Many of you have been associated with the subject of retirement protection for many years. I myself recall how, as a young district officer some 30 years ago, I was involved in a consultation exercise on a proposed scheme known as "The Sickness, Injury & Death Benefits Scheme". It was an idea whose time had not yet come and it received a virtually unanimous thumbs-down from the community.

I mention this recollection up front, to illustrate two points on which I hope you will all reflect. The first is that Hong Kong is a traditionally self-reliant community, innately suspicious of any suggestion that it does not know how to look after itself, particularly where the suggestion involves paying any money to the Government. The second point is that society's attitudes change over time, but only slowly, and that it is generally a bad idea for any government to try and force the pace.

Those of you who were involved in any part of the intense discussions, both inside and outside the LegCo Building, which led eventually to the enactment of the Mandatory Provident Fund (MPF) Schemes Ordinance in 1995, will understand exactly what I mean.

The existing MPF system is not the result of one man's sudden inspiration, or impulse to do good. It is the work of many people. It was consulted on widely. It was put under the microscope through several sessions of the Legislative Council. It was argued over passionately over a long period. Through a process of communication and compromise leading to consensus, it was progressively modified and improved. The present system represents a balance of interests, and one which commands broad community support.

The introduction of the MPF scheme on December 1, 2000, thus marks an important milestone for the workforce of Hong Kong and I use that word deliberately. The journey was by no means easy.

Prior to that date, our society had gone through a period of uncertainty and debate on whether, and if so how best to design a new retirement protection infrastructure in Hong Kong. The MPF system is the biggest ever attempt to transform that infrastructure. It represents a radical change from what went before. With its introduction the missing third pillar of the "three-pillar" approach for retirement protection advocated by the World Bank was finally put in place in Hong Kong:

* First, a publicly-managed, social safety net for the elderly, now provided under schemes such as the government's Comprehensive Social Service Assistance (the CSSA) Scheme;

* Second, a mandatory, privately-managed and fully funded contribution scheme, now provided through the implementation of the MPF system; and

* Third, voluntary personal savings to provide additional protection for people who want more income in their old age.

Over the past three years and 136 days, the MPF has become an accepted part of our way of life. At present, some 97% of our employers and 96% of the relevant employees have joined MPF schemes. Such compliance rates are impressive, particularly in light of our traditionally high labour mobility and the fact that the great majority of employers in Hong Kong are small and mediuam enterprises.

In absolute terms, the MPF system now covers over 2.2 million employers and employees. If we add to this figure members of the workforce who have participated in other types of retirement schemes, about 84% of the total workforce in Hong Kong is now covered by some form of retirement protection.

While the corresponding figures in some other developed economies may be higher, there is no question that this level of coverage is already a huge advance. Before 2000, perhaps only one out of three employees in Hong Kong was covered by some sort of retirement scheme.

The smooth implementation of the MPF system is in no small part due to the conscientious and hard work of Diana and the MPF Schemes Authority (MPFA) team. A vote of thanks is also owed to the industry players who have made it possible, as well as professional bodies like the Hong Kong Retirement Schemes Association, the Hong Kong Investment Funds Association and the Hong Kong Trustees Association. Without your sound advice and active participation, the MPF system would not have been such a great success.

The real key to success has however been the tacit partnership between employers and employees. Their willing and joint contributions are the signature feature of this mandatory system and have been fundamental to its success.

Just to give you some idea of the financial scale of this operation, the total net asset values of all MPF schemes is close to the $100 billion mark. Every month, some $2 billion are added to the MPF accounts. Thus while the primary objective of MPF is to serve as a pillar of retirement protection, this large and growing pool of assets has also had a significant impact on the further development of our financial markets.

For instance, the deepening of the debt market is evident through accumulation of funds managed under the MPF schemes. There has been increased demand for debt instruments, which could produce a steady stream of income, in particular, debt instruments of longer maturities and larger issue sizes. The demand for quality, rated bonds, larger issue sizes and longer maturities in turn contributes to higher market liquidity, fostering the development of both the primary and secondary debt markets.

In addition, MPF investment has also contributed to the development of the local stock market. Currently, some 52% of MPF assets are invested in equities.

Almost more significant than these already substantial figures is the longer-term change of people's attitudes brought about by the MPF. With the MPF has come a greater awareness among Hong Kong people of the need to save and invest for their future retirement and to insure the well-being of their families. In my view, this is more important than an injection of $100 billion or even $200 billion into the market. Thus the introduction of the MPF system has given rise to new opportunities for providers of related services, ranging from trustees and custodians, to scheme administrators, actuaries, accountants, fund managers, just name a few.

Looking forward, I think it is important that we do not regard the introduction of the MPF system as an end in itself. Like similar systems in other places, the MPF system must and will grow over time.

The size of our ageing population is growing. We will have more and more seniors in Hong Kong, thanks partly to the improved medical and social services provided here. In 2031, the projected number of persons aged 65 or above will surge to over two million; the elderly dependency ratio will be about 380 per 1,000, which means some 2.6 people of working age (15 to 64) to one elderly person.

