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The following is the speech by the Hon. Charles Lee Yeh-kwong, JP, Chairman of the MPFA at the CFO Asia, MPF Seminar today (Wednesday):

I am delighted to be invited to address this seminar on a very important and topical subject, MPF Scheme. The media have recently given wide coverage to the list of 21 corporate trustees and 243 MPF products approved by the MPF Authority, and promotional campaigns by service providers have attracted the attention of the public. Hong Kong is moving closer to the launch of its Mandatory Provident Fund system, which will have wide social and economic implications and benefits.

I am glad that the suggested topic of my speech is "Why MPF?", as it gives me an opportunity to recount the reasons for instituting this system. This question has often been asked, and the answer is that its necessity is simply rooted in prudential financial management as well as common sense. The overriding reason for MPF is related to the fact that Hong Kong has a rapidly aging population. Currently, 700,000 or 10% of our population are aged 65 or over. It has been estimated that the age of the population will accelerate rapidly, and in some 36 years, that is by the year 2036, the number of senior citizens will jump to 2 million, or one in five of the population.

Almost two millenniums ago, Cato the Elder wrote "Cessation of work is not accompanied by cessation of expenses." This is as true today as it was 2000 years ago. Financial provision for one's old age is still a need which everyone must face. Although one way of achieving this would be by prudent retirement planning and savings, this is not always the case in Hong Kong's senior population. Currently, about 170,000 recipients aged 60 or above still rely on social assistance as their major means of income. With a projected growth of senior citizens to over 2 million in 36 years, the drain on the public purse from demands of social assistance would reach staggering proportions, and would be financially intolerable. It would be irresponsible if we were to pass this heavy burden to our children. The institution of a financial protection net based on contributions to cover retirement for the workforce is a pressing and urgent need which must be addressed as early as possible.

It was to avert the dire consequences of the old-age crisis that, after extensive public discussions and consultations, The Mandatory Provident Fund Schemes Ordinance was enacted in 1995, to set up a formal system of privately managed, employment-related MPF system, to invest and accrue financial benefits for the whole workforce in Hong Kong when they retire. Since then, some amendments and supplementary legislation have been added. With the establishment of the Mandatory Provident Fund Authority and the extensive planning work undertaken, it is hoped that December the 1st this year will see the actual launch of the MPF schemes, and the commencement of the employer and employee contributions of 5% each. We will then be on our way to initiating a retirement protection system and storing the seed money which will reap a rich harvest for our future.

I will return to this a little later. But first I would like to clarify why a mandatory and privately managed MPF system was chosen as the retirement protection net for Hong Kong, and what does this mean to the publicly funded social assistance programme. The World Bank has made a detailed study on ways of solving the problems posed by an aging population, and in their report entitled, "Averting the Old-Age Crises : Policies to Protect the Old and Promote Growth", they made reference to two overriding criteria governments should adopt for old-age programmes, namely, they should protect the old, and at the same time, promote economic growth. I will explain shortly why Hong Kong's MPF system precisely meets these overriding criteria.

The report also advocates that the protection of the old is best achieved by adopting what is described as the 'three-pillar' approach, that is, a mandatory, privately managed, fully-funded contribution scheme; a publicly managed social safety net financed from the public purse; and thirdly, voluntary personal savings and insurance. The second and third pillars have been firmly in place in Hong Kong for many years. With the implementation of the MPF system, Hong Kong will have erected the first and most important pillar by the end of this year. The triangle will then be complete.

Let me turn to why Hong Kong opted for a privately managed and run scheme, a question that is often asked, especially during the early days of the debate. There are several important considerations which underlie this choice:

* First, the system adopted is equitable, as the amount of accrued benefits is directly related to the contributions made which in itself provides an incentive to make additional voluntary contributions.

* Second, it is cost-effective. Fund management in a private and competitive environment leads to increased efficiency and reduced costs which ultimately benefit members of the scheme; and

* Third, it is suitable for Hong Kong's needs. We have a well-established and sound financial services sector, which is capable of operating a privately-managed retirement system, under prudential regulation and supervision, to offer retirement protection to the workforce.

There are also important safeguards built into our system. Trustees play an important role in managing MPF schemes, and their specific duties and responsibilities are clearly spelled out in the Ordinance. They have to properly carry out their fiduciary responsibilities and act in the best interests of scheme members. All MPF schemes must be established under trust arrangement and be governed by Hong Kong law. The assets of the schemes will be held separately from the assets of the trustees or the investment managers. In this way, the interests of scheme members are protected from unnecessary financial risks.

The MPF scheme has also been designed in such a way as to make portability from one employer scheme to another as smoothly as possible. This ensures the full preservation of the accumulated benefits until the end of a person's working life.

