President Lee, former presidents, ladies and gentlemen,

I am very delighted and honoured to be invited to speak at this luncheon.

Hong Kong has already become a Special Administrative Region of China for four weeks. As ceremonies and celebrations gradually die down, we will notice that it is business as usual in Hong Kong - including financial markets, trades, social order, culture and education, etc. Over this post-handover period, the average daily turnover in the local stock market has stood at $18.2 billion, and the volatility of the Hang Seng Index has been within the range of 4% below or above the opening on 3 July. During the same period, the values of some South-East Asian currencies have been affected by sell-off pressure, but the exchange rate of the Hong Kong dollar has been stable. Those who have been pessimistic in the last few years about Hong Kong's future are now, I believe, revising their original assessment.

The relevant provisions under Section 1 of Chapter V of the Basic Law clearly stipulates that Hong Kong shall enjoy independence and autonomy in respect of its public finance, monetary affairs, trade, industry and commerce under the principle of "One Country, Two Systems". Article 109 further states that the Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre. I believe that this provision, compared to those in other constitutions, is a unique one, which, on one hand, stresses the importance of financial services to Hong Kong and, on the other, reflects the firm commitment of the government in its financial policies.

As we all know, Hong Kong's economic success is attributed to the free market principle. While the government undertakes to provide a suitable economic and legal environment for businesses to prosper, we never favour or support any single business but have regard to the overall interests of the market. We encourage free market competition in an open and level-playing field. Indeed, the key factor contributing to the normal operation of the stock market and the stable exchange rate of the Hong Kong dollar which I mentioned earlier is our sound management system. Our regulatory systems are clear, well-defined and up to international standards. The rules of the game that we have set will not change easily, even though in the free market there could be intense speculations in various investment tools, including stocks, by different people at different times. The government has two key policy objectives in this, namely to strike a balance among various sectoral interests, and to look after the community's long-term interests. These two policy objectives provide the steer in the way we manage our financial environment. We keep the regulatory system up to international standards to safeguard the credibility of the Hong Kong market, and, at the same time, we provide sufficient room for the market to develop according to the rule of supply and demand. In this way, we maintain and enhance Hong Kong's competitiveness.

Mandatory Provident Fund

Introduction

The introduction of the Mandatory Provident Fund (MPF) System is a very good example of the Hong Kong Special Administrative Region (SAR) Government's determination to uphold the principles of open and fair competition. The introduction of the MPF system also reflects very clearly the important roles of the Government I have just mentioned - striking a balance between different sectoral interests and looking after the community's long-term interests.

Retirement Protection

According to statistics compiled by the Census and Statistics Department, people aged 65 and above currently accounts for 10% of our total population. In 20 years' time, this percentage will rise to 13%. It will further increase to 20% in another 20 years' time.

However, less than one-third of the workforce of three million people is covered by voluntary retirement schemes. Prudence demands that we establish a formal retirement system as soon as possible, involving employees and employers. Otherwise, an intolerable burden will be put on our taxpayers in future.

Therefore, the SAR Chief Executive Mr. C.H. Tung has clearly stated in his speech on 1 July that the SAR Government would set up the MPF System as soon as possible.

Debates on Retirement Systems

The community has been increasingly concerned about the problem of ageing population and has accepted, in principle, that there is a need for a formal retirement protection system in Hong Kong.

Notwithstanding, the government has encountered great difficulties in developing its retirement policies over the last few decades. Years of delays have aggravated the situation, resulting in an even more pressing need for a retirement protection system. Why have we been facing all the difficulties?

The major reason is that the general public cannot fully appreciate the roles they should play in retirement protection:-

* First, although the community has been well aware of the problem of ageing population, some people are reluctant to share the responsibility and play their part in solving the problem.

* Second, some regard retirement protection as a social issue, and consider that it should be entirely the responsibility of the government. They believe that as members of the workforce have contributed much to the success and prosperity of Hong Kong, the government has the responsibility to take care of their post retirement life.

* Third, people tend to think that retirement is very far off in the future. They naturally query why part of their income should be withheld mandatorily and reserved for use only after 20 to 30, or even 40 years' time.

