MPF Savings What is the "best" solution for a bright and stable future after retirement ?

Christine,Fung Ching Yee(043035)

MPF Savings

What is the "best" solution for a bright and stable future after retirement ?


Present By Group 4 members…. Christine David Lit Nick Patrick Priscilla Taylor


Major Components

INTRODUCTORY ABOUT MPF BASIC INFORMATION ON HK MPF CASE STUDY EMPHASIS ON RETURN REGULATIONS ON MPF FUNDS

OPERATIONS CLIENT’S SELF MANAGEMENT COMPARSION BETWEEN CHILE AND

SINGAPORE PENSIONS FUND SYSTEM CONCLUSION


INTRODUCTORY ABOUT MPF


What is MPF?

Compulsory retirement benefit plan Implemented on Dec 1 2000 Regulate and monitor by MPFA


Previous Form of Pension Fund

Two types of Provident Fund

Defined-benefit scheme Defined-contribution Scheme


Defined-benefit Scheme (Benefit Factor x final salary x years of

service)

benefit factor - determine by the years of service


Defined Contribution Scheme

-contribution amount is fixed ratio Included two parts

-whole contribution amount by employees -parts of accumulated contribution by employers


Disadvantages of Pension Funds

Shirking responsibility from the employers improper management and supervision of

Provident Fund


The process to the development of MPF 1993 Oct 15 >implement ORSO>deal and

supervision on voluntary Pension Fund 1994>Averting the Old-Age Crisis report

>suggest MPF 1995 Aug 3 >approved the Mandatory

Provident Fund Scheme Ordinance 1998 Mar> amended parts of MPFCO and

set up MPFA 2000 Dec 1> implemented the MPF


BASIC INFORMATION ON HK MPF

Priscilla, Man Yi Wai(043036)

Types of MPF Schemes There are three types of MPF schemes, they are:

(1) Employer-sponsored Schemes (僱主營辦計劃 )Target: Employees of a single employer, company or group

of associated companies.

(2) Master Trust Schemes (集成信託計劃 )

Target: Employees of unrelated employers and self-employed persons.

(3) Industry Schemes (行業計劃 )Target: Casual employees within certain industries of high l

abour mobility e.g. catering and construction.


Types of MPF Schemes

(1) Employer-sponsored Schemes (僱主營辦計劃 )

Advantage: Tailor-made according to specific requirements of the employer.

(2) Master Trust Schemes (集成信託計劃 )Advantage: Economical as costs are shared by all employe

rs and members using the schemes.

(3) Industry Schemes (行業計劃 )Advantage: Eases the administrative burden for employers

in industries of high labour mobility.


Tax Concessions

(1) Employers' contribution

MPF contributions are profits tax deductible, provided that the deduction does not exceed 15% of each employee’s yearly emolument.

e.g. $1 000 000 x 15 %

=$ 150 000


Tax Concessions

2) Employees' contribution

Mandatory contributions are income tax deductible, subject to the maximum amount of HK$12,000 per year.

e.g. $ 300 000

Tax deductible amount:

$240 000 x 5% = $12000


REGULATIONS ON MPF FUNDS OPERATIONS

Lit, Lit Chun Hei(043062)

Regulations on MPF

1. Mandatory Provident Fund Schemes Authority (MPFA) (積金局 )

Develop and supervise the system of MPF• Compliance with the MPFSO (強積金條例 )• Consider and propose reforms to the law relati

ng MPF • Approve qualified persons to be approved trus

tees


Regulations on MPF

2. The Securities and Futures Commission (SFC) (證監會 )

Responsible for regulating the securities and futures markets in Hong Kong

• Supervise the collective investment products offered to public (Including MPF)


Regulations on MPF

3. The Office of the Commissioner of Insurance (OCI) (保險業監理處 )

Ensure that the interests of policy holders are protected

• make sure that those companies hold enough cash for compensation.


Regulations on MPF

4. The Hong Kong Monetary Authority (HKMA) (金管局 )

Responsibilities to regulate operation of banks

• some banks are acting as trustees, investing manager and underwriters for MPF


CLIENT’S SELF MANAGEMENT

Nick, Lee Cheuk Yee(043034)

Clients’ Management on MPF Investment

1. Know their trustees

2. Know their needs

3. Know the funds


Know their trustees

Financial conditions :

(e.g. net assets value) Good management Adequate computer

system Adequate internal

supervision system


MPF Clients’ needs

the length of life cost of living medical expenses inflation risk tolerance level

( e.g.. age, personality, personal financial status, family)


Know the funds

Equities fund ? Capital guarantee fund ? Stable fund ?

the fund's launch date Net asset value? Asset allocation ? the fees and charges


CASE STUDY EMPHASIS ON RETURN

Taylor, Lee Wai Leung(043040)

Case Study

Situation: (1) Two people, named X and Y, have the same amount of

monthly salary, $10,000. This would remain unchanged during their whole career. It is now 30 years from their retirement.

(2) Interest rate is being ignored. (3) X put his MPF in American International Assurance

Company (Trustee) Limited (AIA), and Y put his MPF in HSBC Institutional Trust Services (Asia) Limited (HSBC).

(4) 5% ($500) of their salaries are put in MPF every month and the same amount ($500) are also put by their employers.


