In pursuance of comprehensive retirement protection measures in Hong Kong


1.In the past years, the Government had proposed to establish three different retirement schemes, a) "A Community-wide Retirement Protection System" in October 1992; b) "Old Age Pension Scheme" in July 1994 and c) "Mandatory Provident Fund"(MPF) in March 1995. The first two schemes were rejected by the Government based on various reasons. The MPF, which the government imposed no other alternative, was gazetted by the government on June 9, 1995 and is pending for debate and discussion on its subsidiary legislation in the Provisional Legislature in the coming few months.

2.The Hong Kong Council of Social Service (hereafter referred to as the Council) had responded to these proposals and expressed its support for the establishment of a Compulsory Retirement Protection Scheme for the growing elderly population in Hong Kong.

3.The Council has indicated its support to a centrally managed retirement protection system in the form of a Central Provident Fund and proposed, as an alternative, a three-tier system which includes:

3.1 The current Comprehensive Social Security Allowance (CSSA) schemes to offer assistance to the elderly at poverty level;

3.2 The Old Age Pension Scheme(OPS), to offer, as a right of a citizen, a basic old age protection measure; and

3.3 A portable compulsory retirement scheme for the working population for a better and reasonable level of protection on top of OPS.

4.Rationale for a Good Pension Scheme

The Council has been advocating for a comprehensive and government active retirement protection scheme for Hong Kong. It should be consistent with the following principles :

4.1 capable to provide adequate retirement protection for the existing and future elderly population;

4.2 its coverage should be as universal as possible;

4.3 the level of benefits should at least catch up with inflation to ensure adequate protection for life after retirement;

4.4 the structure of the scheme is financially secure and viable

4.5 its administration simple with low cost of operation

4.6 capable to protect contributors on the certainty of the survival of pension schemes in case of economic and political adversity

Inadequacy of the Mandatory Provident Funds

5.Dilemma of Conflicting Goals

5.1 The MPF only seeks to ameliorate modestly, with minimal vertical income-redistribution impact and at minimal government expense, the future poverty amongst Hong Kong's aged community.

5.2 While it may reduce the future public financial burden of Hong Kong's aging population, the MPF could well reduce the quality of life of some contributors. Particular concern are those low wage-earners who have to accommodate their contribution obligations by reducing their consumption expenditure and/or their voluntary savings intended for more short-term goals (such as their children's education or health care).

5.3 As the MPF is designed to build upon, through integration, the coverage achieved by voluntary occupational provident funds, it is very much in the Hong Kong tradition of creating profitable opportunities for the private sector to exploit. Making mandatory memberships of what were previously voluntary occupational provident funds, however, places a responsibility on government to ensure both their long-term solvency and the adequacy of the rate of return they offer. After all, mandatory covered employees cannot reverse past decision made by their employers in the event of insolvency or inadequacy of investment returns adversely impacting on their retirement savings. Thus it is incumbent upon government to articulate and to adequately monitor and police a regulatory regimes that protects the long-term interests of contributing members before reaping the benefits of their foregone consumption. This highlights the need for a regulatory regime that ensures the interests of future MPF beneficiaries do not become incongruous, incompatible or even subservient to the business goals of the private sector managers of mandatory occupational retirement savings funds.

6.An Inadequate Social Security Strategy

6.1 The problem of inadequate savings - the long period of continuous contributions required to achieve savings levels that will enable an annuity to be purchased that will provide even quite modest income replacement after retirement. For example, a 30-year continuous contribution period must elapse before employees can accumulate enough savings to achieve an income replacement rate of 25%. (assuming a combined contribution rate of 10%, a growth in employee earnings of 7% and an real investment return of 8% a year.)

6.2 The Dispersal of Lump-Sum payments - the lump-sum payments are not determined in accordance with social security needs, rather they are the product of past savings. It is unable to ensure that their beneficiaries use their lump sum payments to provide for themselves a future source of income, and cannot guarantee that the beneficiaries do not quickly become impoverished, as inflation eats away at their means of support. Actually, the 1952 ILO Convention endorses only the use of periodic payments for a particular period of time or an income-tested flat-rate "sufficient to maintain the family of the beneficiary in health and decency" to meet social security needs.

