Citibank Urges MPF to Buy ETFs: Low Fees, Full Transparency, One Cost-Cutting Move

This article is a rewrite of a report from November 2012.

In November 2012, MPF’s “low returns, high fees” problem drew fire — and every MPF fund fees comparison pointed the same way. Citibank Asia-Pacific transaction services senior adviser Ho Kwok-fu proposed one fix: let MPF invest more strategically in exchange-traded funds (ETFs) — low fees, transparent operations, an effective way to cut costs for workers’ benefit.

Why can ETFs save MPF money?

Buying ready-made ETFs saves the extra cost of launching new funds. Ho noted ETFs’ low fees, transparent operations and diversification benefits, widely used in US and European retirement-asset management — American pension funds love ETFs, an experience worth Hong Kong’s reference. Global ETF assets then totalled US$1.5 trillion, Asia US$110 billion and growing.

Are ETFs the cure for high MPF management fees?

One of the cures — but regulation then tied managers’ hands. Under the rules of the time, MPF fund managers could hardly buy ETFs directly, only indirectly via underlying funds beneath constituent funds; the MPFA imposed many restrictions. Raising MPF returns necessarily meant cutting fees, and buying ETFs was a good option — but the rules needed loosening first.

What other fee-cutting pressure existed then?

A three-way squeeze. One, post-“semi-portability” trustees cutting prices to win and keep clients; two, the Financial Secretary for Financial Services’ warning that fee caps would be set if needed; three, the MPFA’s plan to advocate caps and force trustees to offer low-fee funds. The ETF proposal arrived amid this grand chorus for lower fees.