Speech by CS at OECD/IOPS Global Forum on Private Pensions (English only) (with photo/video)
Dr Odundo (President of IOPS and Chief Executive Officer of the Retirement Benefits Authority of Kenya, Dr Edward Odundo), Mr Laboul (Senior Counsellor to the Directorate for Financial and Enterprise Affairs, Special Financial Advisor to the G20 Sherpa of OECD and Secretary General of IOPS, Mr André Laboul), David (Chairman of the Mandatory Provident Fund (MPF) Schemes Authority, Dr David Wong), Matthew (Secretary for Labour and Welfare, Mr Matthew Cheung Kin-chung), Diana (Managing Director of the MPF Schemes Authority, Mrs Diana Chan), distinguished speakers, ladies and gentlemen,
Good afternoon. It gives me great pleasure to join you at this OECD/IOPS Global Forum on Private Pensions. For guests and speakers coming from overseas, a very warm welcome to Hong Kong.
Let me first express my heartfelt thanks to the Mandatory Provident Fund Schemes Authority for organising this important and meaningful forum. I recall that at the early stage of our six-month public engagement exercise on the future of retirement protection in Hong Kong, I discussed with David, the MPF authority Chairman, on the idea of such a forum for the exchange of views and for generating good ideas. Although this forum may be seen as a bit late for that purpose as the public engagement exercise has finished four months ago, I am sure government officials, practitioners, academics, etc will still benefit enormously from the insight and foresight that the panel of distinguished speakers is going to share with us over these two days.
In March and April this year, while we were in the midst of consulting the public, I made two keynote speeches at a forum organised by the Business and Professionals Federation of Hong Kong, which David is also closely associated with, and at the Asia-Pacific Forum co-hosted by the Association of Superannuation Funds of Australia and the Hong Kong Retirement Schemes Association. On both occasions, I talked about the multi-pillar retirement protection system adopted in Hong Kong and appealed to all for consensus-building in finding ways to strengthen these pillars to provide better retirement protection to the elderly. It is therefore a relatively easy task for me to speak on this occasion with a theme "Making the pension pillars work better in Hong Kong", as suggested by David.
Instead of merely repeating those messages in my previous speeches on our multi-pillar system, consisting of the MPF based on employers and employees' contributions, the publicly funded social security system, personal savings and a range of support services, I want to share with you the challenges we, as policymakers, are facing in trying to make our pension pillars work better. These challenges can be summarised in terms of affordability, sustainability, equity and comprehensive protection.
Affordability is an issue we have to address in the wider context of Hong Kong's fiscal reality and demographics reality, namely a rapidly ageing population. It should also be seen against the commitments we have made since the beginning of this term of the HKSAR Government. When we assumed office in July 2012, one of our immediate priorities was to tackle elderly poverty. We took decisive action to introduce in April 2013 the means-tested Old Age Living Allowance (OALA) to enhance financial assistance for the needy elderly. Despite being a publicly funded social security scheme, OALA is designed to be simple and generous in terms of eligibility and to avoid stigmatisation in order to encourage the elderly in need to come forth to apply. At present, about 40 per cent of elderly aged 65 and over are benefiting from this scheme. According to our poverty situation analyses, OALA is the most effective policy intervention in lowering the elderly poverty rate. The 2015 figures show that OALA has reduced the elderly poverty rate by 7.6 percentage points, lifting 78 000 elderly out of poverty.
With the introduction of OALA and other in-kind support like medical and residential nursing care, community and home care, transport subsidy, medical vouchers, etc, the annual elderly budget has risen from $42.1 billion in 2012-13 to $65.8 billion in 2016-17. The growth of 56 per cent in recurrent elderly expenditure in the past four years is impressive, and so far affordable. But going forward, the heavy strain on our public finances cannot be ignored, when the number and proportion of elderly in Hong Kong will surge and the room for collecting more taxes is limited, if Hong Kong were to maintain her economic competitiveness. Sustainability is a question that no responsible government could ignore.
Indeed, our retirement protection discussion in the past year was preluded by a long-term fiscal study commissioned by my colleague, the Financial Secretary. Released in early 2014, that study projected that even without any service enhancement, a structural deficit will occur in 2029-30 given the ageing of our population, and by 2041-42, our fiscal reserve will be completely depleted. By then, increase in taxes would be inevitable. If we were to introduce a universal pension scheme at some $3,000 a month for all elderly irrespective of their means, as fiercely demanded by some quarters, the dire fiscal situation would be aggravated.
