Meeting the future financial needs for caring for our retirees has always been a big challenge to Hong Kong. Way back in the mid-1960s, the idea of a pension scheme was first raised. This is such a controversial subject that the social and political debates continued for three decades before the MPF system framework could be drawn up in 1995.

And in the following five years, the architectural design of the MPF system was put under the scrutiny of the legislative microscope - more than 100 meetings were held through six legislative sessions.

At the end, consensus and compromises were built. On December 1, 2000, when the long-awaited MPF system kicked-off, there was strong and broad support from our community. And this has formed a solid foundation for the coming success.

We all know that our existing MPF system is the result of the concerted efforts of many people. The present system represents a balance of interests and compromises. It also represents a radical change from what went before. With its introduction, we have put fully in place the "three pillars" for retirement protection advocated by the World Bank.

The first pillar is a publicly-managed, social safety net for the elderly, now provided under schemes such as the Government's Comprehensive Social Services Assistance Scheme.

The second pillar is a privately-managed, fully funded mandatory contribution scheme, now provided under the MPF system.

The third pillar is voluntary personal savings and insurance to provide additional protection for people in their old age.

These three pillars, while none of which is the panacea for all ageing-population problems, reinforce each other and form our retirement-protection infrastructure in Hong Kong. 

Thanks to the improved living environment as well as medical and social services, Hong Kong now has one of the highest life expectancy rates in the world. Currently, 12.1% or 840,000 of our population are elderly people. In 2033, it will rise to 26.8% or 2.24 million people.

The elderly dependency ratio will skyrocket from 166 in 2005 to around 428 per 1,000, meaning that there would be about 2.3 persons of working age to one elderly person. With a much smaller working population supporting the growing number of retirees, Hong Kong's population structure will become an inverted pyramid. 

According to the Asian Wall Street Journal, it was estimated in 2000 by academics that without the MPF system, the expenses for the welfare programmes for Hong Kong would treble as a percentage of GDP in two decades, since only one-third of our workforce had some form of retirement protection prior to its introduction.

At present, about 98% of employers and 97% of the relevant employees have joined the MPF scheme. These are impressive participation rates, particularly in light of our traditionally high labour mobility and the fact that the great majority of employers in Hong Kong are SMEs.

The MPF system has already laid a good basis for retirement-protection infrastructure in Hong Kong and I am pleased to learn that its successful implementation in Hong Kong has also provided an invaluable experience for reference by other Asian economies.

At the same time, the MPF system has enhanced the breadth and depth of our financial markets. The total net-asset value captured by all schemes is now over $135 billion, much higher than our previous expectations.

With a monthly contribution amount of over $2 billion, which outweighs the current payment of benefits to retirees by around 10 times, plus the increasing level of voluntary contributions injected into the system, the total net asset value will continue to grow strongly. 

And for the annualised rate of return for the MPF schemes weighted by net contributions, it was 4.3% net of expenses for the period between April 2001 and March 2005. As most of you will immediately work out, the real rate of return should be higher because the annualised composite CPI for the same period was negative. In general, the return performances of most providers and across different fund choices have been positive.

Bond market enhanced

This large and growing pool of assets has been creating a very positive impetus for our financial markets. With about 25% of the assets of constituent funds invested in debt instruments, a large demand for quality, rated bonds with longer maturities and larger issue sizes has been generated.

Together with our all-out effort to promote the bond market through enhancing financial infrastructure, offering tax incentives and simplifying the issuance process, I am glad to tell you that the total outstanding debt amount has grown from around $365 billion in the first quarter of 2001 to around $520 billion in the second quarter of 2005.

The MPF assets are invested heavily in stock markets as well. Currently, about 54% of the assets of constituent funds are invested in equities. With growing awareness of the principles and necessity of retirement plans, we can expect that those scheme members with longer investment horizons and lower risk tolerance would switch to debt instruments. This foreseeable development would strengthen Hong Kong's bond market development.

Apart from the bond market and the securities market, the launch of the MPF system has also directly boosted the fund-management industry in Hong Kong. Currently, there are 334 constituent funds and 280 approved pooled investment funds for the MPF, plus a wide range of institutional funds, unit trusts, collective investment schemes and others in our market.

The strong growth of our MPF schemes in the past few years has indeed promoted our status as one of the most prominent fund-management centres in Asia. However, there is no room for complacency. It is imperative for us to take active measures to capitalise on the opportunities so as to achieve continuing development. 

In respect of pension funds, the scheme members' growing interest in voluntary contribution schemes will no doubt stimulate further growth in the total amount of MPF assets.

Looking ahead, the continuing success of the MPF system and the financial markets will require the concerted efforts of the Government, the regulators and the industry. In respect of the MPF system, the Government will continue to join hands with the MPFA.

Our work could be broadly categorised into two major areas - first is to ensure progressive development of the MPF system, and second is to safeguard the interests of scheme members.

When I talk about progressive development of the MPF system, I mean making refinements from time to time so as to adapt to changes in the environment. In fact, we are constantly making efforts to identify areas for improvement. For example in 2002, among other operational and administrative matters, we have revised the minimum level of relevant income for calculating the contribution amount for MPF in light of the economic situation.

We will continue to refine the operational and administrative aspects of the MPF system. We are now working on some legislative amendments to further improve the MPF's investment regulations. 

Our second major area of work is to safeguard the interests of the scheme members. As most of you will remember, before and immediately after the launch of the MPF system, we focused our efforts on ensuring the compliance of the trustees. This was our prime concern at that time since the trustees are responsible for all aspects of administering, managing and maintaining the MPF schemes.

And as the MPF system continues to grow, in recent years we have placed more focus on the quality of services and transparency of fees and charges. In particular, we are mindful that scheme members must have information at their fingertips to comprehend and compare the performance and costs of different MPF schemes. To this end, the Code on Disclosure for MPF Investment Funds was published in June last year and the Compliance Standards for trustees were launched in July this year. 

Secretary for Financial Services & the Treasury Frederick Ma gave this address at the Forum on MPF - Five Years in Review.