MPF ASSETS
The MPF System prospered with Hong Kong's strong economic upturn and achieved remarkable growth during the 2005-06 financial year, the fifth year of its operation. With average total monthly contributions of around $2.2 billion, the net asset value of MPF amounted to $164.6 billion as at 31 March 2006. In the year, the annualized dollar-weighted return of the MPF System was 11.70% net of expenses.

Five years is perhaps too early to undertake a major review of the MPF System. However, it is useful and of some interest to evaluate the System's progress over these years.

Returns on MPF Investment
The MPF System's returns have not always been positive over the last five years. As MPF funds are invested in existing financial markets, it is logical that the performance of the MPF System is affected by the economic and market fluctuations both in Hong Kong and overseas. Owing to the sluggish economic conditions and the bearish stock market, the MPF System recorded negative returns of -2.49% and -11.21% respectively in the initial two years. Since then, however, returns of the MPF System have been positive.

Despite the ups and downs in the global economy and the financial markets, I am pleased to present the positive contributions that the MPF System has made to the working population's wealth accumulation in preparation for their retirement. As at 31 March 2006, the annualized dollar-weighted return of the MPF System for the five years since 1 April 2001 was 6.99%, which is a marked improvement over the rate of 4.93%1 for the four years ended 31 March 2005.

In terms of money put into the MPF System, average monthly contributions hovered around $2 billion in the first four years. In the last financial year, with the improved economy and employment situation, average monthly contributions increased to $2.2 billion. Up to 31 March 2006, the total net amount of MPF contributions injected into the System was $136.4 billion, including accrued benefits transferred from ORSO schemes. Compared with the total net asset value of MPF of $164.6 billion attained as at the same date, the System had generated investment returns, net of fees and charges, of $28.2 billion for the benefit of MPF scheme members.

Asset Distribution
The MPF investment rules under the MPF legislation provide a framework for diversification of investment across issuers. From the distribution of assets over different asset classes and across geographical regions, we can see how scheme members achieve further asset diversification. Over the years there have been mild shifts among asset classes and across regions. As at end of March 2006, asset allocation of MPF funds was 20% deposits and cash, 22% debt securities and 58% equities. The split between local and overseas assets was around 54% Hong Kong and 46% overseas, which included 8% Japan, 8% Asia (excluding Japan and Hong Kong), 13% North America, and 17% Europe2.

COVERAGE
Before the MPF System came into operation, only one-third of Hong Kong's 3.25 million workforce were covered by some form of retirement protection. Five years down the road, 84% of the working population is now covered by retirement schemes, including 66% covered under the MPF System and 18% covered by other retirement schemes. Since the implementation of the MPF System, the enrolment rates among those who are required to join MPF schemes have remained very high. As at end of March 2006, the compliance rates were 98.5%, 96.7% and 77.0% for employers, relevant employees and self-employed persons respectively.

THE MARKET
The MPF industry has been stable over the years with only mild market rationalization activities. The number of approved MPF trustees has remained at 19 since 2003-04. There have also been only minor changes in numbers of schemes and constituent funds. As at end of the financial year, there were 46 registered MPF schemes, 334 approved constituent funds, 280 approved pooled investment funds and 89 Index-tracking Collective Investment Schemes. Under this MPF market infrastructure, most schemes offer between three to seven fund choices to scheme members.

LOOKING AHEAD
As Hong Kong's ageing population continues to be an important concern in the community, there have been discussions on the adequacy of retirement protection and the ways to finance the various needs of the elderly. MPF naturally forms a part of the discussion. The MPFA will continue to facilitate an informed debate about these issues by collecting and disseminating system statistics, enhancing the disclosure of information about MPF funds and member accounts, and sustaining its investment education efforts.

The MPF System is a major social programme to support the retirement protection for Hong Kong's working population. Having been established only since end of year 2000, it is a relatively new system. Many aspects of its implementation were, and in some respects still are, subject to diverse and sometimes even conflicting views. Many issues discussed well before the MPF System came into existence, such as the System's coverage, the level of contributions, the extent of member choices, the mechanism of offsetting MPF benefits with severance payments/long service payments, etc., continue to be subjects of debate. In considering these issues, we should be mindful of their impact on various stakeholders, and ensure that there is a healthy balance of their respective views and interests. The extensive discussion and thorough debate within the community will help to provide insights for the policy makers in developing viable proposals.

The MPF seeds have fallen on good soil and have achieved healthy growth. No doubt there will be many more challenges ahead. I am confident that these will be met with great spirit and enthusiasm by members of the MPFA family.

VOTE OF THANKS
It is most gratifying to see that the MPF System has had a good five years. Throughout these years, I have had the fortune of working with groups of very capable colleagues on the Management Board and its supporting Committees. I am most appreciative of the energetic participation and contributions from the Members. I must also thank the two statutory committees, namely the MPF Schemes Advisory Committee and the MPF Industry Schemes Committee, for continuing to give valuable advice to the MPFA on the operation of the MPF System and the industry schemes.

On a sad note, we lost an Industry Schemes Committee member during the year. Mr Valiant Cheung passed away in March 2006. While we are most thankful for his valuable contributions, we feel the loss gravely and are in deep sympathy with his family and associates.

Under the leadership of the Managing Director, Mrs Diana Chan, the MPFA's strong team of dedicated staff has been most supportive. On behalf of the Management Board and personally, I would like to put on record my deep appreciation for their professional efforts and excellent performance.

Charles Lee Yeh-Kwong
Chairman