How would ESG benefit pension schemes in Hong Kong and China, and how could it provide more proper retirement protection to the public?
ESG refers to environmental, social and corporate governance issues that investors are considering in the context of their investment portfolios. The awareness of ESG amongst pension schemes in Hong Kong is generally increasing and some pension schemes have been looking into ESG-related investments. In China, most pension schemes are still domestically-focused and ESG-related investments would be constrained by the investment universe.
Generally, ESG brings better governance to pension schemes and also a clear investment belief which helps with investment decisions. Over the long term, we expect these to have a positive impact on the pension investments and thus retirement protection for the public.
What are the hurdles to reform the pension system in Hong Kong amidst the global trend of ESG, and how can we overcome these obstacles?
As ESG and its related investments continue to evolve and grow, it is important to ensure the related investment guidelines keep up with the availability of new investments. Currently, the investment guidelines related to pension investments in Hong Kong are on the conservative side relative to other more mature pension markets globally. It will be beneficial for the government to put more resources into public retirement investment education so that risk is being reviewed appropriately, with investment scopes then adjusted accordingly.
Janet Li, Wealth Business Leader, Asia, Mercer
Why is it important to consider social and environmental issues such as climate change, water security, etc., in transformational investment?
Mercer partnered with the World Economic Forum and GIC Private Limited (GIC) and published a research paper called Trendsetters: Transformational Investment Practices of Advanced Investors in March. More than 30 asset owners with US$3.4 trillion in assets participated, addressing the question of how asset owners can identify return opportunities and better manage risks associated with global systemic trends. Out of the six global systemic trends identified, Climate Change and Water Security were two that were are too critical to be ignored: it would therefore be beneficial for asset owners to actively consider them and manage them properly.
Comparing with investment without ESG issues, how could ESG achieve long-term and sustainable human capital management?
First of all, such investments come with a longer term horizon and usually last beyond generations. Looking at the systemic trends discussed, the management of such risks requires infrastructure investment, raising of capital, innovation in technology, etc. At the same time, ESG has risen to the top of investment agendas and is no longer a “nice to have” but a “must have”. It also presents a huge opportunity. Therefore, we believe there will be an increase in demand for investments that integrate ESG, which hopefully ignites a virtuous cycle with a long-term and sustainable human capital management focus. This will be critical to overcoming the downsides of short-termism, misalignment of interests and governance issues.
What are the challenges of developing transformational investment in Hong Kong? Does it become more generally accepted by the investors due to the outbreak of Covid-19?
The outbreak of COVID-19, while unfortunate in nature, has raised awareness around sustainability. Innovation in technology, digital advancement and medical breakthroughs have prompted greater interest and action around transformational investment globally as well as in Hong Kong. The new normal will continue to evolve, so the key challenge will be keeping up with the pace of change.
How do you envisage the trend of pension index value in Hong Kong and China in the coming 3-5 years?
With the reforms going on in the Hong Kong and China pension markets, things are progressing in the right direction. The key outcome should be an improvement in the Replacement Ratio overall given the additional contributions, better products and more innovative withdrawal arrangements. More ESG-related investments and application will be a plus too. Overall, if progress remains on the same trajectory, we can reasonably expect that pension index values would be positive.
Singapore has seized the highest pension index over other Asian countries/cities in its MPF pension scheme. What makes the Singapore MPF pension scheme so remarkable, and are there any things that Hong Kong and China can take reference to?
The Singapore Central Provident Fund has a longer history of development. The flexibility it offers to its members is highly regarded generally. That said, we are mindful that each system has its own unique characteristics and its design would have to be tied into its local economy as well as social and cultural considerations.
Our annual Global Pension Index, now in its 12th edition, assesses each retirement system based on adequacy, integrity and sustainability. The adequacy category examines a system’s benefits, design, levels of savings and home ownership, among other factors, to determine its ability to provide adequate retirement income. Integrity considers factors such as regulation, governance, communication and operating costs, while sustainability measures how likely a system will be able to provide benefits in the future.
We have learnt a lot about the effectiveness of pension systems over the years and there is no single pension system model that will work for every market. While we can certainly learn from the successes of other systems, we also need to consider what is possible and practical.
Hong Kong has an outstanding performance in the Integrity (A grade). In contrast, it falls in the C range in Adequacy and Sustainability. In your opinion, what are the reasons for such an imbalanced performance in Hong Kong’s MPF scheme?
While the three areas of assessment are inter-connected, they are also unique in their own ways. In particular, Adequacy and Sustainability relate more to design, while Integrity relate more to governance. Thus, the variation in grading is not uncommon. Nonetheless, the high Integrity score is encouraging, and provides a strong foundation for the system to evolve and grow.
