MPF fund fees comparison: suspending the 0.03% levy after a six-year row

Since 2005, trustees and the government had argued for six years over whether to keep “pumping” the overflowing MPF compensation fund — until October 2011 brought a breakthrough. Secretary for Financial Services and the Treasury Chan Ka-keung told the Legislative Council the government planned to suspend the 0.03% levy; but because legislation had to change, the waiver could take effect no earlier than mid-2012.

What is the MPF compensation fund levy?

The MPF compensation fund levy is charged on MPF schemes to maintain the compensation fund; in October 2011 the rate was 0.03%, and because the fund had accumulated far more than needed — “flooding”, in industry parlance — trustees and the government had disputed continued collection since 2005. The MPFA board had recently met and reached a preliminary consensus to recommend suspending the 0.03% levy, so that fund charges could fall by about two percentage points.

How much would the fund expense ratio fall?

After the 0.03% levy is suspended, each of Hong Kong’s two-million-plus workers — with average cumulative contributions of HK$151,308 (the October 2011 basis for the estimate) — would save over HK$45; the MPFA expected fund charges to fall by about two percentage points. The HK$45 works out as:

What mechanism replaces the levy?

A Financial Services and the Treasury Bureau spokesman added that the MPFA, referencing risk levels and overseas experience, recommended an automatic adjustment mechanism: the levy pauses when the fund is flush and resumes automatically when it runs low — turning the “to pump or not to pump” row into a rule. The government would consult LegCo’s Financial Affairs Panel in November 2011 and, depending on its views, table subsidiary-legislation amendments in the second quarter of 2012. Chan also confirmed that “semi-portability” — employees’ right to choose their trustee at least once a year — could launch in the second half of 2012. For how fees eat into long-term returns, see the MPF education hub.