HONG KONG - The Legislative Council has approved legislation creating a mandatory retirement system for the territory.
Legislation requires employers to cover all full-time employees age 18-65 under retirement plans, with management and labor each contributing 5 percent of the employee's salary. The MPF schemes will be trust-based private sector plans; trustees will choose the investment managers.
Hong Kong is expected to have 1 million people aged 65 or older in 2016, compared with 560,000 now. The work force is now nearly 3 million people out of a population of just under 6 million.
Specific regulations governing the MPF have yet to be fashioned; they are expected to be embodied in follow-up legislation, to be drafted in the next 18 to 24 months, said Cheung Chor-yung, assistant secretary for education and manpower. However, some industry representatives think it might take as long as three years to complete the regulations. All subsidiary legislation will be subject to Legislative Council approval.
Some issues have already been decided. For example, according to the newly passed legislation, pension benefits will be paid as a lump sum at age 65 - even if the employee is not retired - or at age 60 if the worker retires, leaves the work force permanently, or leaves Hong Kong permanently.
Exempted from the MPF law are those already covered by registered retirement plans, street hawkers, the self-employed, expatriates working fewer than three months and domestic workers.
Employers will have a choice of investment vehicles under registered plans. The plans' trustees will appoint approved fund managers and the employee may have a number of options available to suit individual needs.
Among the issues yet to be worked out are how the new funds coordinate with existing schemes, how they will be administered and managed and where they will be domiciled.
Details about the portability of funds, exemptions granted to the self-employed, the ongoing registration of existing schemes under the Occupational Retirement Schemes Ordinance currently in force and the compliance of future plans with that law will be addressed by subsidiary legislation.
Also to be created are a mandatory provident fund authority to monitor the system and enforce compliance (which government officials predicted would take a year to achieve); a compensation fund to cover losses from illegal practices or improprieties; a residual pool for low-income workers; and portable benefits.
Lawmakers will hear again from opponents of the MPF law in the Legislative Council and the Chinese government.
The legislators of the Democratic Party, which gets support from labor and grass roots structures, are furious with the current legislation and vow to continue their fight in the next legislative session to revive the previously proposed Old Age Pension Scheme - a contributory plan that is generous in terms of eligibility for benefits. Democrats criticize the MPF plan because they say it will take a long time to accrue valuable benefits. For example, although full vesting will be immediate according to the current program, it will take workers 10 years to receive the equivalent of one year's pay.
This style of system means that pressure on the social security system may persist, said Mark Baxter, director and manager for William M. Mercer in Hong Kong.
The People's Republic of China has also let its displeasure be known, although most pro-China legislators voted in favor of the MPF bill.
"How come (the British government) turned it into a fait accompli? Like a bowl of cooked rice, no matter if it is sweet, salty, too hard or too wet, you are told to eat it," said Yang Huaji, director of the research department of China's de facto diplomatic presence in the territory, the New China News Agency, or Xinhua.
Miffed that Chinese officials were not consulted before the bill's passage, Yang warned that the program would be reviewed after June 1997--when Hong Kong is returned to Chinese sovereignty.
Mercer's Baxter said he wants to know how existing plans will be treated, whether the MPF authority have power over investments, and how it would use that power.
"A lot hinges on subsidiary legislation," Mr. Baxter said. "I hope the government consults widely among insurers, consultancies, and all industry players. The system in Hong Kong is similar to the Australian system. I hope they analyze the experience in Australia."
Putting the system in place will require enormous effort over the next two years. But the establishment of the MPF system - from the March 1995 appearance of the consultants' report by Hewitt Associates L.L.C. and GML Consulting Ltd. to the passage of the bill - was completed in a remarkably short time.
Because of this, Baxter was not surprised that China wants to review the legislation after the political transition, though "this brings in an element of uncertainty."
Sheba Brener, a director of Watson Wyatt Worldwide, said all voluntary schemes are currently being registered under the Occupational Retirement Schemes Ordinance, with which they must comply in October.
While the MPF's subsidiary legislation is expected to harmonize the new plan with the old law, "it should have been dealt with up front instead of later," she said.
Roger Pyrke, chairman of the Hong Kong Investment Funds Association and regional director of the Barclay's International fund managers, thought the MPF bill was the "best of alternatives." Among his concerns were:
Will there be investment restrictions on where the majority can invest money? The Hong Kong Monetary Authority wants a minimum limit to be invested in Hong Kong investment fund assets, but the industry wants no restrictions.
How will portability be administered? "Hong Kong has a fluid work force. We need to design a cost-effective way of achieving portability.....Workers want minimum cost. Charges may be taken out on each contribution or annual administration fee," he said.
Mr. Pyrke also said clarification is needed regarding administrative fees and whether uniformity of charges can be achieved while ensuring that funds can be affordable to the poor and benefits are not eaten up by charges.
Many of these details will be addressed in the second round of legislation, it is believed.
The approximate size of Hong Kong's existing pension fund market is HK$100 billion (U.S. $13 billion), Mr. Pyrke said. MPF contributions will be spread among a few managers and insurance companies to different types of funds: cash, guaranteed, funded capital growth, equity and different geographical funds approved by trustees and by the MPF authority.
"Competition between fund managers and insurance companies will be keen," Mr. Pyrke predicted. Insurance companies will offer fewer varieties of funds but better marketing, while HKIFA members will offer better selection, he said.
The HKIFA has 20 members, managing a total of U.S.$85 billion, with U.S.$30 billion in authorized local and international unit trusts and mutual funds and the balance in other types of funds.