I realize there is a feeling in some quarters that the approval of 21 corporate trustees may result in too many service providers. We believe this is exactly where our provident fund system is different from systems which are basically government run. The introduction of competition will lead to better returns and lower costs for the members, than a government operated environment. In keeping with Hong Kong's reputation as the world's freest economy, we believe market forces will eventually determine the ultimate number of service providers in the market.

Hong Kong thrives on competition. I have no doubt the 21 MPF corporate trustees will be competing primarily on the quality of their products and the cost they charge. And, at the end of the day, this applies equally to anyone in business. Whoever offers the best service at the lowest cost will win the market. This arrangement also offers the contributors of the scheme a choice, as to which service provider and product best meet their needs.

In the approval process, the Mandatory Provident Fund Schemes Authority undertook a thorough and detailed examination of all the applicants for trustees, and consulted other involved regulatory agencies to ensure they satisfied all regulatory requirements. On-site visits were made and meetings were held to scrutinize their credentials. The MPFA will continue to monitor their operations to make sure they comply with MPF requirements at all times; and that their facilities include fully-tested computer systems and other necessary resources to ensure the smooth running of the MPF schemes.

In raising computer-readiness here, I would also like to mention we will shortly be reviewing our overall timetable, which currently sets the launch day as December 1st. The reason for this is that the MPFA is in the process of fully developing and testing its computerized information management system, a project on which our consultants are working. I will be advising the government in late March or April whether we will be ready by the target date.

Early notification is necessary because of the legislative procedures that need to be followed. And I would like to give the public at least six months' notice before the official launch. Nevertheless, at this stage, I am confident that we can meet the timetable.

As indicated in the World Bank 'three-pillar' approach, a mandatory, privately managed and fully funded contribution scheme will be a major and crucial component of old-age programmes, but not the sole component. Hong Kong's publicly funded social welfare net will still exist and act as a supplement for the elderly who are in genuine need of social assistance, subject to eligibility. And, of course, private savings are also encouraged to provide a better quality of life after retirement than can be expected from the level of statutory contributions to MPF schemes.

Another issue that has surfaced recently is the assertion that with the economy still recovering from the ravages of the Asian financial crises, this is not the right time to be launching a mandatory provident fund system. Firstly, because the mandatory contributions will result in a reduced take home pay for workers, particularly those at the lower end of the pay scale. And secondly, it will be an added burden for employers at a time when costs are starting to creep up again after the downturn.

I can understand these concerns. But I believe that short term prevailing economic conditions should not halt the launch date of this important long term project, since MPF contributions require a long time span of 30 years or more to reach maturity and accrue sufficient benefits. Due to the accelerated rate of our aging population, it is imperative that we start the scheme as early as possible. The longer it is delayed, the greater will be the burden to be carried. We must all do our share in curtailing short term needs to build for a better future for ourselves and our children.

On the question of additional costs to employers, a lot of research has been conducted. It has been calculated that the overall increase will be less than 1%. Hong Kong's retirement protection system will add only about 0.8 of a percent to the cost of doing business, after netting out the contributions already made by employers to existing provident fund schemes. Also, it may not be widely known that 30% of our workforce is already covered by some form of retirement fund scheme, and the MPF will basically be looking after the other two-thirds.

I will now turn to the macro aspects on the economy. The MPF system will bring a positive and beneficial impact on Hong Kong's economic growth. In its first full year of operation, contributions to MPF schemes will amount to some $10 billion, rising to about $60 billion annually in 30 years time. By then, the accrued assets of MPF schemes will total almost $1 trillion. This huge pool of investment funds, created from the inception of the scheme and building up over the years, will have a significant and positive effect on the bond and securities markets, as well as Hong Kong's financial services sector, further advancing our status as a leading regional and international centre.

Increased activity and demands for quality rated bonds in the Hong Kong market will lead to more issues and contribute to higher market liquidity, which in turn will foster the development of both the primary and secondary bond markets. MPF funds will also lead to the creation of a pool of capital which will enable new companies to raise capital through equity listings. The relationship between service providers and scheme member will provide an opportunity for the marketing of other financial products. As scheme members retire and receive their provident fund benefits, they may need additional investment assistance in ensuring their newly acquired assets provide sufficient income over their future lifetime. All these spin-offs of the MPF system will produce added opportunities for the financial services sector, and the creation of new business and jobs. Apart from the obvious social benefits, the MPF system will have a significant impact on stimulating economic growth, as clearly emphasized in the World Bank report.

Let me conclude by expressing the belief that the long awaited implementation of the Mandatory Provident Fund will be a blessing to many; our rapidly aging population; our workforce who will be able to look forward to a more secure retirement; the government which will be able to plan its welfare budgets with much more certainty in future; the securities and financial services sector; and Hong Kong generally whose economic growth and status as a premier international financial centre will receive a great shot in the arm.

Thank you.

End/Wednesday, February 16, 2000

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