Fees not the most important element to consider

By Chrysant Liu

When news emerged that the much talked about Employee Choice Arrangement (ECA) scheme would be postponed, it was greeted with surprise by virtually everyone in the industry. Apparently, officials tasked with the change had cold feet. The explanations given then were also seen to be feeble. The official reason cited for the postponement was that the regulatory regime for intermediaries needed strengthening. Officials also said administration platforms were not ready to cope in the new environment.

For many months leading to the prospect of the ECA being implemented (the original date of introduction was set for April 2011), MPF service providers were gearing themselves up for the change and were busy making plans in anticipation of the new business environment. After all, ECA’s introduction was seen to be the biggest game changer since the launch of the MPF scheme in 2000.

Various scenarios were painted; some leading providers were already counting on the scheme’s introduction to generate new growth for them while others were more concerned about protecting their market share.

Voices for the delay of ECA

“It’s probably disappointing for the providers who have invested in the development of their systems and who were getting market ready,” says Gary Tok, principal at Mercer Hong Kong.

 “Employers want a retirement framework that can be integrated with their total remuneration structure that allows them to attract and retain the best talent. Employees need a tax effective system that is transparent and clearly sets out what they need to save for a sustainable retirement,” agrees Alan Oates, Hong Kong business leader for Mercer’s retirement, risk and finance consulting practice.

Kerry Ching, managing director for Fidelity Hong Kong, said the deferral impacts MPF providers to varying degrees. Some providers may have hired additional staff in preparation for the ECA. “The deferral will likely put these providers under some stress,” she says.

With ECA in place, one estimate is that up to HK$90 billion could be mobilised, according to RCM Asia-Pacific. With such a large amount flowing into the market, the authority was apparently concerned and so saw the need to strengthen the supervision of intermediaries to better protect MPF contributors from mis-selling practices; moreover, there was also the need to clarify which regulatory body would be responsible for the oversight of the sector.

Patrice Conxicoeur, director and head of institutional business, Asia-Pacific, HSBC Global Asset Management, says there was a risk that employee choice could lead to a situation where intermediaries with short-term incentives would push investors to make short-term choices, which may not be suitable in the context of long-term investment. “I understand this is why the MPFA works to provide further clarification on what can be done or cannot be done,” he says.

Other MPF service providers see the delay in the introduction of ECA in a different light. One of them is Principal Trust Company (Asia) Ltd, which notes that the delay may give time to clarify the roles of different authorities including banking, investment and insurance regulators who are all involved in overseeing the MPF system.

Regulatory concerns

Currently, MPF intermediaries are, according to their industry sector, supervised by the Hong Kong Monetary Authority, the Insurance Authority and the Securities and Futures Commission. No single regulator is mandated to handle MPF trustee and intermediaries and that is where the danger lies. As a result of the financial crisis, distributors and regulators have become more focused on the quality of the information provided at the point of sale of financial products.

Given the compulsory nature of MPF, concerns are even greater with the impending advent of choice. About 70% of the sales intermediaries licensed to sell MPF services are insurance agents, while only around 3% of intermediaries can provide investment advice such as fund allocation. The MPFA is suggesting new measures to regulate intermediaries, such as requiring them to conduct risk assessments for the members.

“We agree that regulation about the disclosure of potential risks and returns is critical, as is the commission paid to, and advice given by, intermediaries. It is also important that the message is provided to employees in clear and simple terms. Transparency of fees is also critical as these products should be designed to preserve and grow retirement assets over the longer-term,” say Messrs. Tok and Oates.

Ms. Ching points out the deferral of ECA shows that the regulators are taking action to look into intermediary supervision and the necessary legislation to ensure members’ interests and investments are protected. MPFA and service providers will take advantage of this time to further strengthen education for MPF members to ensure they will have the knowledge and confidence they need to make the right judgments. “It is the industry’s vision to build and maintain a robust and orderly market in the MPF,” she notes.

Industry war led by ECA

On the other hand, from the MPF provider’s perspective, the concerns are that the implementation of the ECA will increase competition among them, leading to a reduction of fees.

Mr. Conxicoeur says compared to the Australian and Japanese markets, Hong Kong is much smaller in size. There are 19 providers in the MPF market, meaning that the industry is already crowded. “It would probably be the case that employee choice would reinforce competition, but competition is already fierce,” he adds. Principal noted that fees and charges are always controversial. The company says a price war is inevitable.

Ms. Ching believes that fee differentials among MPF products usually only hover around 0.2 to 0.5% p.a. According to surveys, a first quartile manager could outperform a median manager by as much as 2.5% p.a. for a growth fund. Hence, while fees are one of the factors that members should consider, they are not the most important element.

Messrs. Tok and Oates of Mercer point out that the impact of cutting fees will probably be small. “We have seen this in other markets, for example Australia. Choice creates competition but individuals need to feel empowered to take advantage of that choice. Many people do not make a choice even when presented with the opportunity. Reduction in fees is just one potential outcome of competition; another is the development of new services and the addition of more investment options.”

Fresh blood for the MPF market

MPF plans in Hong Kong are required to offer at least one conservative fund, which means it is invested in Hong Kong-dollar money market funds, high-quality debt securities or short-term bank deposits.

In terms of new products and strategies for the MPF market, Principal notes that apart from the assigned funds, including bond funds, equity funds and conservative funds; life cycle funds, sector funds and index tracking funds have been introduced in previous years. It is expected that more products that are easy to understand will be available to meet members’ expectations.

Ms. Ching says the regulator has been very cautious in approving new yuan-dominated products as they are concerned with the liquidity issues and overall product structure. “Unless the current MPF product guidelines are revised, it is not very likely that we will see many innovative new products in the MPF space anytime soon,” she adds.

Ms. Ching believes that it may worth investigating if it is possible to develop ways to shorten the length of time between transfers from one provider to another and to allow a more diversified range of products for members and to consider applications for riskier products.

Meanwhile, it is not clear when ECA will now be implemented and officials have been reluctant to set a new date.