Tag Archives: MPFA

Editorial MPF System in Urgent Need of Reform

THE MANDATORY PROVIDENT FUND SCHEMES AUTHORITY (MPFA) has come up with four reform proposals well worth the government’s serious consideration – proposals aimed at bringing down MPF fees.

Since their introduction, MPF schemes have on average yielded an annual net return of no more than 3.4 percent, while the average fees charged last year amounted to as much as 1.74 percent. As MPF assets have grown to a total of about $400 billion, this means that the fund industry is pocketing about $7 billion of employees’ hard-earned money every year.

According to an MPFA-commissioned consultancy study on MPF fees, the administration of an MPF scheme may involve as many as six different fee-charging service providers, including, in addition to a trustee and an investment manager, an MPF product sponsor, MPF intermediaries, an administrator, and a custodian. Is it really necessary to involve so many service providers? This is a question the authorities should look into.

And as regards MPF fees, 0.75 percent of the assets under management go to administrative costs. As MPF assets currently stand at about $400 billion, this means about $3 billion. But it appears that the different items of “administrative work” enumerated can well be streamlined and simplified to cut costs.

Now the MPFA has laid before the government four reform proposals, namely (1) capping the fees of MPF funds; (2) mandating various types of low-fee funds in each MPF scheme; (3) providing a type of basic, low-fee, default fund arrangement; and (4) introducing a non-profit operator to run a simple and low-fee MPF scheme. These proposals are all designed to bring down MPF fees, for experience shows that market forces alone cannot be depended on to result in fair charges.

The MPF system aims at providing old-age protection for retired employees, and contribution to MPF schemes is mandated by the government. But now MPF schemes have become a goose that keeps laying golden eggs for fund managers, trustees, and four other service providers whose specific responsibilities we know nothing about. This state of affairs is not right or ethical. The government has therefore the duty to reform the MPF system.

The MPFA’s four reform proposals appear to be a step in the right direction, but they are still not forward-looking enough. There is, for instance, no reform timetable. The government must show the political determination to carry out comprehensive reforms for the development of the MPF system along fair and reasonable lines.

The MPFA’s call for a non-profit operator to run a simple and low-fee MPF scheme certainly warrants further consideration. In any case, there should be no contradiction between such a non-profit operator and a public trustee (the Hong Kong Monetary Authority, for example) that also runs low-fee MPF schemes. The two could co-exist and work side by side, which we believe would be more effective in driving down MPF fees.

While the general reform programme for the MPF system is still in need of study, the MPFA is trying to get one million employees with more than one MPF account to consolidate their accounts. This is what the MPFA should do, since too many accounts will greatly increase administrative costs and defeat the purpose of the MPF system.

明報社評 2012.11.27﹕政府要拿出決心 全面改革強積金

積金局提出4項改革方向,目的為降低強積金收費,政府應該積極研究有關建議。

強積金成立以來,每年淨回報平均只有3.4%,平均收費去年高達1.74%,以強積金已經累積至約4000億元的規模,打工仔的血汗錢每年被蠶食約70億元。

積金局委託顧問公司就強積金收費所作的研究報告,發現每一個強積金計劃,最多有6個「人」參與工作,都收取費用,除了受託人及基金經理外,原來還包括保薦人、中介人、管理人和保管人,這麼多「人」參與,是否需要,當局應該研究。

另外,強積金收費中,行政成本佔了0.75個百分點,以4000億元規模計算,涉及約30億元。不過,從羅列出來的「工作」而言,應該有整合空間,可減少行政成本開支。

積 金局向政府提出4方面改革,分別是(1)為強積金收費設定上限;(2)規定所有強積金計劃提供不同種類的低收費基金;(3)設立一種簡單、低收費、穩健的 「基本基金」;(4)引入非牟利經營者,提供簡單、低收費的強積金計劃。這些改革,都是從降低收費?眼,證諸過去,單靠市場力量,不可能設定公平合理的收 費水平。

強積金制度旨在為就業人士提供退休保障,政府強制打工仔供款,卻成為會生金蛋的鵝,為委託人、基金經理和其他不知道有什麼具體工作的4方面「人」士,源源進貢,事態已經涉及不公義,政府有責任推動改革。

積金局的4方面改革方向,初步看來方向正確,但是仍然不夠積極,例如沒有提出時間表。政府要拿出政治決心,全面改革,使強積金制度在合理公平情?下持續發展。

積金局建議引入非牟利經營者,提供簡單、低收費的強積金計劃。這個構思可以深化研究,不過,非牟利機構參與強積金,與公共受託人(例如金管局)介入,推出穩健、低收費的強積金計劃,可以並存,雙管齊下,對其他強積金計劃降低收費,會起到更大帶動作用。

至於改革大方向仍待研議之際,積金局推動超過100萬名持有多過一個帳戶的打工仔整合帳戶,也是應有之義,因為戶口眾多,會使行政成本大增,損害制度的原旨。

Thoughts on Hong Kong’s MPF rule‘shake-up’

MPF scheme member employees in Hong Kong now have a say over which investments their savings are held in. Glenn Turner, chairman of HK’s IFA Association, looks at the changes, and how they are expected to affect employees, employers and those involved in marketing MPF investments.

