The changing landscape of retirement savings Hong Kong Mandatory Provident Fund (MPF) Scheme

Agenda Context and overview of the Hong Kong MPF Scheme Selected key MPF reforms and learnings Employee Choice Arrangement (ECA) Default Investment Strategy (DIS) eMPF MPF scheme performance to date Conclusion

Demographic shifts created many challenges for Hong Kong Rapid Ageing Low Fertility Longevity In 2016, 17% of population is above 65, this figure will almost double to 30% by 2030 Hong Kong fertility rate declined from 1.9 births per woman in 1981 to a historical low of 0.9 in 2003, before rebounding to the level of 1.2 to 1.3 in recent years The fertility rate in Hong Kong is the fourth lowest in the world based on 2017 data 2016 Life expectancy Man: 81.3 Female: 87.3 2066 Life expectancy Man: 87.1 Female: 93.1 February-23-19

Impact on public finances Economic growth will be dragged by insufficient labour force Impact on public finances February-23-19

Hong Kong Retirement Schemes World Bank 3-Pillar (1994) World Bank 5-Pillar (2005) Hong Kong Retirement Schemes 1 Mandatory publicly managed pillar Non-contributory "zero pillar" that provides a minimal level of social protection. Publicly-funded social assistance schemes The framework 1 Publically managed mandatory contributory plan Nil 2 Mandatory privately managed pillar 2. Privately managed, mandatory occupational or private contributory plan Mandatory contributions to the MPF schemes (Dec 2000) Other occupation-based retirement schemes 3 Voluntary retirement savings 3 Voluntary contributions or savings to occupational or private plans Voluntary contributions to the MPF schemes Retirement savings-related insurance, etc 4 Public services, family support and personal assets Public housing, healthcare and welfare services, family support and Personal assets (e.g. self-owned properties). February-23-19

MPF Scheme structure and service providers The MPF System is a privately managed retirement system. MPF trustees are the major operators of MPF schemes, there are other service providers who take part and play different roles in the MPF System. A company or a natural person approved by MPFA Exercise fiduciary duty in operating MPF schemes in the interest of scheme members Need to appoint a custodian and an independent investment manager to manage the investment of funds Approved Trustee Custodian Scheme Administrator Investment Manager MPF Intermediary An institution to which an approved trustee has delegated administration of the scheme asset The custodian is required to be independent from the investment manager. Acts on behalf of the MPF trustee in handling the daily administration work of the MPF scheme, such as: Recordkeeping Handle transfer or withdrawal Provide customer service Responsible for managing the investment of the funds of the MPF scheme Entity registered by MPFA to engage in MPF sales and marketing activities MPF subsidiary intermediary is a person sponsored by an MPF principal intermediary and registered by MPFA to carry out MPF sales and marketing activities February-23-19

Contributions, tax concessions and retirement accounts Given its mandatory nature, employees, employers and self-employed person are all required to contribute to 5% of the salary into the retirement accounts Contributions made to an MPF scheme is tax deductible, subject to the maximum amount: HK$18,000 for employee and up to 15% of payroll for employers Contribution Account (Current employment) Primarily receives MPF contributions attributable to a member’s current employment or current self-employment for investment Once per year, employee contribution can be transferred to any other MPF schemes Self-employed can opt to make mandatory contributions on a monthly or a yearly basis Personal Account Primarily receives accrued benefits attributable to a member’s former employment or former self- employment transferred from other MPF accounts, and Accrued benefits attributable to a member’s current employment transferred from a contribution account for investment February-23-19

Consolidated market where Top 5 trustee account for ~80% of market share February-23-19

Selected key MPF reforms and learnings February-23-19

Employee Choice Arrangement (ECA) Employee Choice Arrangement is an important reform launched On November 1, 2012 Before ECA Employer-led： Employer’s responsibility to select MPF schemes and providers Employee passively follow employer’s decision for contribution and investments, until they leave the employer or retire Employers are the main focus on MPF providers After ECA Employee-led： ECA gives employees greater autonomy, allowing them to, once a year, opt to transfer the accrued benefits derived from the employee mandatory contributions to a scheme of their own choice (New Scheme). Increase MPF funds liquidity Force providers to innovate and improve quality of services delivered to the employees to retain their MPF assets February-23-19

