In April, there were news reports that the MPF Authority (MPFA) were reviewing the relevant income (RI) levels under the MPF and that they may consider increasing them. Hong Kong’s economy has recently undergone a period of uncertainty, and the minimum and maximum relevant income levels have remained unchanged. As the relevant income levels have not been adjusted for many years, members may be unfamiliar with the concept of RI. This article will explain the adjustment mechanism for the relevant income levels and the impact of the adjustment on members’ contributions and benefits.
Adjustment criteria for Relevant Income levels
Under the MPF Ordinance, the MPFA must review the relevant income levels every four years. Further, the review must have regard to the monthly median employment earnings compiled by the Census and Statistics Department (C&SD). The minimum relevant income level is derived from 50% of the monthly median employment earnings, while the maximum relevant income level is benchmarked at the 90th percentile of the monthly employment earnings distribution.
The MPF Schemes Authority has also considered other factors in the past, such as the Statutory Minimum Wage, economic conditions, employer's affordability, cancellation of offset arrangements for severance payments/long service payments, and members' acceptance level.
The MPF Schemes Authority's prudent approach to adjustment
From past reviews, the MPFA has been very cautious in adjusting the relevant income. The initial upper limit of the maximum relevant income was HK$ 20,000, effective December 1, 2000. It was not adjusted until 12 years later to HK$ 25,000, and then increased to HK$ 30,000 two years later. It has been almost ten years since the last adjustment.
After the last review in 2018, the MPFA recommended increasing the maximum RI level in 2 phases, taking into account the affordability of employers and employees, yet the government decide to maintain the existing RI level.
Narrowing the gap in contribution rates
Setting the maximum relevant income reflects the policy objective of encouraging the workforce to save for their basic retirement needs, whilst high-income earners may opt to make additional retirement savings according to individual needs.
If salaries continue to increase and the maximum relevant income is not adjusted, there will be an increasing number of members with contribution rates lower than 10% of their total income. Based on the current upper limit of the maximum relevant income of HK$ 30,000, if a member's salary was HK$ 28,000 in 2015, the monthly contributions from the employer and employee were HK$ 2,800, which is equivalent to 10% of their total income. Eight years later in 2023, if the member's salary has risen to HK$ 35,000, the monthly contributions from the employer and employee are limited to the upper limit of HK$ 30,000, which is HK$ 3,000. As such, the proportion of total income has dropped to 8.6%.
Meanwhile, inflation continues to push up post-retirement living expenses. If a member’s effective contribution rate reduces over time and if the member has not made other separate retirement savings, the accumulated MPF benefits may only provide basic post-retirement protection and quality of life. Therefore, regular reviews of the relevant income are helpful to protect employees at different income levels.
Employer contributions will also increase
If the maximum relevant income level increases, only members with monthly salaries higher than HKD 30,000 will need to make additional contributions. Although increased MPF contributions will reduce members' disposable income, employers will also need to increase their MPF contributions. Given the investment compounding effect, the benefits of the relevant income adjustment arguably outweigh the drawbacks.
We believe that when the MPFA makes adjustments to the relevant income level in the future, it may recommend that the increases are implemented in phases rather than implementing at a single time.
