Tag Archives: mpf reform

MPF reform on fee-controlled default plan pushed back

Employees will not be able to enjoy a core fund with lower management fees of their mandatory provident fund schemes until the first half next year, rather than the planned end of this year, Secretary for Financial Services and the Treasury Ceajer Chan Ka-keung said.

The Mandatory Provident Fund Schemes (Amendment) Bill 2015 passed its third reading at the Legislative Council by 45 votes to two yesterday.

The bill mandates that all trustees provide in their MPF schemes a default plan for employees who do not to make a choice of the complex investment funds.

There are currently about 20 percent of MPF scheme members who have not made a fund choice. But once the legislation is introduced, these employees will be automatically enroled in the default fund, which is subject to the fee control.

The amendment bill will cap the miscellaneous fees, which cover compensation fund levy, establishment cost of the scheme, indemnity insurance, auditor’s fees and legal charges, to 0.2 percent of the total assets.

Management fees, meanwhile, will be capped at an annual rate of 0.75 percent. Such payments include those asset based fees paid for the services, provided by the the trustee, investment manager and sponsor of the MPF scheme.

This means that altogether, the maximum charge for the new default plan each year will be 0.95 percent of the total investment.

Chan described passage of the bill as an “important reform”, but noted it will take time for the industry to make the necessary changes and implementation will be delayed by six months.

Labour Party lawmaker Lee Cheuk- yan said the delay is disappointing and cannot be justified.

“I don’t think it really takes a lot of effort for the trustees to comply with the law,” said Lee, who believes the government is afraid of putting pressure on the trustees.

He pointed out that the MPF management fee in Hong Kong is extremely high compared to that in other countries.

“In the last financial year we suffered a loss of HK$50 billion, and still, we had to pay a management fee of HK$10 billion,” Lee added.

“So whether they make a loss or profit, they still charge the same amount. This is really unfair to the MPF holders the workers in Hong Kong,” he said.

Hong Kong Investment Funds Association chief executive Sally Wong Chi-ming said while the 0.75 management fee cap may create pressure for some trustees, most companies regard the cap as viable.

MPF reform may prune risks but could also cut returns

Proposed changes in Hong Kong’s Mandatory Provident Fund would reduce risks and make investors more conservative by putting their money into bonds.

The government will submit on Wednesday the Mandatory Provident Fund Schemes (Amendment Bill) 2015 for debate and possible vote around the middle of next year.

If approved, the law change will require all MPF providers by the end of 2016 to have at least one core fund in their MPF scheme as the default investment option.

“The core fund push will surely encourage participants to be more conservative as they move towards retirement,” said Rex Auyeung Pak-kuen, Asia head of Principal Financial, a key MPF provider in the city.

“The concept of target date and target risk funds are becoming common overseas and one benefit of course is to assist people who may not have proper information to decide.”

The reform aims to bring fees down and provide a simple investment option for 600,000 employees who currently do not choose how to invest their HK$100 billion MPF contribution. The providers now put their contribution into different funds which may carry high fees and could be in risky investments.

The core funds will have a fee cap at 0.75 per cent compared with the market average at 1.64 per cent.

Besides the fee, the core funds will also mean MPF investment would carry a low risk and analyst believe this means they would invest in more bonds products in the future.

The new law would have restrictions on the investment mixture of the core funds which would reduce risk as employees get older. To achieve such a goal, fund managers are investing employees’ contributions into two constituent funds.

For those between 18 to 50, they would be invested in a core accumulation fund with 60 per cent of the funds in higher risk equities, and 40 per cent in lower risk products such as global bonds.

When the employees reach 50, a “de-risking” process will begin until 65 years old. During that period, fund managers would gradually shift the MPF contribution into the Age 65 Plus Fund which has 20 per cent in equities and 80 per cent in bonds.

When the employees reach 65 years old, all funds would be invested in bonds.

DAB lawmaker Chan Kam Lam said his party would support the changes.

“The core funds has the benefit to shift the risks level of the investment with the age of the employees. This will provide better protection for the employees when they retire,” Chan said.

According to the Mandatory Provident Fund Schemes Authority, some 42 per cent of the more than HK500 billion of MPF assets are invested in stock funds, 38 per cent in mixed asset funds which invest in stocks and bonds, 9 per cent in conservative funds, 8 per cent in guarantee funds and 2 per cent in bond funds and less than 0.5 per cent in money market funds.

This may affect the performance of the MPF. According to MPFA data, the annualised return of stock funds stood at an average of 11.9 per cent, against mixed asset funds at 2.4 per cent, guarantee funds earned 1.2 per cent, conservative funds only gained 0.1 per cent. Bond funds lost 2.6 per cent.

Stock funds also ranked top in terms of performance over the past 15 years since the scheme was introduced in December 2000, with an annualised return at 5.3 per cent. Mixed funds were next with 4.4 per cent, bond funds at 3 per cent, guarantee funds at 1.4 per cent and conservative funds at 0.8 per cent.

The MPF covers the 2.5 million employees in the city.

“A key objective of a well-designed default investment strategy under the core funds is to reduce outcome uncertainty. We believe that the default investment strategy as mapped out will provide an important mechanism to help achieve this objective,” Hong Kong Investment Funds Association chief executive Sally Wong said.

“By adopting a balanced mixed assets, globally diversified investment strategy, this has struck an appropriate balance in terms of the trade-off between higher potential retirement income and the associated risks. It is in line with international trends.”