Nov. 6 (Bloomberg) — Hong Kong’s Mandatory Provident Fund, the city’s compulsory retirement savings plan, may be headed for its largest annual loss since inception after declining 15 percent between April and September.
Net asset values of MPF dropped to HK$223.8 billion ($28.9 billion) at the end of September, from HK$248.2 billion in April, according to the latest statistics posted on the Web site of the Mandatory Provident Fund Schemes Authority Oct. 31. The fund covers more than two-thirds of the 3.5 million employees and self-employed workers in the city.
Hong Kong, which doesn’t have a universal government pension plan like the Social Security in the U.S., started MPF in December 2000 to provide a basic safety net for the city’s elderly, as the portion of people over 65 is projected to more than double to 27 percent of the population by 2033 over 2004.
“By law, the mandatory benefits under the MPF system must be preserved until retirement; this gives individuals a longer time horizon to ride out short-term volatility in the markets,” said Jennifer Chee, who heads Mercer LLC’s retirement consulting business in Hong Kong. “However, a lot of people are still going to worry about the paper loss.”
Global pension plans face shortfalls as stock markets have slumped. The credit crisis drove the MSCI World Index down 38 percent this year. Hong Kong’s benchmark Hang Seng Index is down 47 percent, on course for its biggest yearly slide since 1974.
The Hong Kong plan requires most workers to contribute a percentage of pay, matched by employers, to privately managed mandatory provident funds run by managers including HSBC Holdings Plc and Manulife Financial Group.
This year’s decline reduced MPF’s annual average return since inception to 2.6 percent. It was forecast to return 2 percent to 3 percent when set up, Darren McShane, the executive director of the regulation and policy division of the authority, said in July 2006.
Hong Kong residents are the least prepared for a comfortable retirement among the world’s mature economies such as Japan, the U.S. and the U.K., research by Fidelity Investments in April shows. Hong Kong households can only generate the equivalent of 43 percent of their final income before retirement, compared with Japan’s 47 percent, 58 percent in the U.S. and 50 percent in the U.K., it said.
MPF lost money in only two earlier periods: Its value dropped 11 percent in the year to March 2003 and slid 4.9 percent in the first 16 months of its life through March 2002, according to the document. Its annual return peaked at 22 percent between April 2003 and March 2004.
Stuart Leckie, Hong Kong-based chairman of investment and pension advisory company Stirling Finance Ltd., said the loss this year may hit people close to retirement age.
“If you have all your money in equity funds, and you retire today, you are going to have less than six months ago,” he said.
Just over a quarter of MPF assets were invested in stock funds at the end of September. Such investments lost 35 percent of their value in the past year after posting an average 3.1 percent since December 2000, the document said.
Mixed-assets funds, accounting for 47 percent of MPF assets at the end of September, dropped 24 percent in the latest year, compared with the eight-year average return of 3.5 percent, it added.
Mercer, a unit of Marsh & McLennan Cos., has seen employers negotiating with MPF service providers and investment managers to roll over investment units to members’ personal accounts when employees are terminated to avoid having to redeem investments at a deep loss in the volatile market, Chee said.
Sally Wong, an executive director of Hong Kong Investment Funds Association, said the 5 percent minimum required contribution by an employee, matched by the employer, has always been insufficient to replace pre-retirement income.
Yet the temporary loss poses no grave concern for the long term, Leckie, Chee and Wong said.
“Generally, an employee will only get their accrued MPF benefits when he or she reaches the retirement age of 65,” Wong said. “Thus, the focus is not on short-term market movement, but to develop a strategy that can enable him or her to achieve a return that can outperform inflation over the long term.”
Last Updated: November 5, 2008 19:28 EST
By Bei Hu