The MPF “separation of powers”: what trustees, investment managers and custodians do

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

Hong Kong’s MPF system was built to provide retirement protection, so it layers in safeguards for members’ interests. This instalment explains the “separation of powers”: how trustees, investment managers and custodians act like a firewall, keeping investment and safekeeping independent of administration.

What is the MPF separation of powers?

It means the trustee, the investment manager and the custodian each perform distinct functions under the Mandatory Provident Fund Schemes Ordinance and operate independently: the trustee handles administration and selects the other two, the investment manager handles investing, and the custodian looks after the assets — checks and balances that protect members’ interests. Although the trustee selects the other two parties, the ordinance sets out specific selection requirements that must be followed.

What does an investment manager do, and who regulates them?

Investment managers handle the investment of members’ contributions, offering fund choices that comply with the ordinance and trading across markets to make appropriate investment decisions; in Hong Kong they must be licensed and regulated by the SFC, and they must observe investment limits — for example, a single stock may not exceed 10 per cent of a constituent fund’s total assets in an equity fund. Trustees may also offer funds run by different investment managers to widen members’ choice.

What is the custodian’s role?

The custodian is solely responsible for safekeeping the scheme’s assets and must by law be a recognised financial institution in Hong Kong meeting capital and net-asset requirements; if negligence causes losses to the scheme, it is liable for compensation, and it must undergo an annual independent audit and report to the trustee. Who watches the money and who invests it are two different parties — that is the firewall in action.