There is room to reduce the current management fees of Hong Kong’s Mandatory Provident Fund (MPF) system by improving the efficiency of the operations of MPF providers, according to a study conducted by Ernst & Young.
The average management fee of MPF portfolios is 1.74 per cent of assets, according to the Ernst & Young study, which was commissioned by the Hong Kong Federation of Insurers (HKFI), the Hong Kong Investment Funds Association (HKIFA) and the Hong Kong Trustees’ Association.
Administration costs and direct expenses make up the largest part of the average fee, taking up 1.17 per cent, with fund management fees taking the remaining 0.57 per cent, according to the study.
The average management fee of 1.74 per cent for 525 MPF portfolios is higher than the fees charged in Australia, Chile, Singapore and the UK, which have much larger pension assets than Hong Kong.
Alex Chu, the HKFI’s immediate past chairman, says: “There is much room for the fee to come down, and it is an inevitable trend.” Competition among MPF providers is causing the fees to come down, he adds.
Providers that have cut fees in the past year include BCT Financial, Fidelity Worldwide Investment, AIA Company (Trustee), HSBC and Axa.
If the fee structure of the MPF remains unchanged, the total management fee of the MPF could be reduced to 1.18 per cent of the assets in 2030 by gaining efficiency, according to HKIFA chairman Kerry Ching.
Over the past 11 years, the MPF regime has grown to more than 2.5m members, with assets of more than HK$365bn ($47bn). The MPF has achieved full compliance, with 99 per cent of employees participating, according to the study.
The size of the MPF system is expected to reach HK$1tn in 2022, with an annual growth rate of 5 per cent, according to Mr Ching.
In the past, Towers Watson gave the MPF system high marks for investment performance and fund options, but the consultancy says administrative fees remain too high while existing investor education efforts fall short.
Philip Tso, Towers Watson’s head of investment for Hong Kong, last year called on MPF providers to replace their asset-based percentage fees with flat rates, reiterating a stance the consultancy has held for several years.
Although the average management fee of MPF portfolios is higher than its counterparts in other countries, MPF providers still believe the fees are in line with other jurisdictions at a similar stage of development.
The average fund management fee of 0.57 per cent of assets is relatively low given the overweighting of high risk assets in the MPF system, according to Josef Pilger, executive director at Ernst & Young.
Fewer than 20 per cent of members in Hong Kong choose the default investment funds that invest in low-risk category funds, Mr Pilger says, adding that the MPF system has a strong bias toward investments in Hong Kong equities.
The average administration fee of 1.17 per cent of assets is also in line with expectations, says Mr Pilger.
The fee, which includes trustee services, sponsor services, custody and other transactions, is not driven by the size of the MPF, but by the number of members contributing to the system, he says.
In US dollar terms, the administrative cost per member of the MPF is comparable to Australia, though representing a higher percentage of assets under management, he says.
The administrative cost of each MPF member is HK$1.577, slightly lower than HK$1.760 in Australia, according to the study.
MPF participants believe member education is a key challenge to reducing the management fees of MPF portfolios.
Hong Kong has already started to build electronic platforms for MPF members to improve the automation process, according to HKFI’s Mr Chu. However, 90 per cent of Hong Kong’s employers are small- and medium-sized enterprises (SMEs) accustomed to using paper transactions, which have higher costs.
“We need to educate them step by step,” Mr Chu says, adding that administration costs for SMEs are much higher than for large employers.
Standards must be set to ensure improvements in MPF efficiency, says Mr Pilger.
HKFI’s Mr Chu says MPF efficiency improvements also require regulatory change and wider industry co-operation.