From the first of this month, two fundamental aspects of Hong Kong’s Mandatory Provident Fund (MPF) regime changed.

The first is that employees now have more control over the choice of investments in their savings schemes. The second involves the introduction of “best practice” standards at the point-of-sale for the sales people (“SI”) who market MPF products and the (MPF licensed) companies (“PI”) under which the sales people themselves are licensed.

With respect to the employee control enhancement, the employee now has control over his or her half of the contributions, and may now place their MPF investment with any one of the 19 existing MPF schemes.

Importantly, though, the employer still retains control – via a trustee arrangement for the employee – over the employer’s half of the contributions, in terms of which MPF scheme product provider looks after this share of the total savings pot.

Increased sales governance

At the same time, there has been a significant upgrade in the requirements of the sales person (the “SI”, or “subsidiary intermediary”) and his/her employer (the “PI”, or “principal intermediary”) that covers the way such individuals are to conduct themselves when “inviting, inducing or giving regulatory advice” in connection with MPF investments.

Significant numbers of the new practices at the point of sale mirror those required by the Securities & Futures Commission (SFC), with some elements even more demanding than those required by the SFC. For example, a “reason why” must be documented for the MPF activity, whereas the SFC does not require this specifically from retail financial advisors.

Penalties for breeches of the new rules are also steep: penalties of up to seven years in prison and a HK$5m (US$645,000) for PIs who do not measure up, and HK$1m fine and two years in prison for SIs who fall short.

This means those sales people who hold an insurance license alone should probably make more of an effort to ensure they are getting things right than those who hold an SFC license, because, being in the insurance industry, they will be less in tune with this up-graded MPFA “best practice” regime.

One strength of these regulations is that the Monetary Provident Fund Schemes Authority appears to have gone out of its way to be descriptive in its regulations rather than prescriptive, which is a common complaint with SFC regulations.

There are, though, some areas left undone by the MPFA in setting up the ECA. Many argue, for example, that the average fund expense ratios, currently running in some instances up to 4.62%, are unacceptably high.

The regulators – notably the MPFA, SFC and Office of the Commissioner of Insurance – also have yet to fully align the way they handle similar types of products and services sold under their respective regulatory oversight.

(One glaring example is when giving advice on the (mutual) funds under MPF (and under insurance ILAS products), no investment advice type license is required, yet under the SFC, when selling (pure) retail mutual funds, a license is required.)

It has also been pointed out that although the regulations address the point-of-sale process, for now they do not mention how investors are to be looked at after the sale has been made. Such clients need to be serviced until they are 65, and begin to receive their benefits.

Finally, of course, there is the argument that employees, not their employers, should be able to choose the MPF provider for all of their savings, not just the half they contribute to themselves.

Nevertheless, most observers – including my organisation, the Independent Financial Advisors Association – believe that the changes which took effect at the beginning of November are welcome, and move the MPF in the right direction. 

MPF’s next step, part 2

Employee Choice Arrangement (ECA) is more than a technical change to Hong Kong’s Mandatory Provident Fund system. It is an opportunity to turn MPF into a vibrant, meaningful industry, akin to the superannuation funds business in Australia.

To make that happen, however, requires a turnaround in MPF’s reputation. That begins with ensuring choices are made wisely.

Philip Tso, director of investment for Hong Kong at Towers Watson, says MPF needs to be promoted in a more positive light. Thanks to rising longevity, Hong Kongers will on average face 20-30 years of retirement life. Today there is no adequate means of ensuring they can pay for it, other than making people work well into their 70s.

Tso says there is evidence that some people are starting to realise this. He notes that over the past 12 months people made HK$1.5 billion of voluntary contributions to MPF accounts, an increase from the previous 12 months.

He suggests ECA will raise awareness of MPF and its pros and cons. It will make members more sensitive to fees, especially as they start to compare providers – which could prove a rude awakening to HR departments, if the company’s own trustee turns out to be not so attractive.

Tso suggests administration fees could be changed from a percentage of assets to a flat fee per member, as the MPF business gains scale.

Perhaps the biggest challenge will be how individuals select trustees and funds. There is a risk that people will want to use MPF to chase hot themes or to time markets – a game that MPF is not suited for, even with ECA. The legislative efforts to prevent mis-selling will go some way.

However, people still need to understand something about investing, retirement safety, asset allocation, and the terrible losses to inflation that already occur in low-risk/low-return MPF funds.

More sales activity around ECA is one opportunity to have more discussions among employees and providers, but it can only do so much. There are going to be a lot of people who are not well equipped for this discussion.

For example, Jardine Matheson’s vast workforce of 60,000 includes many people in businesses such as construction and catering. These workers are financially illiterate (and maybe unable to read), and often work shifts that make it hard to organise sessions with service providers or HR teams, says Nancy Chan, general manager of group HR services.

