The retirement protection plan will provide Hong Kong's greying population, which is projected to double by 2036, with a basic pension scheme to help retirees through their twilight years.

The scheme has been a long time coming - 30 years in fact - with the government only enacting the Mandatory Provident Fund Schemes Ordinance to provide a formal system of retirement protection in 1995.

Francis Lui, director, Centre for Economic Development, and Professor of Economics at Hong Kong University of Science and Technology, said the delay was due to difficulty reaching a consensus over whether to implement a pay-as-you-go style scheme as used in Europe, or a Central Provident Scheme (CPS), similar to that of Singapore.

Then Hong Kong Governor Chris Patten was in favour of a pay-as-you-go scheme, despite warnings from academics that such a scheme had not been successful in Europe and would seriously hurt the local economy, he said.

The government was swayed to adopt a mandatory style scheme after 78 economists endorsed an advertisement they placed in local media September 1994 decrying the plan.

"There was overwhelming support from academics not to adopt the [pay-as-you-go] scheme," Mr Lui, who is often referred to as "the father of MPF," said.

MPF Authority Executive Director Raymond Tam (right) said Singapore's CPS model was ruled out also after a World Bank study found that without exception the CPS style system performed badly for countries around the world.

The CPS system worked for Singapore because the government needed the capital to build up its infrastructure. Hong Kong, by contrast, is awash with capital, he said. Also, the ultra-conservative management of funds based on banks' savings interest rate and one-year fixed deposit cannot beat inflation.

"By the time you retire the sum you have accumulated may not be sufficient to provide a comfortable living. That is why the [Singapore] government requires 40 per cent contributions [20 per cent from both employee and employers]," he said, adding that the amount at one time reached 50 per cent.

In the end legislators concurred that a MPF scheme, similar to the Australian and Chilean systems, which are privately run and highly decentralised, was the best option for Hong Kong.

On February 1, 2000, the MPFA approved 21 MPF providers to market their products, and companies are of course fee to choose any provider they that they wish. Under the MPFA regulations, employers must enrol all employees who have worked for them for more than 60 days into their chosen scheme. Casual employees, regardless of how many hours a day they work, must also be included in the scheme and pay contributions.

Companies already running an Occupational Retirement Schemes Ordinance (ORSO) plan can apply for exemption from the MPF. Mr Tam said there are currently about 19,000 registered ORSO schemes in Hong Kong, and he expects about 14,000 of those will qualify for exemption.

Employers will be issued with a certificate of participation, which must be placed in a conspicuous location in the workplace as proof of participation, once they sign up with a trustee and start paying contributions.

Some industry observers have questioned how the government will get the estimated 300,000 or so companies to all sign up for the scheme by the deadline. But Mr Tam said he doesn't foresee many problems and expects most employers to cooperate with the guidelines.

Total contributions for the first year are estimated to top HK$20 billion, and annual MPF contributions will account for 3 per cent of Hong Kong's GDP. In 10 years time the money pool is estimated to swell to over HK$200 billion.

Some critics of the scheme have argued that the 5 per cent contribution employers are required to make will financially burden companies, many of which are small- and medium-sized enterprises (SMEs).

But Mr Tam said it is a small cost to businesses. "If companies are in the more labour-intensive industries, then of course the cost will be higher, but on average the 5 per cent contribution will lead to an increase in business expenses to slightly over 1 per cent, so it is a small piece to pay," he said.

Chamber SME Committee Chairman Denis W.K. Lee (right) concurs that 5 per cent is an acceptable amount. "It is only like a 5 per cent increase in salary, not in overall operational costs," he said.

Mr Lee said that as a whole, the Chamber SME Committee members welcomed the introduction of the MPF scheme, which they believe is overdue, and feel it may even provide some benefit to employers.

"Some SMEs think it will help retain staff who otherwise might leave for larger companies that offer employees a retirement scheme; so it may encourage staff loyalty and reduce staff turnover," he said.

While many SMEs welcome the scheme, most say they are confused by the various products being marketed to them. Mr Lee said most SMEs that he has spoken to about the issue are vague about exactly what the MPF involves and how they should implement it.

"All the MPF suppliers say we don't need to do anything; just sign on the dotted line and they will take care of the rest. But we need more information than that to help us make a better-informed choice. A lot more education is needed," he said.

Selected media will enjoy a small flip in revenues from advertising, while recruitment agencies are expected to experience a small boon in business as insurance companies and banks hire more staff to handle their MPF business, and in doing so lower unemployment.

Professor Lui (left), who is also author of "Retirement Protection: A Plan for Hong Kong," concurs that the 5 per cent contributions will do little to slow the economy or savings rate.

The fact that Hong Kongers are avid savers, squirreling away 32 per cent of Hong Kong's GDP annually, means that rather than saving 5 per cent less, they are more likely to simply consider that 5 per cent part of their regular savings plan.

Mr Liu also points out that different age groups also have different saving and spending patterns. A slightly lighter pay cheque may affect a 25-year-old's consumption, but this is not the end of the story.

When this person turns 45 he will save less because his pension nest egg is growing nicely. Because his MPF scheme has basically forced him to save for retirement he does not need to save so hard later in life and so he will spend more. Someone who is 45 now, by contrast, already saves hard for retirement, so the introduction of the MPF will have little impact on his spending or saving habits, he said.

After an employee retires after working for 30-40 years the sum accumulated will be sufficient to provide a pension worth about 40-45 per cent of his pre-retirement earnings.

Exactly how much that will be depends on an employee's contributions, the rate of return from the funds and how much risk he is willing to take. But one factor that will affect how much he receives upon retirement is the fund management fee charged by MPF providers.

That is why Mr Lui feels employers should involve employees in the MPF provider selection process. "If a MPF supplier has higher management fees, the employer is not hurt, so they do not care too much about the rate of return or management fees."

While the average 1.5 per cent MPF providers are charging employees for managing their funds represents a small amount now, when pensions mature after 30-40 years, the service fees will account for a considerable sum. As such, Mr Lui feels the rate should come down to about 0.3 per cent, as charged in the U.S. for pension fund management.

Because the public's knowledge about the MPF scheme and fund management is limited, he concedes that the MPFA's decision to keep it as simple as possible and to let employers choose their provider to get the scheme up and running is not a bad strategy.

But in five to six years' time, he feels the MPFA should change its policy and allow employees to decide who looks after their pension funds; after all, it is their money.

Employees will only be able to cash in their pensions when they turn 65, or if employees stop working after 60. Pensions can also be withdrawn if a worker loses his ability to work or upon premature death. Pensions can also be cashed in if workers leave Hong Kong permanently.

"The reason it is so restrictive is that MPF is designed for only one purpose; only for retirement. That is why we can keep the contribution rate so low," Mr Tam said.

The collapse of Barings and Peregrine, both of which handled pension schemes, has raised the question: "Will my money be there when I retire?"

Mr Tam said people who had taken out pension plans with both companies did not experience any loss because pension funds must be under trust so that assets are separate.

Even so, the MPFA said it has combed through the investment objectives of each fund to ensure investment rules banning high-risk investments are being met.

It has also put in place a three-tier safety net to guarantee workers money will be there for them when they retire in the highly unlikely situation that bad management or illegal conduct jeopardises the health of a company.

Firstly, trustees are required to have capital of at least HK$150 million, backed by a substantial financial institution.

Secondly, trustees are required to take out indemnity insurance, so that in case of losses due to illegal acts, the indemnity insurance will provide full cover.