By "growth", I do not mean just an increase in MPF investment or MPF assets, but also the progressive development of the system so as to adapt to changes in social environment.

MPF is a system affecting nearly two million scheme members, 200,000 employers, and numerous services providers plus their employees. We need to review and, where appropriate, to refine the system from time to time, in order to ensure its effectiveness and efficiency, bearing in mind the overriding concern that MPF investments must be prudently made and managed. What we must avoid is either well-meaning but misguided tinkering, or sudden shocks or changes of direction.

I am pleased to note that this view is shared by many here. I understand for example, that Mr Gadbury from the Consultant of Gadbury Group will be presenting his research into the subject of retirement income policy in Hong Kong, later in the seminar, including ideas for strengthening the MPF system.

As the regulator of the system, I know that the MPFA is also constantly on the alert to identify areas for improvement. In mid-2001, less than a year after the launch of MPF, the authority set up a committee to review the operational and administrative aspects of the MPF system. In line with that same spirit of communication and compromise leading to consensus, which I mentioned earlier, this committee includes representatives from employers' associations, labour unions, and the retirement scheme industry, as well as the government.

Having said that I support change, allow me to stress that such change should be of the cautious evolutionary, and not the revolutionary variety. The MPF is a system affecting million of people. Before any change is introduced, however well-intended, the community will need to be convinced that it is a change for the good. Those "Three Cs", communication, compromise and consensus, take time, but the world is littered with examples of why they are vitally necessary for success of any endeavour of this sort.

Some of you may ask, "What is government's role now that the MPF system is up and operating under the auspices of the MPFA?", or "Well, what is the role of government in the growth of the MPF system?" Allow me to give my answer in two parts.

The first part of my answer is that government should, I believe, avoid being prescriptive. This is a young scheme; it should be given space to find its own way, subject always to prudent oversight.

The second part of my answer comes in the form of a handful of broad principles, which I offer as reminders and possible points for discussion as we chart our way forward. Each I think deserves discussion; taken together they are designed to help the process of balancing interests. I will set them out very briefly.

First, let us remind ourselves that the MPF is one of the three pillars. It is neither designed, nor intended, to be the panacea for all the retirement problems of our entire population.

In Hong Kong, we have the CSSA as a basic social safety net and a well-developed financial market that channels savings and investments efficiently and is open to all. The three pillars reinforce each other. We should not lose sight of this broader picture when discussing MPF-related matters like the mandatory contribution rates, scope of cover and withdrawal of benefits.

Second, we must ensure adequate risk management. The MPF is a mandatory system. It requires scheme members to save and invest for life after retirement. Because it is mandatory, because it to some degree reduces citizens' freedom of choice, it is clear that the MPFA and government have a moral obligation to ensure that the system remains safe and stable. How to manage risks within prudent levels, while at the same time maintaining market flexibility, is always a fine art. Nevertheless safety and stability are essential preconditions both for investor confidence and for product development by scheme providers.

Third, we should remind ourselves about freedom of choice. Unlike many schemes elsewhere in the world, ours is based on mandatory contributions combined with freedom of investor choice. For such freedom of choice to be effective, it is essential that scheme members understand the choices open to them and have access to adequate information on which to make informed investment decisions. Thus public education is important, but so also is access to accurate updates on how much they are saving towards retirement and what sort of benefits they might have accrued. This is the rationale behind MPFA's Disclosure Project.

I understand that MPFA is in the process of finalising the Disclosure Code for promulgation shortly. We hope the Code would pave a solid and useful ground for helping scheme members make investment decisions that suit their individual circumstances.

Fourth, we believe that the MPF system should continue to be based on employers-employees joint participation. Employees naturally have an interest, indeed a duty, to participate since we are talking about their retirement protection. As for employers, a caring employer who perceives and is seen to perceive retirement protection as a matter of importance to his employees is much more likely to enjoy their appreciation and loyalty.

Lastly, and most importantly, we need to remind ourselves of the interests we are seeking to balance. The questions before us are largely judgmental or political, rather than empirical. They involve people rather than formulae. Balancing the rights of scheme members and the need to protect their interests while allowing service providers flexibility to maximise investment return requires expert advice. It also demands that we continue with communication, compromise and consensus.

Ladies and gentlemen, I would like to end where I began - why we have the system in the first place. The MPF system is a collective investment in the sustainability and stability of our society. With the launching of the system the great bulk of our workforce have taken an important step to assuring their families a protected retirement. With it comes considerable peace of mind to a large sector of our community.

There will be some who argue that the step taken is too small and that other societies have legislated for larger mandatory contributions. To them I would say only that Hong Kong's philosophy has always been to minimise government interference in people's lives so as to maximise their freedom of choice and scope for personal initiative. That simple belief lies behind much of our success; it is not something we should lightly vary.

(Permanent Secretary for Financial Services & the Treasury Tony Miller gave this speech at the Retirement Protection Seminar jointly organised by the HK Investment Funds Association and the HK Retirement Schemes Association on May 15.)