Wrong Kong Part 7

Pensions
A friend new to Hong Kong observed she’d never seen so many old people still working and doing taxing jobs like cleaning the street. Or pushing carts full of cardboard up the city’s steep hills when the temperature is 110 degrees.

The reason? They have to work because of Hong Kong’s pathetic pension system.

Let’s start with the paltry payment the government gives - a shameful HK$3,500 (US$448) per month in a city with the 8th highest income per person in the world.

Upon learning the hated Carrie Lam regime was thinking about increasing that amount to win some favor (recall the HK government has a $1.7 trillion dollar surplus), a prominent local economist said the government should be trying to get more work from the very old rather than encouraging them to be idle.

Repellent as that is, the rip-off that is Hong Kong’s version of a retirement savings plan sponsored by an employer is even worse. Known as Mandatory Provident Fund, or MPF, it may be the most brazen example of Hong Kong allowing the rich to steal from the poor.

Take from the poor, give to the rich
MPF covers 4 million employees and self-employed people.

Under the scheme, employers and employees each contribute five percent of an individual’s salary to a combined maximum of HK$36,000 (US$4,633) a year. That’s a small amount, which creates several issues we’ll consider.

Employees then have a mind-boggling 476 choices of what to do with their money. There are six types of investment funds under 30 schemes provided by 14 MPF trustees. You must pick from those schemes. And that’s where the scam begins.

MPF = Mandatory Payment of Fees

These funds charge huge administrative fees — an average of 1.56% a month. To put that in perspective, administrative fees in the US average 0.58% a month. Vanguard, the largest provider of mutual funds and the second-largest provider of exchange-traded funds (ETFs) in the world, says its average fee is 0.1%.

Those fees add-up, taking money out of the accounts of retirees to line the pockets of administrators.

Compounded over time, the fees leave performance well below those of other investment options.

Take the biggest MPF fund run by HSBC, an index fund that tracks the 50 largest companies on the Hong Kong Stock Exchange.

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index. Instead of a fund portfolio manager actively stock picking and market timing—that is, choosing securities to invest in and strategizing when to buy and sell them—the fund manager builds a portfolio whose holdings mirror the securities of a particular index.

For example, the Standard & Poor's 500 Index (S&P 500), which tracks the 500 largest companies that trade in the United States. Since it’s easy for portfolio managers to run, Vanguard’s fee for its S&P 500 Index tracker is 0.10%.

If you buy a share of HSBC’s Hang Seng’s index fund, you buy a piece of all 50 companies and their returns.

HSBC’s fee for its MPF Hang Seng Index? 0.80%. Note: it should be much cheaper to run an index fund with 50 companies than 500.

There is a non-MPF fund available to investors in Hong Kong that tracks the Hang Seng. Its fee is a reasonable 0.09% - or nine times less than what HSBC charges for the same product. Remember, MPF savers who want to invest in a Hang Seng Index ETF are not allowed to choose that one.

Those huge fees hammer investors.

To put that in real dollars, two investors start with $100,000. One puts his money in HSBC’s Hang Seng Index and other in the low cost Hang Seng index. And they leave the money for 20 years.
At the end of two decades here are their returns:

Wonder where the Sheriff of Nottingham lived?

That’s a whopping 15% difference. Remember: that $87,832 difference is money that goes to HSBC rather than a retiree — like our lady in the photo above pushing a cart full of cardboard.

On the right is the house HSBC’s chairman lives in on Hong Kong’s swanky Peak.

And HSBC’s offering is one of the lowest-cost MPF funds available.

The industry says the fees pay for everything from the marketing of the fund and the administrative paperwork to the compensation of the fund managers and any profits logged by the providers. It blames the small contribution amounts, that leave the funds with smaller pots across which to spread administrative costs. Obligatory contributions in Singapore’s system are more than four times higher.

Why are contributions so low? In a city where the average rent is 70% of the average monthly income - there’s not much room for saving. And employers like Li Ka-shing and his conglomerate pals are happy to not have to kick-in any more money than they have to.

Performance of those funds is another huge issue. All mutual fund portfolios have dogs, but MPF funds have more fleas than most.

From the South China Morning Post:

Film producer and finance tycoon Checkley Sin Kwok-lam, 62, founder of the National Arts Entertainment and Cultural Group, has complained that he lost about HK$500,000 (US$64,000) last year and saw his total MPF savings reduced to HK$4 million (US$512,000).
Angry that the MPF had failed to hold fund managers accountable, he said: “This is outrageous. The loss of returns was almost 12 per cent last year. If this happened in a private company, the fund manager would have been sacked immediately.
“But under the MPF scheme, no matter whether fund managers gain or lose money, they still charge the same management fees.”

Those high fees add-up for the administrators. Manulife paid Standard Chartered US$400 million a year ago for its 2.4 per cent share of the MPF management business.

In other words, the Hong Kong government has created a pension system that doesn’t provide nearly enough money for people to retire on while making the city’s most affluent even richer.

Perhaps the best example yet of an elite so detached they make Marie Antoinette seem caring.