MPF made easy

What is MPF?

MPF = Mandatory Provident Fund

You've heard about MPF. You've read about MPF. But do you really know what MPF is? Allow us to explain. For most of us, it's important that we save to provide for our future so that we have money reserved for old age.

That might seem many many years away right now, but time flies and before you know it you might be considering where your money will come from once you stop working.

Where will your money come from in retirement?

Once you stop working, where will you get the money to pay for your daily expenses?

Launched in December 2000, MPF is simply a retirement investment plan which makes saving compulsory, to ensure that most Hong Kongers will have money put by for the future.

Or to give it its official description - a mandatory, privately managed, fully funded contribution scheme.

Bit by bit, month by month, 5% of your salary while you are earning, will be contributed to your MPF, and matched by a mandatory contribution by your employer.

In other words, MPF is you being paid to save. That's not a bad thing is it?

And while MPF is an important part of your retirement income, on its own it is not enough to cover your entire post-retirement expenses or your future retirement needs. It is only a part of a multi-pillar approach for retirement protection, as envisioned by the World Bank in its report released in 1994.

However, big or small the contributions are, year by year they will add up to quite a respectable amount by the time you retire.

Like growing a small seed into a healthy plant, with the right care and attention, you can grow your MPF into something worthwhile for the future.

How does MPF work?

This is how you become part of the MPF scheme, which will be set up for you given the following criteria. If you are between 18 to 65 and have been employed for 60 days or more, your employer will enroll you into an MPF scheme. You will have to choose what type of funds you would like to invest in within that scheme.

Both your employer and you will make monthly contributions to that scheme until the day that you leave that company.

Your monthly contributions will be deducted directly from your salary into the MPF account on a monthly basis, and the contributions (both yours and your employer's) will then be used to buy units in the funds you have personally chosen in your MPF scheme.

When you leave for a new job, you can either keep your MPF contributions in the existing MPF scheme with your previous employer, an existing personal account or consolidate it into the MPF scheme of your new employer.

This MPF contribution process will repeat itself throughout your working life (normally until you reach 65). You will be able to withdraw the money in your MPF account when you reach 65 years old.

Who should contribute?

18-65 age
Full-Time or Part-time
Employed for 60 days +

For employees who are making less than $7,100 per month, they will not have to contribute their portion. However, their employers will still need to contribute the employer portion.

Who is exempted?

Domestic employees
Self-employed hawkers
People covered by statutory pension or provident fund schemes, such as civil servants and subsidized or grant school teachers
Members of occupational retirement schemes which are granted MPF exemption certificates
People from overseas who enter Hong Kong for employment for not more than 13 months, or who are covered by overseas retirement scheme
Employees of the European Commission in Hong Kong

Are my employer contributing?

How do you know if your employer is keeping to his part of the deal?

Your MPF trustee will issue a membership certificate to you within 60 days after you have become a member of the scheme.

Your employer will provide you with a monthly pay-record.

So if in doubt, ask about your membership certificate or your monthly pay-record.

Can I afford to take a risk?

There are two core factors which can determine your risk tolerance:

Your ability to take on risk.	Your attitude toward risk.
As when planning any investment portfolio, you need to consider your personal financial circumstances. For example, when you are younger, you can afford to take on more risk, as you have more time to make up for any losses which you may incur. You can still adjust your savings pattern to make up any shortfall without any great lifestyle adjustments.	Even for individuals who have similar circumstances, risk attitudes can differ widely. You yourself might be very risk tolerant, while someone else similar to you may be averse to market downturns. Risk tolerance is also affected by subjective reactions to risk.

Your risk tolerance can be classified into five categories, you are either:

Source: Investor Education Centre

Risk is the potential threat that may impact the expected outcome of your investments. Investments that deliver potentially higher returns are usually accompanied by higher risks.

Your risk tolerance will differ depending on your situation.

Are you a fresh graduate or someone approaching retirement?

If you are young and single, the chances are you will have a higher risk tolerance and can opt for higher-risk funds with better chances to have higher returns. Whereas if you are nearing retirement or have family dependents, you will have lower risk tolerance.

Find out your risk tolerance now.

How to choose funds?

Choosing your MPF fund is a bit like choosing a pair of shoes.

You need to know what suits your needs, and if you are comfortable with the fit - because you will be starting a journey which will last for many years. Thankfully, with today's arrangements, you are free to make your own choice and also change that whenever you feel the need.

Here is what you need to think about.

Are you going to be aggressive for gains? Or play it safer with longer term goals?

Step one – Establish your investment objectives

A typical strategy for retirement investment should follow the following spectrum:

Step two – Identify relevant factors, such as your financial situation, risk tolerance, etc.

For example, if you opt for a more aggressive approach, you should invest the bulk of your assets into more aggressive tools such as equity funds.

However, this may result in a more frequent and possibly significant ups and downs, which in other words may have high probability of loss now and then.

Also, it is important to note that while it is great to have a strategic plan sometimes personal or financial changes in life may cause the need to alter and re-adjust your MPF strategy.

Step three – Find the fund that suits you, your needs and risk level

To ensure that you do not put all your eggs into one basket, it's important you have a good understanding of different types of funds - what they are, what are the fund's investment objectives and whether or not they are suitable for you.

Remember, it is crucial to revisit periodically and review your strategy accordingly.