by MPFA
Exercise fiduciary duty in operating MPF schemes in the interest of scheme members
Need to appoint a custodian and an independent investment manager to manage the investment of funds
Approved Trustee
Custodian
Scheme Administrator
Investment Manager
MPF Intermediary
An institution to which an approved trustee has delegated administration of the scheme asset
The custodian is required to be independent from the investment manager.
Acts on behalf of the MPF trustee in handling the daily administration work of the MPF scheme, such as:
Recordkeeping
Handle transfer or withdrawal
Provide customer service
Responsible for managing the investment of the funds of the MPF scheme
Entity registered by MPFA to engage in MPF sales and marketing activities
MPF subsidiary intermediary is a person sponsored by an MPF principal intermediary and registered by MPFA to carry out MPF sales and marketing activities
February-23-19

7. Contributions, tax concessions and retirement accounts
Given its mandatory nature, employees, employers and self-employed person are all required to contribute to 5% of the salary into the retirement accounts
Contributions made to an MPF scheme is tax deductible, subject to the maximum amount: HK$18,000 for employee and up to 15% of payroll for employers
Contribution Account
(Current employment)
Primarily receives MPF contributions attributable to a member’s current employment or current self-employment for investment
Once per year, employee contribution can be transferred to any other MPF schemes
Self-employed can opt to make mandatory contributions on a monthly or a yearly basis
Personal Account
Primarily receives accrued benefits attributable to a member’s former employment or former self- employment transferred from other MPF accounts, and
Accrued benefits attributable to a member’s current employment transferred from a contribution account for investment
February-23-19

8. Consolidated market where Top 5 trustee account for ~80% of market share
February-23-19

9. Selected key MPF reforms and learnings
February-23-19

10. Employee Choice Arrangement (ECA)
Employee Choice Arrangement is an important reform launched On November 1, 2012
Before ECA
Employer-led：
Employer’s responsibility to select MPF schemes and providers
Employee passively follow employer’s decision for contribution and investments, until they leave the employer or retire
Employers are the main focus on MPF providers
After ECA
Employee-led：
ECA gives employees greater autonomy, allowing them to, once a year, opt to transfer the accrued benefits derived from the employee mandatory contributions to a scheme of their own choice (New Scheme).
Increase MPF funds liquidity
Force providers to innovate and improve quality of services delivered to the employees to retain their MPF assets
February-23-19

11. Default Investment Strategy (DIS)
Impact
Better default options compare to MM (selected by trustee)
Low-cost investment vehicles
Automatically adjusting portfolio mix when customers are closer to retirement
February-23-19

12. eMPF platform is currently under consideration to promote portability
Why
How
Impact
Large number of paper-based transactions and
Large number of schemes lead to fragmented member database leading to high admin cost
High Fund Expense Ratio (FER) and low return mean that members are not motivated to invest further
Centralized collection of MPF contributions and necessary information from employers through an electronic channel
automatically calculate the amount of contributions in respect of each employee and submit such information to the trustees concerned
Provide a one-stop electronic portal for scheme members to access all relevant information about their MPF accounts
Build scale to drive down FER
Centralized member database to reduce admin cost and improve efficiency
Enhance member experience and engagement
Create greater transparency
February-23-19

13. MPF scheme performance to date
February-23-19

14. 𝟏 𝟑 of the Hong Kong workforce had some form of retirement protection
MPF scheme now covers 72% of employed population
Before the implementation of the MPF System, only about
𝟏 𝟑 of the Hong Kong workforce had some form of retirement protection
February-23-19

15. Average MPF account size
MPF’s AUM has been growing rapidly since inception; average account size tripled over the last decade
MPF Net Asset Value (NAV)
(US$b)
Average MPF account size
(US$b)
+22.3%
15,080
12,610
8,320
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
2016
2017
February-23-19

16. Equity funds dominate MPF asset allocation
As of 12/31/2017, over 40% of MPF assets were invested in equity funds
Over the past 17 years, Equity funds tripled in AUM while Guaranteed funds and money market funds shrank significantly
2001
2017
0.7%
2.4%
14.6%
7.4%
3.1%
0.4%
21.4%
9.2%
Equity Fund
: # of Funds:154
42.9%
Mixed Fund
: # of Funds:210
Conservative Fund
: # of Funds:32
Guaranteed Fund
: # of Funds:21
14.6%
Bond Fund
: # of Funds:43
46.3%
MM and other Funds
: # of Funds:9
37.0%
February-23-19

17. Based on global experience, it would take about 40 years for the scheme to mature
Hong Kong’s MPF system has been implemented for 17 years and is moving towards full portability
Phase V
Phase IV
Maturity
Conclusion
Phase III
Phase II
eMPF
Phase I
ECA launched
DIS
10 yrs
Now
20 yrs
30 yrs
40 yrs
Setup infrastructure & increase participation rate
Product innovation & participants protection
Full portability & fee review
Increase operational
efficiency & focus on customer experience
Continue to improve policy & promote adoption

18. Decisions made easier. Lives made better.
February-23-19

19. Appendix - Contributions and tax concessions
Employee & Employer contributions
Monthly Relevant
Income
Amount of Mandatory Contributions Payable by Employer
Amount of Mandatory Contributions Payable by Employee
Less than $7,100
Relevant income x 5%
No contributions required
$7,100 to $30,000
More than $30,000
$1,500
Tax Concessions
Employee
Contributions made to an MPF scheme is tax deductible, subject to the maximum amount: HK$18,000
Voluntary contributions are not tax deductible.
Employer
Both mandatory and voluntary contributions are tax deductible, to the extent that they do not exceed 15% of the employee’s total emoluments
Self-employed Person
Contributions made to an MPF scheme as allowable business expenses for Hong Kong Profits Tax purposes. The maximum amount that can be claimed for deduction is: HK$18,000
Self-employed person contribution
Monthly Relevant Income
Mandatory Contributions
Less than $7,100 per month (or $85,200 per year)
No contributions required
$7,100 to $30,000 per month (or $85,200 to $360,000 per year)
Relevant income x 5%
More than $30,000 per month (or $360,000 per year)
$1,500 per month (or $18,000 per year)
February-23-19