HONG KONG - Hong Kong's much-awaited and highly contentious Mandatory Provident Fund has been delayed indefinitely by legislators' request for more study time.
Although the period requested will only amount to months, the delay means the MPF is unlikely to be approved for at least two years, by some estimates. Fund managers, in the meantime, may be lured to other Asian economies that are presenting more certain opportunities.
The MPF system, which could have amassed hundreds of billions of dollars under management, will have to wait for the formation of a legislature after Hong Kong becomes China's Special Administrative Region this summer. A provisional legislature is prepared to take the reins until an elected body takes its place, at least a year from now.
But there is no guarantee the pension plan will be resurrected. Hong Kong has been debating mandated retirement relief for decades and while the MPF hardly did away with all of the objections from all sectors (employers, labor, politicians, the financial community), the scheme came closer to passage than any other. In fact, preliminary legislation was passed in 1996; it was the draft regulations that were held back the last week of May.
The MPF Office, the pension system's regulator, maintained consistently that the draft legislation would be ready before the territory's return to China, and it was. But the text did not appear in time to give legislators time to weigh the more than 200 pages of rules and regulations.
There also is a backlog of legislation waiting to make it through the last session of the Legislative Council.
The financial community will have to observe the next government's timetable closely to see if the provisional legislature will debate it.
Some believe the provisional body will find more compelling business during Hong Kong's first year back under Beijing's rule. They fear the MPF will take a back seat to other matters, at least until an elected body will consider it. Chief executive-designate of Hong Kong SAR, Tung Chee-hwa, and his advisers, the Executive Council, are seen as supportive of an MPF system. But even when the MPF is submitted to a new body of lawmakers, it is not certain it will win favor.
While mandatory, the scheme would empower the private sector to provide fund management and administration. The local fund management industry (and competitors including insurers, banks, trustees and consultants) have been preparing new products and anticipating new alliances to meet the competition for a market that is estimated to reach $50 billion by 2025. Now that the legislation is on the back burner, fund managers might look elsewhere until the Hong Kong picture becomes clearer.
"The regional market, such as Taiwan, Malaysia, Singapore, is opening up schemes for fund managers. . . . If the MPF is delayed for a long time, companies in Hong Kong can divert their interest elsewhere," said Desmond Chan, director of Jardine Fleming Investment Management Services Ltd.
Singapore's Central Provident Fund, long touted as an example of a well-run government-operated scheme, opened up to private sector fund management last year, Mr. Chan said. "Malaysia is opening up and Taiwan sometime this year." In Hong Kong in the meantime, "no one can do anything."
But he says the enforced hiatus has its positive side. "It's a good breather" because the fund management community has been frantically gearing up to meet the expected demands of a mandated system. Industry players have been seeking alliances with other service providers (although none has been announced publicly), developing products to conform to the legislation, and considering how to position themselves in market. This activity will continue as everyone waits to see what the government will do.
One large insurer, which stands to figure prominently as a service provider under the system, will continue its active pursuit of pension fund business. "We will concentrate on existing business," said Carolyn Butler, managing director of AIA Pension & Trustee Co. Ltd. "Our competitors will be trying to write existing pension plans, as we are. We are trying to encourage clients to take up pension plans in the meantime."
The MPF's potential has the industry salivating, despite the possible pitfalls of low margins and predictions that none but the biggest players will make money on serving this market.
Up to the very week of the Legislative Council's request for a deferral, workshops and seminars on the MPF's promise were held.
A. Grahame Stott, regional director, Asia-Pacific, Watson Wyatt Hong Kong Ltd., at one such shindig, measured the Asian pension markets today and the volume of funds managed: Singapore is the most abundant market with almost $50 billion (U.S.) under management; Malaysia, $40 billion; Korea, $20 billion; Hong Kong, $20 billion; Taiwan, $6 billion; and Indonesia, $4 billion. Background such as this can only highlight the attractiveness of Hong Kong's neighbors.
Mr. Stott also said that mandatory schemes hold sway in Malaysia, Singapore, Korea, Taiwan and China, while Japan and Indonesia offer both mandatory and voluntary systems. The Watson Wyatt consultant predicted funds under management in Hong Kong under the MPF would shoot from a base of $20 billion in 1997 to $50 billion in 2002. But the deferral means managers will have to wait for that accumulation.
Philip W. Moore, executive director, Coopers & Lybrand, warned the MPF system will be highly competitive and many providers will lose money. He advised entrants to decide whether they will be niche players or mass market players. "Only (those) providing economies of scale will make money in this market."
He predicted a great demand for funds with guarantees.
However, even when the MPF is dragged back onto the legislative agenda, there is still the chance unanimity will be elusive. Lee Chuek-yan, legislative councillor and general secretary of the Hong Kong Federation of Trade Unions, said that while it was disappointing to have the draft legislation put on ice, he and his constituents didn't support it completely. They favored an earlier old-age pension scheme the government had proposed some years ago.
Employers also are objecting to the government's attempts to create an interface between MPF and earlier pension legislation, the Occupational Retirement Schemes Ordinance. If the MPF is resurrected, this debate will not die.