MPF Savings

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MPF Savings

• What is the "best" solution for a bright and
  stable future after retirement ?

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Present By Group 4 members.

• Christine
• David
• Lit
• Nick
• Patrick
• Priscilla
• Taylor

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Major Components

• INTRODUCTORY ABOUT MPF
• BASIC INFORMATION ON HK MPF
• CASE STUDY EMPHASIS ON RETURN
• REGULATIONS ON MPF FUNDS OPERATIONS
• CLIENTS SELF MANAGEMENT
• COMPARSION BETWEEN CHILE AND SINGAPORE PENSIONS
  FUND SYSTEM
• CONCLUSION

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INTRODUCTORY ABOUT MPF
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What is MPF?

• Compulsory retirement benefit plan
• Implemented on Dec 1 2000
• Regulate and monitor by MPFA

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Previous Form of Pension Fund

• Two types of Provident Fund
• Defined-benefit scheme
• Defined-contribution Scheme

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• Defined-benefit Scheme
• (Benefit Factor x final salary x years of
  service)
• benefit factor - determine by the years of
  service

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• Defined Contribution Scheme
• -contribution amount is fixed ratio
• Included two parts
• -whole contribution amount by employees -parts
  of accumulated contribution by employers

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Disadvantages of Pension Funds

• Shirking responsibility from the employers
• improper management and supervision of Provident
  Fund

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The process to the development of MPF

• 1993 Oct 15 gtimplement ORSOgtdeal and supervision
  on voluntary Pension Fund
• 1994gtAverting the Old-Age Crisis report gtsuggest
  MPF
• 1995 Aug 3 gtapproved the Mandatory Provident Fund
  Scheme Ordinance
• 1998 Margt amended parts of MPFCO and set up MPFA
• 2000 Dec 1gt implemented the MPF

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BASIC INFORMATION ON HK MPF
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Types of MPF Schemes

• There are three types of MPF schemes, they are
• (1) Employer-sponsored Schemes (??????)
• Target Employees of a single employer, company
  or group of associated companies.
• (2) Master Trust Schemes (??????)
• Target Employees of unrelated employers and
  self-employed persons.
• (3) Industry Schemes (????)
• Target Casual employees within certain
  industries of high labour mobility e.g. catering
  and construction.

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Types of MPF Schemes

• Employer-sponsored Schemes (??????)
• Advantage Tailor-made according to specific
  requirements of the employer.
• (2) Master Trust Schemes (??????)
• Advantage Economical as costs are shared by all
  employers and members using the schemes.
• (3) Industry Schemes (????)
• Advantage Eases the administrative burden for
  employers in industries of high labour mobility.

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Tax Concessions

• Employers' contribution
• MPF contributions are profits tax
  deductible, provided that the deduction does not
  exceed 15 of each employees yearly emolument.
• e.g. 1 000 000 x 15
• 150 000

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Tax Concessions

• 2) Employees' contribution
• Mandatory contributions are income tax
  deductible, subject to the maximum amount of
  HK12,000 per year.
• e.g. 300 000
• Tax deductible amount
• 240 000 x 5 12000

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REGULATIONS ON MPF FUNDS OPERATIONS
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Regulations on MPF

• 1. Mandatory Provident Fund Schemes Authority
  (MPFA) (???)
• Develop and supervise the system of MPF
• Compliance with the MPFSO (?????)
• Consider and propose reforms to the law relating
  MPF
• Approve qualified persons to be approved trustees

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Regulations on MPF

• The Securities and Futures Commission (SFC) (???)
• Responsible for regulating the securities and
  futures markets in Hong Kong
• Supervise the collective investment products
  offered to public (Including MPF)

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Regulations on MPF

• The Office of the Commissioner of Insurance (OCI)
  (??????)
• Ensure that the interests of policy holders are
  protected
• make sure that those companies hold enough cash
  for compensation.

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Regulations on MPF

• The Hong Kong Monetary Authority (HKMA) (???)
• Responsibilities to regulate operation of banks
• some banks are acting as trustees, investing
  manager and underwriters for MPF

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CLIENTS SELF MANAGEMENT
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Clients Management on MPF Investment

1. Know their trustees
2. Know their needs
3. Know the funds

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Know their trustees

• Financial conditions
• (e.g. net assets value)
• Good management
• Adequate computer system
• Adequate internal supervision system

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MPF Clients needs

• the length of life
• cost of living
• medical expenses
• inflation
• risk tolerance level
• ( e.g.. age, personality, personal financial
  status, family)

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Know the funds

• Equities fund ? Capital guarantee fund ? Stable
  fund ?
• the fund's launch date
• Net asset value?
• Asset allocation ?
• the fees and charges

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CASE STUDY EMPHASIS ON RETURN
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Case Study

• Situation
• (1) Two people, named X and Y, have the same
  amount of monthly salary, 10,000. This would
  remain unchanged during their whole career. It is
  now 30 years from their retirement.
• (2) Interest rate is being ignored.
• (3) X put his MPF in American International
  Assurance Company (Trustee) Limited (AIA), and Y
  put his MPF in HSBC Institutional Trust Services
  (Asia) Limited (HSBC).
• (4) 5 (500) of their salaries are put in MPF
  every month and the same amount (500) are also
  put by their employers.

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• (5) They are assumed investing under three
  different risk combination.

Fund investment combination Capital Preservation Fund Stable Fund Balanced Fund Growth Fund Hong Kong Equity Fund
Low risk investment combination 60 10 10 10 10
Medium risk investment combination 20 20 20 20 20
High risk investment combination 10 10 10 10 60

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• We are going to calculate
• How much can X and Y receive after retirement
  under different risk investment combination ?

