MPF’s biggest reform yet: employer duties unchanged, sales kickbacks illegal

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

The Employee Choice Arrangement (ECA) took effect November 1 — the first major reform to Hong Kong’s MPF system, a defined-contribution regime covering 2.6 million people with HK$384 billion in assets. Anna Wu Hung-yuk, chairman of the MPFA, told a seminar: “We will consider full portability down the track.” But ECA was an evolutionary step, not a radical one.

How did employer and employee roles differ?

Employer duties unchanged: still selecting the MPF provider and schemes, ensuring employees were enrolled, and filing monthly contributions. Over time, though, employers might need to review providers more thoroughly and take MPF duties more seriously.

Employees gained limited freedom: strictly speaking, ECA wasn’t workers’ first taste of choice — preserved accounts (which the MPFA wanted to call “personal accounts”) could already sit with a chosen provider, and voluntary contributions were always allowed. ECA added the right to transfer accrued assets to a chosen provider; but workers could not direct future contributions elsewhere — those still went to the company-selected scheme.

That limited freedom was meant to make Hongkongers more proactive about retirement money, and to introduce competition that would lower asset managers’ fees.

Why did ECA almost never happen?

It was slated for 2010, but Legco feared choice could produce debacles like the 2008 structured-products losses; other countries’ DC-choice experiments offered cautionary tales — Chile’s 1990s transition saw rampant mis-selling that undermined confidence in the pension system.

To guard against mis-selling, legislation targeted intermediaries: it became illegal for bank tellers or insurance agents to promise rebates, kickbacks, supermarket coupons or free toasters in exchange for MPF business. The law was also careful not to discourage voluntary contributions.

Could admin costs rise instead?

Full choice was deemed too difficult: employers — especially small ones — would at a stroke have to connect with 21 trustees running 42 schemes. Even semi-free choice would increase administration; and since fees were as much administrative as investment-related, ECA might raise costs rather than reduce them — as some HR executives in the audience said.