[SCMP Column] Pensions and savings

May 21, 2018

It was September 1997. Hong Kong had transitioned smoothly from British to Chinese sovereignty. The Thai baht had been devalued and there were foreign debt worries in Indonesia and South Korea, but there was as yet no sense of the awful crash that was to envelop Asia.

The titans of global finance were gathered for the World Bank meeting in the newly-opened Convention Centre. The auditorium was packed, and on the podium the heads of the world’s leading fund management houses were gunning for one thing alone: for Hong Kong to establish a compulsory pension scheme.

The scene was set for one of my scariest appeals ever. With a microphone in my hand, I stood up to commend the panellists for their concern about the long term income security of the Hong Kong people – but could not endorse their plans for Hong Kong’s proposed Mandatory Provident Fund. Instead, I claimed that Hong Kong had a different approach to ensuring financial security in old age, in the absence of compulsory pensions. It was called “saving”.

I talked about how indelibly impressed I had always been by modest, hard-working Hong Kong families who without qualifications, but lots of sweat and patient saving, managed to put their kids through university, or managed to buy modest homes in Canada or Australia through Hong Kong’s uncertain transition years.

To my great pleasure, the audience erupted in applause, and sour faces flashed across the podium. But my glorious moment was short-lived. Hong Kong’s Mandatory Provident Fund was launched anyway, just over two years later. So much for my persuasiveness or lobbying power.

I must confess I had particular reasons for my bias against pensions. Ever since my father’s factory crashed during the tough Thatcher years, and his company pension scheme evaporated, I had seen in very stark terms the price a family can pay for trusting the Government, and the national pension scheme, to deliver security in old age.

Eighteen years later, and I feel my prejudice was entirely vindicated. I wholly agree with Steve Vines who wrote here in the SCMP just a week or so ago that the MPF “is the gift that never stops giving – for fund managers.”

The paultry savings rates built into the MPF scheme may by today have created a handsome fund management pool of almost HK$1 trillion, but it offers laughably little security for any Hong Kong retiree. As people live longer, and careers become more fragmented, so the arithmetic of pension schemes like the MPF look bleaker and bleaker. Only what Nobel economist Daniel Kahneman calls “delusional optimism” keeps us from mass panic attacks.

To glimpse in on the grim arithmetic, I commend “The 100-year Life” by Lynda Gratton and Andrew Scott at the London Business School. From the demographically sound starting point that a kid graduating from university this year is more likely than not to live to the age of 100, Gratton and Scott ask four simple questions: How large a pension do you want? What return do you expect on your savings? How do you expect your salary to grow? And at what age do you want to retire?

It seems most people hope to retire by the age of 65 on a pension that is at least 50 per cent of their final salary. For the other two questions, Gratton and Scott turn to solid data: average earnings on investments from 1900 to 2014 have been 2.8 per cent, and average salaries have risen about 1 per cent faster than inflation.

When they run the numbers for the 22-year-old about to enter the world of work, their conclusion is blunt: “A life with retirement at 65 and living to 100 is financially out of reach for the majority of people”.

In reality, if that graduate stays in work all his or her life, gets a salary that keeps just ahead of inflation, and saves 10 per cent of that salary every month for their entire working life (a tall order for most Millennials, I fear), he or she will not be able to retire until well into his or her 80s. He could choose to retire at 65 anyway, but that would mean living on a monthly income around 30 per cent of final salary for the next 35 years without any form of insulation against inflation.

Facing this daunting challenge, Hong Kong’s MPF is little more than a cruel joke – cruel because there might be some innocent souls out there in the community who believe the government is, through the MPF scheme, providing them with a safety net in old age.

Even crueller is the mean-mindedness of so many in the business community who are today fighting to retain the right to fund their long-service and severance payment obligations to employees by plundering their employees’ MPF pools, meagre as they already are. This is a loophole that should never have been there in the first place, and I am frankly embarrassed that so many at the top of Hong Kong business are fighting this case with a straight face.

As the boss of a small company myself, I have had to make long-service payments to departing staff, and I confess it is a bit of a burden. But to draw on those staff’s hard-earned pension savings is unacceptably harsh.

For me, there are more important messages to take away than this mean-minded spat over employers’ MPF offsets. First, no-one in Hong Kong should make the mistake of believing their MPF savings will come anywhere near to providing security in old age. Second, the idea of retirement at 65 should be consigned to the rubbish heap. It is no longer possible nor helpful. And finally, never forget the time-tested Chinese family preference for saving.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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