MANDATORY PROVIDENT FUNDCASE SIMULATION FOR RETIREMENT SUFFICIENCY

Lu Yanyuan | Leung Kayan | Mark Raygan Garcia

A Look Forward Goal

Determine “sufficiency” of MPF contributions for retirement by age 65 years old

Qualifying ‘Sufficiency’

Analysis determines total amount of contributions made in two cases (low-income household; high-income household)

Simulates monthly contributions and monthly expenses per case; and calculates potential savings plus total MPF contributions by 65 years old

Forecasts expenses by retirement age until average life expectancy of 80 years old and assesses the same against potential savings plus MPF resources from 65 years old

Hong Kong in Focus Aging Population

Year 2009: population aged over 65 was 0.88 million,(13% of the total population)

Bureau of Statistics: elderly population will increase to 2.38 million by 2039 (28% of the total population)

Source: Hong Kong Census and Statistics Department

Hong Kong in Focus Dependency Ratio

Year 2009: 1,000 individuals supporting every 180 elderly

Year 2039: 1,000 individuals supporting every 464 (2 adults to 1 elderly)

Source: Hong Kong Census and Statistics Department

Hong Kong in Focus Income Inequality

Hong Kong is “Pearl of the Orient”, one of the world’s economic hubs and international financial centers

But:

Economy is getting worse; competitiveness rankings beginning to fall

Social wealth distribution and concentration is becoming increasingly unfair

Latest data: Top 10 wealthy assets of GDP over 35%

Data from the Census and Statistics Department of the Hong Kong Special Administrative Region (HKSAR) show that the Gini coefficient of wealth distribution was up 25% from 0.43 to 0.537 between 1971 and 2011. In fact, the Hong Kong Gini coefficient is still higher than 0.5 in 2016.

Hong Kong in Focus Retirement Protection Principles

Self-sufficient persons are competent; the role of government is to support the elderly who cannot help themselves

On-the-job people plan their own retirement with their family members through MPF Mandatory contributions, voluntary savings or retirement investments. ●

The government uses taxes to reallocate wealth.

What is MPF?A privately managed, employment-based retirement protection scheme aimed at helping Hong Kong employees generate resources to support their retirement.

Only 1/3 of workforce had retirement

protection

August 1995Enactment of Mandatory Provident

Fund Schemes Ordinance

September 1999Establishment of the Mandatory

Provident Fund Schemes Authority

December 2000Implementation of the Mandatory

Provident Fund System

85% of workforce has retirement protection

Before After

Is MPF enough?

MPF: How to avail? Coverage: all employees and self-employed persons ages 18 to 64

Monthly Contribution/Counterpart: employee and employer (employee: 5% of income; employer: 5% of employee’s income)

Subject to a maximum income level for contribution purposes of $30,000/month or $1,000 per day

For self-employed with a monthly income above $7,100, contribution of 5% of income

Benefits accrued can only be used at age 65, or under the following conditions: early retirement at 60, permanent departure from HK, total incapacity, terminal illness, small balance of $5,000 or less, or death

Portability: If switching jobs, accrued benefits can be transferred to new employer’s MPF scheme

MPF: Who are exempted?

Those Covered by statutory pension (i.e. civil servants, judicial officers, teachers in subsidized schools)

Members of occupational retirement schemes regularizer under ORSO

Foreigners entering HK for employment for no more than 13 moths or are members of retirement schemes outside HK

Domestic helpers & self-employed hawkers

MPF: How are contributions protected? Capital adequacy requirement - ensures MPF trustee’s financial resources enough to compensate losses

Professional indemnity insurance - compensation mechanism against losses due to breaches by trustee

Compensation Fund - when insurance mechanism fails, members can file for claims under MPFSO

Losses due to market fluctuations not included.

Simulating Retirement: Is MPF Enough?

Is MPF enough to shoulder expenses during retirement?

How much in MPF contributions can low-income and high-income households generate until the retirement age of 65?

Up to what age can your MPF contributions be enough to support you during retirement?

Guide Questions Variables Case 1 Case 2

Household Income Low High

Monthly Expenses

Tax Bracket

Savings Potential

Projected Debt

Simulating Retirement: Case Profiling (Ke Family)

Age Both 25

ProfessionsHusband: Salesman

| Wife: Office Assistant

Child 1 (primary school)

Housing Government

Simulating Retirement: Case Profiling (Liu Family)

Age Both 25

Professions Husband: Nurse | Wife: Doctor

Child 1 (primary school)

Housing Private / High-end

Simulating Retirement: Comparative Monthly Combined Expense Projections Pre-Retirement

Expense Ke Family Liu Family

Household Income 27,000 146,000

Combined MPF Contribution 1,350 (550 + 800) 3,000 (1,500 + 1,500)

Housing / Rent 1,000 20,000

Food 10,800 (40% of income) 33,580 (23% of income)

Child’s Tuition Free 100,000 / year (10,000/month)

Utilities 3,000 5,000

Transport 1,800 4,000

Domestic Helper 0 4,500

Housing Maintenance 0 3,000

Parking Fee 0 7,000 (3,500 x 2)

Total Expenses 17,950 90,080

Disposable Income’ / Net of Expenses 9,050 55,920

Simulating Retirement: Comparative Monthly Combined Expense Projections by Retirement

Expense Ke Family Liu Family

Housing / Rent 1,000 0

Food 7,500 12,400

Utilities 3,000 5,000

Transport 1,200 2,800

Domestic Helper 0 4,500

Housing Maintenance 0 3,000

Parking Fee 0 3,500

Medicines 600 600

Medical Checkup 0 50

Total Expenses 13,300 31,850

Simulating Retirement: Comparative Projected MPF Accrued BenefitsAssumptions: Expected annual MPF contribution return @ 4% | Inflation rate at 3.2%

Mr Ke

Mrs Ke

Combined MPF accrued benefits: $6,179,220

Mr Liu

Mrs Liu

Combined MPF accrued benefits: $11,319.172

Simulating Retirement: Comparative Projected Combined Retirement Needs Assumptions: Expected rate of return @ 4% | Inflation rate at 2.5%

Ke Couple

Liu Couple

Simulating Retirement: Comparative Projected Accrued MPF Benefits against Projected Retirement Needs

Expense Ke Couple Liu Couple

Projected (Joint) Accrued MPF Benefits at 65 6,179,220 11,319.172

Projected (Joint) Retirement Needs at 65 5,818,117.87 13,932,861.20

Surplus / Deficiency 361,102.13 (2,613,689.20)

Assumptions

• No additional child • University tuition of child

on loan payable during work

• Availment of government medical healthcare benefits

• House owned before retirement

• No additional child• One car given up • Savings not factored in

Findings & Conclusion Ke family represents 7% only of HK household income (25,000-29,999); majority fall below it; Liu family represents 4.7%

MPF proves insufficient when the household income is lower than the Ke’s; this becomes worse when: (a) the family has more children, (b) takes part in family transfers (outward), (c) and goes for higher-cost options for basic necessities

Unless effective savings and investment schemes, and inward private/family transfers are in place, middle class, average-size families may experience difficulty preparing for retirement (given inflation and fluctuating/low ROIs).