Are Hong Kong pensions worse than Singapore’s?

Andy Mukherjee

In May, the South China Morning Post published a letter from a reader who wrote to say that Hong Kong’s Mandatory Provident Fund should be abolished as “it has failed on multiple levels from the perspective of ordinary citizens.” Replace it with a universal basic income, he suggested.

Hong Kong was recently graded C+ in the Mercer CFA Institute Global Pension Index 2022. Being in the same category with the US, France and Spain means that MPF has “some good features, but also has major risks and/or shortcomings,” the study noted.

Still, is the MPF so bad that it should be scrapped?

I had argued in early 2019 that Hong Kong’s old-age security ought to be fortified with a state-provided pension to have any chance of a favorable comparison with Singapore’s Central Provident Fund, or CPF, which is rated B in the Mercer CFA Institute survey. (In the Asia-Pacific region, only Australia’s retirement system is graded B+. For really world-beating outcomes, one must live in Iceland.)

Both Hong Kong and Singapore collect defined contributions, but there the similarity between the rival financial centers ends. Singaporeans below 55 years of age mandatorily save 20% of their pay up to a salary cap; their employers funnel another 17%. That works out to about S$2,200 ($1,543) each month. Hong Kong’s forced savings, equally shared by the worker and the firm, top out at HK$3,000 ($382) and comprise the bulk of MPF. Voluntary contributions, which enjoy tax breaks, accounted for less than a quarter of the money that came into the system in the June quarter.

Not only do Singaporeans squirrel away four times more, their triple-A-rated government offers a guaranteed 4% return on so-called special accounts, which can’t be used for housing. (For those who want to dip into their savings for apartment purchases and mortgages, the ordinary account pays a risk-free 2.5%.) By contrast, Hong Kong’s pension outcomes are strictly a private affair: They’re determined by the performance of the funds members select from the menu offered by providers such as HSBC Holdings Plc and Manulife Financial Corp. The annualized net rate of return has been 2.8% since the inception of the MPF in 2000.

In September, total MPF assets fell below the HK$1 trillion mark for the first time since July 2020, when the pension system crossed that milestone, according to MPF Ratings. The independent researcher estimates investment losses so far this year at HK$260 billion. High inflation and rising interest rates, global recession risks, a war and energy crisis in Europe and a meltdown in China’s property industry have all added to volatility. Plus, the average saver has a home bias. That has hurt returns this year as Hong Kong’s economy paid a price for mimicking the mainland’s aggressive stance against Covid-19 infections.

It’s unfair to judge a long-term savings vehicle by one year’s performance. However, the comparison with Singapore is too stark to ignore. The first S$60,000 accumulated in CPF accounts earns a 1% top-up interest rate. In other words, had MPF’s 4.57 million members kept their average December balance of roughly HK$255,000 in the rival city, they would have been earning 5% this year — and not losing 18%.

—Bloomberg