Many may also think that they are the best investors or the lucky ones who know their own needs best. They therefore see no reason why their money should be "frozen" by the government. There is also no need for the government to worry about their future. Some even think that it is not necessary to plan for retirement or, if they need assistance then, they can seek help from the government at that time.

As a consequence, the debates on the most appropriate form of retirement protection for Hong Kong and how to alleviate the overall burden of society have lasted for decades. Although most people agree in principle to the establishment of a retirement protection system, they cast grave doubts on the policies and the details of implementing such a system. All this only caused further delays in finding a solution to the problem and the implementation of a formal retirement system.

After years of debates, a certain degree of consensus has finally been reached in the community and the proposal to introduce a privately managed, mandatory retirement system was generally accepted in 1995. The consensus was possible in the light of the following circumstances:

First, the community has gradually become aware of the acuteness of the problem of ageing population.

Second, people understand from overseas experience that only a privately managed MPF system would be practicable and in line with Hong Kong's long-term interests:

* A study by the World Bank has shown that privately managed schemes generally produce higher investment returns than Central Provident Fund (CPF) schemes do. Since retirement fund is a kind of long term investment, higher yields mean more retirement benefits in the long run, which would be highly beneficial to scheme members.

* Evidence shows that "pay as you go" systems as implemented in Europe and the U.S. will not work. As more people retire and fewer people contribute, the government will have to raise the contribution rate, which will increasingly aggravate the burden of the contributors. This "pay as you go" system is not only unfair to contributors, but in the long run, it might collapse when contributors could not afford the hefty contributions anymore.

* Thirdly, the community has gradually accepted the recommendation of the World Bank that old age protection must be based on three necessary "pillars", namely:-

** Individual savings or insurance arrangements.

** A privately managed, mandatory, fully funded scheme supervised by the government.

** A publicly managed scheme, financed by tax revenue, offering minimum protection.

* Hong Kong has already got the first and third pillars since the majority of the population have good saving habits and the government has also provided the needy with the Comprehensive Social Security Assistance (CSSA) Scheme. With the implementation of MPF in future, Hong Kong will have all three necessary pillars for old age protection.

In the light of the above, the MPF Schemes Ordinance was finally passed by the Legislative Council in mid-1995.

Difficulties in setting up the MPF System

With the enactment of the principal Ordinance, the government started to prepare the draft subsidiary legislation for the implementation of the MPF system as soon as possible. However, we have encountered numerous difficulties in the consultation exercise and the drafting process of the subsidiary legislation over the past year.

One of our main difficulties is the balance between "individual" interests and "overall" interests. What concerns the public most is what benefits a government policy can bring to them individually. However, government polices often cannot fully meet the individuals' expectations. As an accountable government, we must start out from the long term interests of the society as a whole. We have to strike a good balance among the conflicting interests of various parties. By definition, striking a balance means that we cannot meet all individuals' demands in full and, hence, conflicts would arise.

Despite its being a thankless task, we are committed to our work in developing a most effective and feasible MPF system.

Controversies and Conflicts

Because of the need to balance the interests of various groups, we have come across a lot of conflicts and controversies. Let me explain the problems at both the policy and implementation levels.

From a policy perspective, we have to deal with the following major conflicts:

* Contributions : The MPF contribution rates cannot be too high, otherwise MPF will be a heavy burden to both employers and employees. On the other hand, if the contribution rates are too low, MPF will not be able to provide a reasonable level of retirement benefits. We must therefore strike a balance between the level of retirement benefits and the financial burden of participants.

* Flexibility in scheme operations : An advantage of a privately managed system is that service providers can compete to provide the best services to scheme members by exploiting their strengths, and maximize members' investment return by making sound investment decision. To achieve these ends, we must therefore allow the industry sufficient flexibility. Nevertheless, the government must ensure a system of prudential regulation and supervision is in place so that the MPF System can operate securely. This will inevitably restrict the degree of flexibility available to service providers. We must therefore strike a good balance between flexibility and asset security.

* Investment restrictions : There will inevitably be conflicts between asset security and investment returns. We must impose investment restrictions to limit MPF investment risks and ensure a high level of asset security. Naturally, these restrictions will affect the return of MPF investments. To balance these two factors, careful considerations have to be made in developing the MPF investment standards and guidelines.