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• Their annual return rate are computed according
  to the recent return rate of one year and three
  year. Data are collected from MPF trustees
  quarter fund investment reports.

Performance of Fund (Return) Capital Preservation Fund Capital Preservation Fund Stable Fund Stable Fund Balanced Fund Balanced Fund Growth Fund Growth Fund Hong Kong Equity Fund Hong Kong Equity Fund
Performance of Fund (Return) 1 Year 3 Year 1 Year 3 Year 1 Year 3 Year 1 Year 3 Year 1 Year 3 Year
American International Assurance Company (Trustee) Limited 2.46 3.12 5.76 19.62 9.04 30.79 15.58 55.97 24.93 81.70
HSBC Institutional Trust Services (Asia) Limited 4.19 6.22 8.06 31.10 10.88 43.78 13.52 56.37 17.13 74.16
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Calculation

• Example
• Assume X chooses a low risk investment
  combination of MPF.
• The amount that A has put in MPF each year
• (500500) 12 12000
• The amount invested in Preservation Fund each
  year
• 12000 60 7200
• The amount of return that A can earn in Capital
  Preservation Fund each year (using 1 year rate
  of return)
• 7200 (12.46) 7377.12
• Then, we would sum up with the return in Stable
  Fund, Balanced Fund, Growth Fund and Hong Kong
  Equity Fund.
• 7377.12 12000 10 (15.76) 12000
  10 (19.04) 12000 10 (115.58)
  12000 10 (124.93) 12,840.84

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Fund investment combination Investor (Trustee) Total investment return after 1 year Total investment return after 3 years Total investment return after 30 years Total investment return after 30 years
Fund investment combination Investor (Trustee) Under 1 Year Return Rate Under 3 Year Return Rate Under 1 Year Return Rate Under 3 Year Return Rate
Low risk X(AIA) 12,840.84 43,444.80 385,225.20 434,448.00
Low risk Y(HSBC) 12,916.92 44,738.28 387,507.60 447,382.80
Medium risk X(AIA) 13,386.48 49,766.40 401,594.40 497,664.00
Medium risk Y(HSBC) 13,290.48 51,237.36 398,714.40 512,373.60
High risk X(AIA) 14,189.04 57,589.20 425,671.20 575,892.00
High risk Y(HSBC) 13,673.16 56,967.48 410,194.80 569,674.80

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Findings

• Combinations are based on different tolerance
  level of risk.
• Trustee which has better performance in one
  combination does not imply it has better
  performance in other combinations.
• Trustee which has better performance in one year
  does not guarantee it will have better
  performance forever.

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Thought

• According to the return rate of one year and
  three year,
• it seems that investing more on the funds with
  higher risk can yield higher return.
• But, is that we should put all the investment on
• Hong Kong Equity Fund which has the highest risk?

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• Certainly Not!
• The fluctuations of the return rate
• over time
• should not be overlooked.

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Capital Preservation Fund
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Stable Fund
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Growth Fund
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Hong Kong Equity Fund
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Comparison between Chile and Singapore pensions
fund system
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Why compare?

• Pay-as-you go fails
• Singapore Totally Centralized
• Mandatory
• Saves when Young
• Chile Totally Privatized
• Successful in making High Return

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The Chilean Model

• Link benefits to contributions
• Pays totally owned by the worker
• Capitalization scheme
• Managed by competitive private companies called
  AFPs
• Contribute 10 of pre-tax wages to personal,
  private accounts

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Strength of AFP

• Separate from the mutual fund
• Free to change from one AFP to another
• Hot competition among the companies
• Return for these private accounts have been high
  -- around 10 a year

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Reality about Chiles System

• Helped fuel an economic expansion
• Only half of workers are captured by the system
• A rather large underground economy in Chile
• Chile is far richer than it was prior to 1981

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Reality about Chiles System (con.)

• Generated a critical mass of capital
• Increase workers' sense of ownership
• an average 10 percent annual return on
  investments

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Singapore model

• Mandatory for workers
• Savings program for retirement, home ownership
  and health care.
• Offers 400 funds to participants
• Caps applied to the funds
• Total contribution of 40 percent of income

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Singapore model

• All compulsory saving are tax exempt
• Important contributor to Singapore's savings rate
  
• More comprehensive package of social insurance
  benefits
• Must be invested in government bonds and in
  advanced deposits

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Reality about Singapores System

• No information is available on either the
  investment portfolio
• Particular mixture of benefits that may not in
  fact suit their individual or family needs
• No chink of competition
• Enormous concentration of money and investment
  power in a single agency

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CONCLUSION
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Conclusion

• Provident Fund gtMPF (1 December 2000)
• 90 of the workforce cover
• regular employees
• causal employees
• self-employed people

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Conclusion

• Different types of constituent fund
• (a) capital preservation fund
• (b) Hong Kong equity fund
• (c) stable fund
• (d) balanced fund
• (e) growth fund
• Things need to know in investment
• (a) time value of money
• (b) risks

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Conclusion

• Management of the MPF investment
• trustees --settlors
• Employees responsibility
• select the portfolios of the fund
  according to their own needs

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Conclusion

• Case study -AIA and HSBC
• Concerns
• actual return of the MPF
• personal risk tolerance
• rate of return
• the health of economy
• any MPF may have the chance of getting lost

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END OF OUR PRESENTATION

• Thank you very much!