MPF guaranteed funds are not risk-free: three guarantee conditions to read closely

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

MPF funds came in five categories, with guaranteed funds the lower-risk option for the cautious, the risk-averse or the near-retired. But guaranteed did not mean risk-free — most guarantees came with strings attached.

What conditions do MPF guaranteed funds carry?

Guaranteed funds typically invested in bonds, equities or short-term interest-bearing money market instruments, offering capital or rate-of-return guarantees — but most on the market were conditional:

What other risks lurk?

First, trustees could unilaterally adjust the guaranteed rate. With prior notice, they could lower future guaranteed returns or even cancel guarantees in response to market conditions; members who breached the terms and lost the guarantee bore the full market risk of the underlying assets.

Second, credit risk. Where a guaranteed fund’s assets were invested in insurance policies, members faced the insurer’s credit risk — the guarantor might fail to honour its promise.

Third, higher fees. Guaranteed funds typically charged guarantee or reserve fees, making them pricier than other fund types.

Before choosing, members needed to read the scheme’s offering documents for the guarantee mechanics and terms. The bottom line: all investing involves risk, MPF included — balance objectives against tolerance, keep risk within bearable limits, and don’t over-worry.