6.3 The coverage standard - It must be recognised that the MPF provide the most generous aged income support to those covered employees who have the highest incomes and who have not experienced periods of either unemployment, uncovered employment or absence from the workforce. Unquestionably, the less fortunate receive less income support, which is a product of the lack of risk-pooling.

7.In brief, the MPF proposed is a system that

7.1 covers only those presently in the workforce and can only be realised in 30 to 40 years' time. It does not provide effective retirement protection to the present elderly population,

7.2 intends to be a vehicle for helping employed individuals accumulate savings for withdrawal in their old age and adequacy of retirement benefits cannot be ensured

7.3 increases financial hardship to low-wage earners; cannot provide economic security of part-time and temporary workers

7.4 does nothing to solve the retirement protection for people outside the workforce; namely, housewives, chronically ill, the disabled etc..

7.5 without active government intervention, there is cumbersome administration in transferring portable individual account;

7.6 independent pension schemes may be financially insecure due to market fluctuations and inflation; these programmes confront a dilemma between the need to pay members an adequate real rate of interest on their deposits with their private sector managers' needs for profits especially when the real rate of interest on member's accounts becomes negative.

7.7 in case of economic and political adversity, the survival and continuity of individual pension funds are in doubt,

8.The Council would perceive MPF only as a compulsory saving plan and cannot be accepted as the only measure for retirement protection. It constitutes only one part of the comprehensive social security system: with CSSA covers the current elderly poor, OPS provides basic pension for the present general elderly population, & MPF enhances quality of life the future elderly. In other words, MPF cannot substitute or replace OPS.

Revival of the proposal on Old Age Pension Scheme

9.When the Old Age Pension Scheme just proposed in 1994, it carried the following features:

9.1 each elderly person aged 65 and above would receive a pension of $2,300 per month ($2,190 at 1997 prices level)

9.2 employers and employees would need to contribute 1.5% salary income to the scheme.

9.3 low-income earners would be exempts from contribution.

10.Merits of the Proposal

10.1 The scheme is comprehensive for all eligible elderly citizens including housewives, disabled, chronically-ill etc. It coincides with the principle of retirement protection as a right of citizens.

10.2 It provides a basic level of income security for the elderly citizens. The payment rate proposed coincided with MacPherson's Study in 1994 to provide a minimum and reasonable living after retirement.

10.3 It provides immediate benefits upon implementation.

10.4 It considers and exempts low income earners making less than $4,000 a month, from contribution. As most of the disabled persons in Hong Kong belong to the low income groups of society, they thus benefit from the exemption.

10.5 A separate administration of the earmarked fund and the pay-as-you-go system has an advantage for its transparency towards the financial situation of the scheme and hence, may not add any additional burden onto the future government.

11.Issues on OPS

11.1 Recognition on contribution of our elderlies
The Council agrees that all citizens in the territory are entitled to enjoy social security and share the prosperity, or recession, in their later age of life. We should honour our elderly for their dedication and contribution made to the community. Retirement protection scheme should thus be comprehensive and should benefit both contributors and non-contributors.

11.2 Contribution arrangement
The issue of fairness has been raised as the flat-rate "pension" received is not proportional to what one has contributed. The proposal, as the Council sees it, is a special tax earmarked for a minimum level of retirement protection rather than an occupational "pension" expected by one who contributes. It involves a choice of values in respecting the older population's contribution towards the society.

11.3 Level of Protection
The level should pitch at the basic pension level recommended by the International Labour Organisation's(ILO) which should not be less than 40-45% of average monthly wage of a male labourer.

11.4 Qualifying age for receipt of Benefits
There is a gap of 5 years for an individual who is required to retire at the age of 60 to receive benefit at age 65. The Council recommends that the qualifying age to receive OPS should be eventually lowered from 65 to 60.

11.5 Role of the Government
The Government should actively participate in the scheme. The proposal which intends to provide benefits for all eligible elderly citizens, should be an effort collectively supported by all sectors of society. The government should not and could not deny its responsibility. The government should contribute annually to 1/3 of the scheme.

November 6, 1997