Three factors will decide the amount of money that you will have to fund your lifestyle in retirement via your pension – the amount that is contributed into your pension over your working life, the performance of the investment managers, and your life span in retirement.
Governments looking to increase the number of their citizens that are self-sufficient in retirement have few options. They cannot control the life span of retirees, which is extending due to continuing medical advancements, and they cannot control the rates of returns on your investments. The only lever at their disposal is to set the contribution levels for people working within their borders, which are generally expressed as a percentage of salary.
Under Hong Kong’s Mandatory Provident Fund (MPF), the minimum contribution level is currently 5% of an employee’s salary up to HKD 30,000 of monthly relevant income, above which it is capped at a top rate of HKD 1,500 per month. This amount is deducted from the employees’ salary and then matched by their employer.
Under the MPF system there are two ways to make additional contributions: voluntary contributions (VCs) and special voluntary contributions (SVCs). VCs have to be a regular, fixed amount. Contributions are made to the trustee via your employer and some employers may match your contributions. SVCs are flexible in terms of amount and frequency and are made directly by the employee to the trustee.
Why should employers make a further voluntary contribution to an employee’s retirement fund that is over and above the mandatory contribution? This is not generally just an act of benevolence on the part of the employer. Typically, it is done for sound pragmatic and commercial reasons because it may assist an employer to:
- Compete for and retain talent by matching benefits offered by direct competitors;
- Move staff between operations by matching benefits available in other countries;
- Structure remuneration packages to link more of the benefits to the length of the period of employment;
- Benefit from tax incentives offered by some countries, like Hong Kong, in respect of pension contributions.
VC benefits can, subject to the terms of the MPF scheme, be withdrawn or transferred before retirement, but only after ceasing employment. SVC benefits can be withdrawn or transferred at anytime. The frequency and minimum amount of withdrawal will depend on the trustee.
Hong Kong’s pensions regulator, the Mandatory Provident Fund Schemes Authority (MPFA), recently warned all 14 MPF providers to tighten control measures to avoid any SVCs being used for short-term speculative activities. It is currently reviewing its policy on SVCs but has yet to decide whether to abolish it.
Manulife, the largest single MPF provider in Hong Kong, said it had decided to cease accepting SVCs, noting that their primary objective was not being generally achieved in view of the withdrawal frequency, transaction pattern and trend. Where members still wish to additional contributions to a pension, they will need to make alternative arrangements.
The primary option in Hong Kong is for the employer to establish a separately registered ORSO (Occupational Retirement Schemes Ordinance) scheme. The MPF will still receive the mandatory contributions, while the ORSO will receive any additional contributions made by the employees or employers. An added benefit of an ORSO scheme is that it enjoys far broader choice of funds than an MPF scheme.
Sovereign Trust (Hong Kong) is licensed in Hong Kong to act as an ORSO scheme trustee and administrator. Any companies that are looking for alternative solutions in view of the new restrictions on SVCs, or that are currently exploring how they can restructure their staff remuneration package, should contact Sovereign for further information.