Capitalist Solutions

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Make The Mandatory Provident Fund Voluntary

by Simon Patkin

Much has been said about government collusion with business in Hong Kong and unfortunately some of that criticism is legitimate. One of the biggest examples was the government giving into heavy lobbying by the finance industry to implement the ill-fated Mandatory Provident Fund (MPF).

Indeed, recent reports show the returns on the MPF have been averaging a woeful 4% per year - less than the growth of the Hang Seng Index. Further activist David Webb claims that up to 55% of total contributions to the MPF will end up as commission payments to underperforming MPF providers, rather than helping individuals save for their retirement.

Like me, David's solution is to abolish this scheme or to replace it with something voluntary. However I think our reasoning may be different. Even if David's calculations on MPF commissions are correct, it is not enough to get it made voluntary unless we understand and point out its weak moral base. As a hair brained idea, the MPF is based on the flawed moral premise that the MPF providers are helping people allegedly meet their retirement goals and it is somehow right to use coercion to meet this end.

Nurturing the idea that most people are irresponsible with their money, the Mandatory Provident Fund Authority (MPFA) and the MPF providers position themselves as general lord overseers who think they are better than anyone else when it comes to investment. Employees through their employers must hand over part of their salary or there will be prosecutions and possible jail sentences should anyone dare plan their own financial future. It is this coercive nature of the MPF that makes it immoral, because it takes away each individual's right to think and make their own decisions based on their own individual requirements. For many the MPF is just a bad investment - period.

Fortunately many in the community still see virtue in individuals exercising personal responsibility in planning for themselves. Indeed a scheme similar to the MPF was floated as part of a public consultation in 1991 and roundly condemned because it was an attack on our virtues. No wonder there was no consultation for the latest reincarnation when it was refloated and rammed down our throats several years later.

The answer to any government collusion such as the MPF is not more government through competition law but rather the removal of government favouratism by ending preferential treatment. By making the MPF completely voluntary, banks and insurers will still be free to offer any product they want but the difference is customers will also be free to accept or reject what they have to offer. Like David Webb suggests index linked funds are the simplest to administer and they generally offer better returns than many actively managed funds. They certainly make a welcome change from the current crop of over-priced funds that do so badly today.

On a wider note, the MPF is less than five years old and already there are plans to loot individual MPF accounts. Some advocate 50% of all contributions going to a general welfare account. With this 50% going into welfare for the unproductive and another chunk going into corporate welfare as commissions, most individual benefits the MPF was supposed to bring will be for nothing.

By supporting action to have the MPF made voluntary, the general public will send two strong messages to the government. The first is that government policy is not written in stone and can be reversed, especially when it is manifestly bad like the MPF. Secondly, it will say that the public does not support collusion with special interests in making this scheme mandatory. Instead, the government should recognize that most people are inherently rational. They should return choice to the individual so they can make their own educated and intelligent decisions as to how they will plan for their retirement.

The move to a voluntary scheme will be a practical victory for improved market efficiency and a moral victory for those that support personal choice. It is a cause worth fighting for.

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