Increasing numbers of the 2.4 million employees who are member-investors in the Mandatory Provident Fund Schemes are beginning to question whether its rules should be tightened or even radically revised to offer better protection to their savings.

This follows in the wake of the recently announced average MPF return of 1.5 percent for 2014, a disappointing return. This figure is in stark comparison with rises registered in 2013 and 2012, respectively, 7.72 percent and 11.91 percent.

Hong Kong Securities Association Chairman Jeffrey Chan Lap-tak says MPF funds have underperformed and fees are high, adding, "We hope to see the government carry out MPF reform soon to address these problems".

The fact is that, being investment-linked, the MPF's returns will reflect Hong Kong's economy, and our economy last year was already struggling before the "Occupy Central" demonstrations ensured that the last quarter of the year experienced a significant drop. The MPF average fared slightly better for 2014 than the Hang Seng Index, which only increased 1.3 percent. But another statistic for the year is far more significant - inflation rose 4 percent.

Many have complained about some of the 19 MPF providers making poor investment choices, one claim being that not only were large amounts invested in high-risk ventures, but that high fees were also charged, delivering a double-blow to those whose savings were involved.

On the other hand these providers plead that they observed due diligence in choosing these particular investments, but that results had been affected by unforeseen downturns in economic conditions.

As strategic solutions specialist Andrew Economos of Capital Group pointed out, "Retirement funds should never be seen as short-term investments but evaluated over multiple capital market cycles. A fund that trails inflation or the stock exchange index over a one-year period may outpace the same benchmarks over a 30-year or 40-year period. The key is to have an appropriately balanced mix of assets in the portfolio and holding the investment over the long run for 20 to 30 years or more."

Economos also raised another interesting point that might cause many member-investors to re-think their plans - in light of recent advances in our population's longevity, should the retirement wage be advanced from 65 years to at least 70, with the MPF payout correspondingly postponed for at least five years, assuming the beneficiary is willing to continue working, and remains healthy enough to do so?

"With people now living longer, the MPF Authority should consider the option of allowing participants to draw their savings when they are 70 or even 80, with the annual dividends and interest payments reinvested throughout the selected period," he argued.

The whole point about the MPF is that its role is to provide a secure protective financial "umbrella" that will ensure a safe future for our fast-ageing workforce following retirement - and that does not envision any risk-taking beyond the customary investment parameters.

The relatively small ratio of investment-wise members is very picky when it comes to choosing which companies or funds in which they wish to invest. At the other end of the scale, no fewer than 600,000 "punters" blithely put their faith in their providers, giving them full control of whatever investments their money goes into.

Since this involves one in every four members it shows that not all Cantonese are as sharp-minded or street-wise as they are reputed to be.

Another interesting fact about the MPF is that while the employee and employer each contribute 5 percent of the employee's wages to the fund, the employer has the say over how his 5 percent is to be invested. Thus, since the MPF's inception, an employer with a very large workforce would have had the opportunity to perform a big favour for a business associate or even a relative launching a new company.

Should this invaluable privilege be allowed to continue? And what other reforms should be introduced? Firstly, the 2.4 million workers involved would like fees reduced, and preferably standardized at 0.75 percent instead of the current average fee of 1.7 percent, which is higher than fees for similar employee provident funds in the United States (0.83 percent) and Australia (1.21 percent).

However, Rex Au Yeung, Asia president of the pension plan provider Principal, firmly believes that fees should be guided by market forces, arguing, "In the competitive world of MPF, market pressure will drive fees down. There have already been many fee reductions in the past year as a result of competition."

He points out that fees are only one facet of the issues the MPF now faces. "A viable MPF system will require more than low fees and good investment performance - it must have scale to minimise trading costs and withstand market movement."

And Elvin Yu of Allianz said the government should address the administrative paperwork and related factors that contribute to the high fees.

The author is an international businessman and keen observer of Asian affairs.

(HK Edition 02/06/2015 page10)