Default Investment Strategy (DIS) Impact Better default options compare to MM (selected by trustee) Low-cost investment vehicles Automatically adjusting portfolio mix when customers are closer to retirement February-23-19

eMPF platform is currently under consideration to promote portability Why How Impact Large number of paper-based transactions and Large number of schemes lead to fragmented member database leading to high admin cost High Fund Expense Ratio (FER) and low return mean that members are not motivated to invest further Centralized collection of MPF contributions and necessary information from employers through an electronic channel automatically calculate the amount of contributions in respect of each employee and submit such information to the trustees concerned Provide a one-stop electronic portal for scheme members to access all relevant information about their MPF accounts Build scale to drive down FER Centralized member database to reduce admin cost and improve efficiency Enhance member experience and engagement Create greater transparency February-23-19

MPF scheme performance to date February-23-19

𝟏 𝟑 of the Hong Kong workforce had some form of retirement protection MPF scheme now covers 72% of employed population Before the implementation of the MPF System, only about 𝟏 𝟑 of the Hong Kong workforce had some form of retirement protection February-23-19

Average MPF account size MPF’s AUM has been growing rapidly since inception; average account size tripled over the last decade MPF Net Asset Value (NAV) 2001-2017 (US$b) Average MPF account size (US$b) +22.3% 15,080 12,610 8,320 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112011 2012 2013 2014 2015 2016 2017 February-23-19

Equity funds dominate MPF asset allocation As of 12/31/2017, over 40% of MPF assets were invested in equity funds Over the past 17 years, Equity funds tripled in AUM while Guaranteed funds and money market funds shrank significantly 2001 2017 0.7% 2.4% 14.6% 7.4% 3.1% 0.4% 21.4% 9.2% Equity Fund : # of Funds:154 42.9% Mixed Fund : # of Funds:210 Conservative Fund : # of Funds:32 Guaranteed Fund : # of Funds:21 14.6% Bond Fund : # of Funds:43 46.3% MM and other Funds : # of Funds:9 37.0% February-23-19

Based on global experience, it would take about 40 years for the scheme to mature Hong Kong’s MPF system has been implemented for 17 years and is moving towards full portability Phase V Phase IV Maturity Conclusion Phase III Phase II eMPF Phase I ECA launched DIS 10 yrs Now 20 yrs 30 yrs 40 yrs Setup infrastructure & increase participation rate Product innovation & participants protection Full portability & fee review Increase operational efficiency & focus on customer experience Continue to improve policy & promote adoption

Decisions made easier. Lives made better. February-23-19

Appendix - Contributions and tax concessions Employee & Employer contributions Monthly Relevant Income Amount of Mandatory Contributions Payable by Employer Amount of Mandatory Contributions Payable by Employee Less than $7,100 Relevant income x 5% No contributions required $7,100 to $30,000 More than $30,000 $1,500 Tax Concessions Employee Contributions made to an MPF scheme is tax deductible, subject to the maximum amount: HK$18,000 Voluntary contributions are not tax deductible. Employer Both mandatory and voluntary contributions are tax deductible, to the extent that they do not exceed 15% of the employee’s total emoluments Self-employed Person Contributions made to an MPF scheme as allowable business expenses for Hong Kong Profits Tax purposes. The maximum amount that can be claimed for deduction is: HK$18,000 Self-employed person contribution Monthly Relevant Income Mandatory Contributions Less than $7,100 per month (or $85,200 per year) No contributions required $7,100 to $30,000 per month (or $85,200 to $360,000 per year) Relevant income x 5% More than $30,000 per month (or $360,000 per year) $1,500 per month (or $18,000 per year) February-23-19