HONG KONG - Hong Kong's Mandatory Provident Fund is again mired in politics, and the timing of its passage remains uncertain.
Members of the local Democratic Party recently vetoed in subcommittee a proposal to extend for a second year funding for the agency that is to administer the fund.
It is a crucial time because the government wants to present the regulatory framework to Hong Kong's Legislative Council in April or May for passage before the territory reverts to Chinese rule July 1.
Despite the delay, those in the investment community and government sound optimistic about the MPF's survival. "The (current) government is committed to it and it will go through either before or after" the change to Chinese rule, said Mark Baxter, director and manager-Hong Kong, William M. Mercer Ltd.
The Democrats' maneuver was not unexpected, because they consistently have opposed the mandated pension plan, whose enabling legislation passed last August. It is believed the government will next appeal to the financial subcommittee to approve funding at the end of February.
Even if the MPF Office is funded and legislators give the regulatory framework their most speedy endorsement, the scheme would not be operative for at least 12 months, by the most optimistic estimates.
The MPF appears to have the blessing of the People's Republic of China - a point that until recently was a worry. PRC officials had let it be known they were offended they had not been consulted before the bill's passage, because the MPF system would take effect under Beijing's rule.
"We have had numerous contacts with China. They have no objections and have asked a lot of questions. This is a very positive, sign," said Pamela Tan, director of the MPFO.
The man recently elected to head the Special Administrative Region - as Hong Kong will be known under PRC rule - has shown support for the MPF. Tung Chee-hwa endorsed the MPF during his campaign last fall. Before he became Beijing's man in Hong Kong, Tung sat on the Governor's Executive Council, where he also was known to be in support of mandated retirement systems.
The Democrats' opposition stems from their fastidiousness in assuring the security for the 3 million-strong workforce who will be covered by the mandatory plans. Democrats have been said to favor a parallel scheme modeled after Singapore's Central Provident Fund that would be operated by the government, not the private sector. Among other things, the Democrats demand the MPF guarantee a minimum 4% return to participants. The investment community, meanwhile, has been lobbying the government to loosen what it perceives to be overly onerous and duplicative security measures.
The Democrats' demand is unlikely to be resurrected after the handover because they have no voice in the Provisional Legislature that was recently created by Beijing to act as an interim body before a new system is established.
Ironically, the Democrats appear to be helping Tung Chee-hwa by pushing the MPF's passage further into the future, until the time when he can take credit for its passage under his own government.
The MPF provides full and immediate vesting in an economy where two-thirds of the workforce have no pension coverage and where the elderly no longer can be certain their children will support them. The MPF is conceived as a defined contribution scheme. The protection is quite modest, providing 10% of salaries to accumulate in benefits, coming one-half from employers, and the same from employees.
Employees can choose to receive their lump-sum benefit any time after reaching the age of 60 if they are retired, or they can wait until 65 and claim it even if they are not retired.
Employers with existing defined benefit schemes will be able to keep them, but the compliance hurdles involved in doing so are likely to act as deterrents. Those employers also must offer all employees the option of joining an MPF scheme. There are an estimated 15,000 to 18,000 pension plans in Hong Kong now. A. Grahame Stott, regional director, Asia-Pacific, Watson Wyatt Worldwide, estimated one-half of existing plans would eventually fold into the MPF.
Once the subsidiary legislation covering MPF regulations is approved, trustees, investment managers and custodians will have to register with the MPF Office.
The products they create also will have to be approved, Ms. Tan said. Administrators will not have to get approval; they will be hired by trustees, who also will select money managers and custodians.
This registration process will take at least six months; meanwhile, employers will be going through the same process.
Employers will be allowed to have individual MPF plans, or they will be allowed to participate in pools, which will keep administration costs down for the thousands of small employers for which the system was created.
Because investment products already on the market will not satisfy the MPFO's standards, investment managers and other providers are trying to second-guess the legislation that has yet to pass so they can begin work on designs and pricing. Under the regulations that are awaiting passage, no more than 10% of a fund's assets may be invested in a single instrument or more than 10% into one company's shares; derivatives cannot be used for leveraging and there will be restrictions on warrants; and products must be 30% invested in Hong Kong-dollar funds.