This brings me to the third challenge of equity. When public resources are limited and when we should not pass on the fiscal burden to the future generations, one could not help but ask whether providing each elderly person a standard monthly pension regardless of their assets and income is more just and fair than targeting public resources towards those more in need. Advocates for universal pension saw across-the-board protection as a basic right and a proper recognition of the elderly's contribution to society. What they have not realised is such right and recognition would be at the expense of providing more help to the vulnerable old people and narrowing the gap between the rich and the poor.
As we have emphasised in the public consultation document released last December, retirement protection encompasses not just financial assistance, but an array of housing, medical and nursing care services which the Government has to continue to provide through heavy subsidies. The current comprehensive protection is much treasured by our elderly, albeit with obvious room for improvement, for example in reducing waiting times. In my current capacity as the Chief Secretary, I chair an internal meeting called Star Chamber to decide on the allocation of new resources every year. I can tell you that this is a painful process when demand invariably outstrips supply.
Confronted by these challenges, policymakers have to adhere to guiding principles in finding solutions. In this case, our multi-pillar retirement protection system is built upon the key principle that caring for the elderly is a responsibility to be shared by individuals, families and the community. For our system to be sustainable in the long run, it should continue to encourage private savings among those able and willing to work so that public resources can be targeted to those in need. The Government should play a crucial role in making each of the pillars work better.
For the social security pillar, our poverty statistics tell us that despite 73 per cent of the elderly are receiving cash subsidies of one form or another, about 38 000 elderly are below the poverty line and indicate that they still have financial needs. We are running different projections to see how we may provide them with additional support.
For the in-kind support pillar, we are providing better service in the form of community care vouchers and residential care vouchers, we are helping NGOs to redevelop their sites to provide more purpose-built homes and day centres, we are embarking on a HK$200 billion hospital expansion programme, and we are drawing up an Elderly Programme Plan. All these initiatives will require additional public resources.
For the voluntary savings pillar, we see the need to encourage voluntary contributions to MPF and to identify more financial products for retirement protection that may address the dual risks of longevity and investment. These may include silver bonds of longer maturity period and annuity plans.
For the MPF pillar, I would like to say a bit more. Launched in the year 2000, the MPF has several desirable features that have emerged in the international trend for pension reform. It is a defined contribution system that links post-retirement benefits with contributions at working age and only allows withdrawal of benefits upon the age of 65 or exceptional circumstances. It is a broad-based system covering almost all of our employees who are not protected by other occupation-based systems. It is a system that requires co-contributions from employers and employees underlining the principle of shared responsibility. After some 16 years of benefit accumulation, the total net asset value of the MPF System has now grown to $607 billion, including voluntary contribution which saw an increase from $4.1 billion in 2007 to $15.4 billion in 2015.
Notwithstanding the above, one has to acknowledge that this mandatory savings scheme is never quite popular with employees. We concur with the prevailing view that fees should continue to be reduced and the offsetting arrangement, which results in leakage of benefits, must be addressed. In the longer run, the feasibility of raising the contribution rates and achieving full portability should be explored. I appreciate that the MPF authority, under the chairmanship of David, will continue to do its utmost to inspire greater confidence in this private pension pillar. Efforts will continue to be made to drive down fees, quicker and deeper. Hopefully, the launch of the Default Investment Strategy next year will have a benchmarking effect, bringing down the costs further.
Offsetting is a difficult and thorny issue. Indeed, offsetting is quite unique to our MPF System whereby employers can use their contributions in employees' MPF accounts to offset the expenditure on their statutory severance payment or long service payment obligations. Albeit permissible under the Hong Kong legislation, offsetting diminishes the total contributions that can be accumulated as retirement income, especially for the low-income group, and further erodes the public confidence in the ability of the MPF System to protect their retirement income. The current term of the HKSAR Government is committed to finding a policy direction and possible measures to tackle the offsetting arrangement. Our aim is to strengthen protection for our workers without causing undue financial burden on businesses, especially the small- and medium-sized firms which constitute over 90 per cent of our business establishments. The Government is prepared to assume a more active role if our involvement, financial or otherwise, is conducive to developing a solution acceptable to employers and employees.
Ladies and gentlemen, a society will not be a just and compassionate one if it could not take good care of its elderly citizens, who have helped contribute to the place's prosperity. Care for the elderly is one of the policy priorities of this term of the HKSAR Government. We have made considerable progress but clearly more needs to be done. There is no easy solution. With less than eight months before our term of office comes to an end, we will spare no effort in mapping out the right path for Hong Kong. We appreciate this opportunity to learn from distinguished speakers in this forum.
With these remarks, may I wish you a very fruitful discussion.
Thank you very much.
Ends/Wednesday, November 9, 2016
Issued at HKT 16:25
Issued at HKT 16:25