October 2008 - Hong Kong brands itself as one of Asia’s key financial hubs and in many respects this is true. Asian companies, particularly mainland Chinese, are queuing up to list on its Stock Exchange and the city’s ‘free market’ economics make it an easy and attractive place to do business.
It is also a city known for entrepreneurialism and one of the embryonic ideas that lends itself to Hong Kong’s strengths is for the SAR to become a “pension hub” for Asia. The initial idea borrows substantially from the “Pan-European” pension plans being set up in the Old Continent and asks whether something similar could work in Asia.
Pan-European pensions have been 15-20 years in the making and are now coming to fruition. The principle for the system is for employers (or industries) to have one pension plan for all their employees wherever they may be in Europe. The assets, liabilities and administration records are all tied to a single pension plan - and potentially a single pension provider.
As the system gets up and running European member states are now competing to become the “European pension hub” to house these pan-European pension arrangements. The payoff being that service providers domiciled in these states will collect the investment and administration fees for pension plans all over Europe - a potentially huge source of new revenue for the smaller EU states.
Putting this into context for Asia, the thinking is that Hong Kong could take the lead in attempting to implement a similar system and ensure by design that the city becomes the “pension hub” for Asia. So how would it work?
The European system came into being via Europe-wide legislation which, we must accept, is very unlikely to happen in Asia. This is going to be the first difference. Any system in Asia is going to be driven by economics rather than politics. Hong Kong will need to demonstrate competitive advantage if it is to re-direct pension plans away from the local pension systems.
The concept of Pan-Euro breaks down into three areas of consolidation; pooling of the pension assets (ie through one investment provider), pooling of the liabilities (ie through one single pension plan) and pooling of the administration (ie through one single administration provider). Technically it is possible to consolidate all three of these but, in reality, pooling of the liabilities is very difficult - mainly due to the different Social Security rules in the various member states.
What is emerging in Europe is the pooling of pension assets to a single provider and the pooling of administration services to another (possibly the same) single provider.
Companies with multiple European pension arrangements can take advantage of scale to get lower administration and investment fees whilst the providers pick up higher volumes of either pension assets or member headcounts - essentially the classic pooling model already used in the life insurance markets.
Both asset and administration pooling would be possible within Asia and some creative amendments to Hong Kong’s existing Mandatory Provident Fund (MPF) system could open this market up.
The single biggest challenge will be for the MPF providers to gain “approval” for their services in each of the other Asian countries. This won’t be easy and will probably need to be taken one country at a time. There will need to be some bargaining and the Hong Kong service providers will need to demonstrate how they are bringing value to the local economy. Theoretically economies of scale could bring significant efficiencies to the local pension market leading to higher levels of retirement savings - this would make governments sit up and listen.
Assuming this hurdle could be overcome, the next biggest challenge is to actually make the MPF a world class pension system. At the highest level the MPF does not permit non-domiciled employees to join the system and legislation would be needed to change this.
The other major area of improvement to the MPF system would be around the services offered by the providers themselves. The current fee levels and investment options offered are typically less competitive than in other developed markets - Australia being a good example of this. This would need to change. If this idea is to work then Hong Kong will need to demonstrate that the services offered by the MPF providers are clearly an improvement on what is available locally.
If we can get to this stage then Hong Kong will have MPF providers locally approved and offering competitive services in other Asian markets. A lot of the hard work will be done and market forces should do the rest. There will be a few technical wrinkles to overcome - eg ensuring tax effectiveness, coping with local pension rules, removal of MPF minimums for overseas plans, etc - but all of these can be ironed out over time.
This discussion is of course very ideological. The reality for Hong Kong is that it is a very long way from this type of situation. The MPF service providers have sufficient critics within the domestic market right now to suggest that exporting the system will involve some radical improvements.
Hong Kong may want to start looking in this direction though. The last 50 years have shown Asian countries to be masters in at adapting “Western ideas” for Eastern markets - why not do the same with Pan-European pension plans?
The danger for Hong Kong is that someone else moves first. Replacing Hong Kong for Singapore or Australia and everything written above is equally applicable. In the case of Australia; its “superannuation” system is much admired and the associated master trust pension arrangements are efficient, competitive and very exportable.
For all its faults, delays and critics the Pan-European pension system is a brave and innovative idea that could certainly be adapted for Asia. The question is; who will be brave enough to take it on?