Fund investment combination

Capital Preservation

Fund

Stable Fund Balanced Fund

Growth Fund Hong Kong Equity Fund

Low risk investment

combination :60% 10% 10% 10% 10%

Medium risk investment

combination:20% 20% 20% 20% 20%

High risk investment

combination:10% 10% 10% 10% 60%

(5) They are assumed investing under three different risk combination.


We are going to calculate:

How much can X and Y receive after retirement under different risk investment combination ?


Their annual return rate are computed according to the recent return rate of one year and three year. Data are collected from MPF trustee’s quarter fund investment reports.Performance

of Fund (Return)

Capital Preservatio

n Fund

Stable Fund Balanced Fund

Growth Fund Hong Kong Equity Fund

1 Year

3 Year

1 Year

3 Year

1 Year

3 Year

1 Year

3 Year

1 Year

3 Year

American International Assurance Company (Trustee) Limited

2.46% 3.12% 5.76%19.62

%9.04%

30.79%

15.58%

55.97%

24.93%

81.70%

HSBC Institutional Trust Services (Asia) Limited

4.19% 6.22% 8.06%31.10

%10.88

%43.78

%13.52

%56.37

%17.13

%74.16

%


Calculation Example: Assume X chooses a low risk investment combination of MPF.

The amount that A has put in MPF each year: ($500+$500) *12 = $12000 The amount invested in Preservation Fund each year: $12000 *60% = $7200 The amount of return that A can earn in Capital Preservation Fund each

year: (using 1 year rate of return) $7200 *(1+2.46%) = $7377.12 Then, we would sum up with the return in Stable Fund, Balanced Fund,

Growth Fund and Hong Kong Equity Fund. $7377.12 + $12000 *10%* (1+5.76%) + $12000 *10% *(1+9.04%) +

$12000 *10% *(1+15.58%) + $12000 *10% *(1+24.93%) = $12,840.84


Fund investment

combination

Investor

(Trustee)

Total investment

return after 1 year

Total investment return after 3

years

Total investment return after 30 years

Under 1 YearReturn Rate




Low risk

X(AIA) $12,840.84 $43,444.80 $385,225.20 $434,448.00

Y(HSBC) $12,916.92 $44,738.28 $387,507.60 $447,382.80

Medium risk

X(AIA) $13,386.48 $49,766.40 $401,594.40 $497,664.00

Y(HSBC) $13,290.48 $51,237.36 $398,714.40 $512,373.60

High risk

X(AIA) $14,189.04 $57,589.20 $425,671.20 $575,892.00

Y(HSBC) $13,673.16 $56,967.48 $410,194.80 $569,674.80


Findings(1) Combinations are based on different tolerance

level of risk.

Trustee which has better performance in one combination does not imply it has better performance in other combinations.

(2) Trustee which has better performance in one year does not guarantee it will have better performance forever.


Thought…

According to the return rate of one year and three year,

it seems that investing more on the funds with higher risk can yield higher return.

But, is that we should put all the investment on

Hong Kong Equity Fund which has the highest risk?


Certainly Not!

The fluctuations of the return rate

over time

should not be overlooked.


Capital Preservation Fund


Stable Fund


Growth Fund


Hong Kong Equity Fund

David, Li Cheuk Hon(043043)

Comparison between Chile and Singapore pensions fund system


Why compare?

Pay-as-you go fails Singapore: Totally Centralized

Mandatory

Saves when Young

Chile: Totally Privatized

Successful in making High Return


The Chilean Model

Link benefits to contributions Pays totally owned by the worker Capitalization scheme Managed by competitive private companie

s called AFPs Contribute 10% of pre-tax wages to perso

nal, private accounts


Strength of AFP

Separate from the mutual fund Free to change from one AFP to another Hot competition among the companies Return for these private accounts have be

en high -- around 10% a year


Reality about Chile’s System

Helped fuel an economic expansion Only half of workers are captured by the

system A rather large underground economy in

Chile Chile is far richer than it was prior to 1981


Reality about Chile’s System (con.) Generated a critical mass of capital Increase workers' sense of ownership an average 10 percent annual return on in

vestments


Singapore model

Mandatory for workers Savings program for retirement, home

ownership and health care. Offers 400 funds to participants Caps applied to the funds Total contribution of 40 percent of income


Singapore model

All compulsory saving are tax exempt Important contributor to Singapore's

savings rate More comprehensive package of social

insurance benefits Must be invested in government bonds

and in advanced deposits


Reality about Singapore’s System No information is available on either the

investment portfolio Particular mixture of benefits that may not

in fact suit their individual or family needs No chink of competition Enormous concentration of money and

investment power in a single agency


CONCLUSION

Patrick, Chan Hoi Tat(043047)

Conclusion

Provident Fund >MPF (1 December 2000)

90% of the workforce cover

regular employees

causal employees

self-employed people


Conclusion

Different types of constituent fund: (a) capital preservation fund (b) Hong Kong equity fund (c) stable fund (d) balanced fund (e) growth fund Things need to know in investment (a) time value of money (b) risks


Conclusion

Management of the MPF investment

trustees --settlors Employees’ responsibility:

select the portfolios of the fund according to their own needs


Conclusion

Case study -AIA and HSBC Concerns:• actual return of the MPF • personal risk tolerance • rate of return• the health of economy any MPF may have the chance of getting lost


END OF OUR PRESENTATION

Thank you very much!

MPF Savings What is the "best" solution for a bright and stable future after retirement ?

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