* Level of supervision : We all agree that we must exercise proper and sufficient supervision over the operations of MPF schemes. Nevertheless, excessive supervision will turn MPF into a de facto CPF, which is both costly and inefficient in generating a reasonable level of investment return. It is of course scheme members who will suffer ultimately.

In addition to conflicts at the policy level, we have also to deal with a lot of conflicts at the implementational level.

* First, both employers and employees will participate and contribute in the MPF System. It is quite obvious that they have different views on a lot of issues. The Administration must balance the interests of both parties.

* Second, the MPF System will involve various groups within the financial services sector, such as banks, trustees, investment managers, insurance companies, scheme administrators, the accountancy profession, etc. It is natural that different groups or companies will want to maximize their share in the MPF market. Unavoidably, therefore, there will be conflicts between different groups.

Because of the different modes of operations of insurance companies, fund managers and banks, there are arguments among these service providers on what constitute a "level playing field". For example:

* Insurance companies regard the reserving requirement on investment guarantee as too harsh. They are worried that they may not have sufficient capital to compete with banks in the MPF market. They are also worried that the banks will have a competitive edge over insurers as a result of their established retail network and clientele.

* Insurers also fear that investment fund companies, with their reputation and expertise in fund management, will have the upper hand.

* On the other hand, the investment fund industry are worried that the public will be over-conservative on MPF investments and inclined to opt for the capital preservation products offered by insurance companies.

* The investment fund industry also fears that banks may demand excessive guarantee fees to back their guarantee products, which will impair the competitiveness of the investment fund industry.

* As for the banking sector, they are worried that the 30,000 strong sales team of the insurance industry will put them into a very disadvantageous position. The investment fund industry shares the same sentiment.

* Smaller operators, including both banks and insurers, have expressed concerns that the large banks, investment companies and insurance companies will dominate the MPF market.

Each group within the financial services sector have their own strength. They can take a more positive stance, cooperate with each other and share the MPF market. In this respect, the SAR Government will continue to provide a level playing field for all players and allow them to compete openly and fairly, regardless of size. The SAR Government does not have the obligation to take special care of the interests of a particular industry, nor should we favour any particular industry.

Indeed, all players in the financial services should join their hands and complement each other to help develop the MPF System. They must appreciate that the government not only have the responsibility to establishing an MPF System that facilitates competition and cost-effective scheme operations, but it also has the obligation to ensure that scheme members' interests are properly safeguarded.

Implementation of Retirement Protection System

With all relevant parties' untiring efforts, the preparation of the MPF subsidiary legislation has now been completed. In designing the MPF system, we have adopted the following objectives. First, it should be simple and easy to understand by both employers and employees. Secondly, it should be cost-effective to run. Finally, it should be reliable and secure enough to protect scheme members' interests.

During the year-round consultation exercise, we have received valuable comments from the labour, business, financial and professional sectors to help us achieve these three objectives. We have striven to strike a good balance between conflicting interests and objectives. Whilst the solutions may not be regarded as totally satisfactory by some quarters, our responsibilities and objectives are clear - we must safeguard the interests of scheme members and the integrity of the MPF system.

The proposals for the MPF system have been developed after extensive consultation. During the process, the labour, business and financial sectors and other related bodies as well as the government have spent a great deal of time, efforts and resources in discussions with a view to enhancing the system and striking a good balance among different parties' interests. If anyone continued to insist that the MPF system should meet all of his own interests and, thereby, upset the balance which we have achieved through tremendous efforts, thus causing delay to the implementation of MPF, then he must be held accountable for the losses which the community and our next generation will have to bear.

Our next steps are to study in detail the comments made by various parties on the draft legislation, and then submit the legislation for enactment as soon as possible. We hope that most of the preparatory work will be completed by the end of next year, and that the MPF System can commence operations soon afterwards.

Conclusion

The target of the SAR Government is to implement the MPF System as soon as possible.

During the whole preparatory process, we have come across a lot of difficulties. In the course of setting a public policy, controversial issues may arise and the short term interest of some people may be affected. However, as a responsible government, we must take the long term interest of the whole community as our primary consideration and try our best in balancing the interest of all affected parties. MPF is a very good example of this policy setting dilemma.

We are determined to play our role and implement the MPF System as soon as possible.

Thank you.