Is your MPF safe in a debt crisis? How the trust system protects assets

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

Amid the eurozone debt crisis and volatile global markets, some members worried about their MPF assets. But Hong Kong’s MPF system had already weathered several major market crises since its launch, and the Mandatory Provident Fund Schemes Ordinance provided structured protection.

What is MPF and how does its trust system work?

MPF schemes are established as trusts, giving the assets independence: trustees must manage them according to the trust deed’s objectives, custodians hold the assets, and the MPFA conducts regular on-site inspections of trustees. In short, members’ ownership of their MPF assets is unaffected by a trustee’s own financial health.

What are the four layers of protection?

First, strict trustee vetting. Trustees had to clear a battery of MPFA approval and registration requirements — adequate capital, financial soundness, proper qualifications, internal controls and expertise — plus ongoing supervision through site visits and regular reports.

Second, investment risk controls. To keep risk in check, MPF funds could not invest in overly risky structured products, and bonds or shares of a single issuer could not exceed 10 per cent of a fund’s portfolio. Every fund needed MPFA approval before launch.

Third, indemnity insurance. Trustees were required to carry sufficient professional indemnity insurance to cover asset losses caused by their own or their service providers’ misconduct.

Fourth, a statutory compensation fund. The MPFA maintained a compensation fund under the ordinance to top up members when indemnity insurance fell short.

Written originally by an industry practitioner in 2012, the message still holds: the MPF trust structure exists precisely to separate members’ assets from trustees’ financial risk.