Recently, some critics claim that if someone make the tax deductible voluntary contributions, he/she can enjoy the tax deduction. The cost will be its own liquidity. Well, it is half-truth. The MPF member also pays the opportunities cost of not buying outperforming funds. In the long run, the compound interest effect of investment may outweigh the tax deduction.
Under current MPF scheme, employees and employers are required to make regular contributions. The contributions of both parties are 5% of the employee’s income and are subject to the minimum and maximum income levels. For monthly employees, the minimum and maximum relevant income levels are $7,100 and $30,000 respectively. In other words, the monthly contribution from both employees and employers is between HK$710 and HK$3,000.
The MPF system covers 73% of Hong Kong’s working population. As of December 31, 2018, the net asset value and number of MPF funds were 813.02 billion and 467 respectively. Most of them are equity and mixed assets funds, which accounted for 39% and 36% of the total assets respectively (see Table 1). However, how are their performance?
Table 1: Net Asset Value and Number of MPF Funds by Fund Type – 31 December 2018
* Figures may not sum up to the total or 100% due to rounding.
Most of the MPF Funds are underperformed
Take Hong Kong equity fund (excluding Index Tracking) as an example. Its performance is worse than that of the Hong Kong equity fund (Index Tracking) in different periods of the past 10 years (see Table 2). In fact, most of the Hong Kong equity fund (excluding Index Tracking) underperformed the Hang Seng Index. As of the end of April 2019, there is only one fund (MPF Fund A) outperforming the benchmark.
Table2: Investment Return of MPF Funds by Fund Type and Period – 31 December 2018
In addition, it is worth noting that there are funds outperforming MPF Fund A. You can find one of the outperforming funds (let’s call it iFund Fund X) in iFund platform. If you make a $1,000 monthly contribution on both MPF Fund A and iFund Fund X in the past 10 years as of April 2019, then you can earn around $10,000 more for choosing iFund Fund X. Unluckily, the iFund Fund X like most of the sfc-authorized funds is not available in your MPF scheme. Why are they not included?
It is the main drawback of the design of MPF scheme. The ideal one should combine a single trustee and retail funds. The trustee is responsible for handling contributions and other operation stuff, while employees can choose their investment product from a larger investment universe, a pool of more than 2,000 sfc authorized retail funds. Nevertheless, it is already too late.