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Retirement clock is ticking

Published on Friday, 05 Nov 2010
It is crucial that people take responsibility for their retirement fund.

The Mandatory Provident Fund and the pensions business involve a psychological element not seen in other types of investment. That's because many people simply choose not to think about it much, regarding retirement as a distant goal and often assuming there is little they can do to influence the performance of their portfolios.

Change, though, is on the way, coming from two directions. Firstly, every demographic chart and trend shows the same thing: an ageing population and longer average life spans mean individuals must take a more active interest in saving for their long-term financial security.

Secondly, proposed changes to the MPF scheme will allow members to choose which provider manages their employee contributions, affording more personal responsibility for key investment decisions.

A recent research report by consultancy firm Mercer amply demonstrated the first of these points by highlighting several crucial facts. For example, it showed that life expectancy in Hong Kong is now among the highest in the world, with the city also having one of the five lowest birth rates internationally. It noted that the proportion of citizens aged 85 or over will treble in the next 30 years, while the ratio of workers to pensioners will go from 4:1 this year to 2:1 in 2047.

Such stark reminders will no doubt lead to further debate on issues such as the retirement age and a redesign of the MPF based on higher contributions and lower fees. But, whatever the outcome, the initial task is to get people to face up to realities and to start taking action on their own behalf.

"The reality is that Hong Kong faces an ageing society and the economic climate is uncertain, so retirement has become a near-term [concern]," says David Fried, chairman and CEO of HSBC Insurance for the Asia-Pacific region. "To achieve the increasing funds needed, people should start planning as soon as possible and be proactive to enjoy the benefits of dollar-cost averaging. You need to be disciplined enough to save throughout your working life rather than sprinting at the end."

He points out that, as a rule of thumb, someone in retirement needs the equivalent of two-thirds of their previous salary to maintain a similar standard of living. Based on rough estimates, if MPF members hope to reach that position - and without drawing on other investments - their total monthly contributions would have to be about 25 per cent of their monthly salary.

Member choice won't change that, but it should at least provide new impetus.

"If employees are able to make decisions about their mandatory contributions, we expect more members will start paying attention and take control of MPF accounts," Fried says. "They will be able to choose providers that suit their criteria and meet their needs, allowing them more accountability for retirement savings."

As things stand, many people are completely passive in managing their accounts, despite their long-term importance and the sums at stake.

An HSBC survey this year showed that 24 per cent of respondents had never reviewed their MPF portfolios. Another 29 per cent had last reviewed the performance of their funds more than a year ago.

"Retirement planning must be dynamic to take account of changes in personal circumstances, stage of life and family needs," Fried says. "It is essential to review how investment portfolios are doing and to consider whether changes are appropriate."

Belinda Luk, senior vice-president of pensions and group business for Sun Life Hong Kong, says the introduction of member choice is still contingent on establishing certain controls on the sales practices of intermediaries. However, she does welcome the shift. "We think this is a good move," she says. "It will encourage more active management of retirement savings and provide more choice for the consumer."

However, she echoes the general industry view that the actual take-up rate may be relatively slow. It will be necessary for employees and MPF providers to digest the new rules and come up with new offers.

"But we will ensure the required administrative system is ready on time and are working on both acquisition and retention strategies for our products," Luk says.


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