The pros and cons of MPF semi-free choice: a HK$384 billion pie, and timing is everything

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

(Note: the original was an English opinion piece by a university finance professor; all figures are from the 2012 original.)

When MPF launched in December 2000, employers chose the trustees and schemes — to cut administration costs: a few hundred thousand employers versus over 2.5 million employees. The system’s assets were also too small then for millions of individual accounts to each pick a trustee.

Why was 2012 the moment for reform?

After 11 years of growth, total MPF net assets reached HK$384 billion by end-June 2012. At a 1% annual management fee, the 19 trustees shared potential revenue of HK$3.84 billion — about HK$202 million each, before other charges. With the pie that big, it was time to lower transaction costs and fees and give employees more choice.

What could move under semi-free choice — and what were the limits?

For monthly salaries of HK$6,500 or above, employee and employer each contributed 5% (on salaries up to HK$25,000). Each employee’s MPF account split into three sub-accounts:

The author argued the once-a-year lump-sum limit wasn’t optimal for employees; the ideal would be monthly transfers to a chosen trustee. But management difficulty and complexity produced the compromise format.

Why was switching timing so critical?

Monthly MPF contributions are inherently dollar-cost averaging: the same amount each period, using time to diversify risk. But with only one transfer allowed per year under the arrangement, timing became critical — the process took six to eight weeks, a long window, and switching in volatile markets could easily prove ill-timed. Employees needed to exercise the right with particular care.