She says education material must accommodate such people, “especially when fund performance hasn’t been so good”.

Tso adds that service offerings by providers need to be flexible, because not everyone has access to the internet; the level of tech savviness will vary between, say, bank employees and bus drivers.

Jardine Matheson is developing a pilot programme to provide financial planning to its employees, including MPF and defined-benefit members.

Ken Lau, head of institutional business at BestServe, an MPF administrator, says there are ways to judge service. On the surface, every provider says their service is top-notch, and they all offer websites, call centres and written material.

“But do they have SMS alerts?” asks Lau. “How easy is it to navigate their website? What information do they offer about fund performance over different periods of time? Do they provide any suggestions about rebalancing?”

Tso says track record alone or fees alone are not good indicators. Instead, choice should be about a package of performance, fees, reputation and service. The desire for many people to have a guaranteed fund should be countered by offering more target-date funds or passive funds.

MPFA’s Darren McShane says the best way to think about performance is not to look at returns, as most people do, because such data says nothing about future performance and few funds are always successful. Rather members or employers should compare fees and risk indicators, to get a sense of long-term prospects.

“MPF is more than just a compliance obligation to companies,” says KT Lai, formerly group HR head at CLP Holdings. “It’s complicated. We need to understand all aspects of scheme, including risk and return, not just fees.”

Our final article in this series will address the bigger question of whether choice arrangements can help MPF become more than just a compliance obligation, but also a vibrant industry and a meaningful part of Hong Kong society.

MPFA: Providers should offer more index funds

Index fund usage for MPFs is still low despite the authority’s efforts to encourage providers to increase the number of products, according to Darren McShane, MPFA executive director.

McShane said the index funds usage for MPFs was 8.9% as at March 2011. He said those index funds were only accounted for HK$33.5bn out of total MPF assets of HK$378.3bn.
Under the list of approved Index-tracking Collective Investment Schemes (ITCIS), there are currently 105 index funds available for use by MPF funds.

However, McShane, who was speaking at the ETF & Indexing Investment Summit Asia 2011 in Hong Kong, remains positive that index funds have fee advantages over active-managed funds, which he think can help to reduce MPF management fees. He would like to see MPF providers increase the usage of index funds as investment tools to diversify risks and enhance transparency.

Currently, the MPFA does not allowing any synthetic-based ETFs to be used in MPF funds. He noted the regulator is still facing challenges in accommodating the emergence of complex index funds while respecting the MPF system rule which is ‘keep it plain and simple’.

Govt proposes to give MPFA more disciplinary power by 2012

The government plans to give the MPFA more disciplinary power such as sanctions, inspections and investigations to ensure compliance by MPF intermediaries.

It follows the government’s recent consultation which found the majority of those who responded support the introduction of a statutory regime to regulate the sale and marketing of MPF products before the implementation of the Employee Choice Arrangement (ECA).

The consultation, which started on 28 March 28, received 13 written submissions.

A spokesman for the Financial Services and the Treasury Bureau (FSTB) said: "We propose to vest in the MPFA all disciplinary powers (including reprimand, fines, suspension and revocation of registration) whilst front-line regulators (FRs) would participate actively in the disciplinary process to ensure regulatory consistency."

The proposals also include the introduction of sanctions against the sales and marketing of MPF products by unregistered MPF intermediaries, and empowering regulators to conduct inspection and investigation and take disciplinary action to ensure compliance by intermediaries.

Currently, there are about 29,000 MPF intermediaries registered with the MPFA to carrying out sales and marketing activities.

The FSTB spokesman added: "At present, the MPFA regulates MPF intermediaries through an administrative regulatory regime. The legislative proposals are modelled on the existing administrative arrangements with appropriate improvements."

The FSTB and the MPFA are proceeding with the drafting of the legislation and the Government will table the bill at the Legislative Council in Q4 2011 while eyeing the arrangements to be implemented in H2 2012.

Experts raise concerns about MPF early withdrawal

Experts have raised some concerns in regards to the new MPF early withdrawal proposal.

The potential changes will be submitted to the MPFA board in September this year and the suggestion will be open for public consultation later this year before proposing to the government.

Anna Wu, MPFA chairman, said the authority is considering an early withdrawal option for MPF members who have seriously illness while also facing financial difficulties before reaching their retirement age at 65.

She added the idea for the early withdrawal option is to show sympathy for MPF members who are in need for money. The authority is also willing to consider other compassionate grounds such as paying the initial payment for buying property and paying university school fees for members’ children.

The chairman added they will consider a ceiling for the amount for those ‘qualified members’ who can take money from their MPF accounts and how many times they can make a withdrawal. Wu said the proposal will be submitted to the MPFA board in September this year. They will be open for public consultation later this year before being considered by the government.

Her personal view on the ceiling is that it should not exceeding 50% of a member’s total accrued benefits in MPF accounts.

Gloria Siu, director and general manager at Gain Miles, agreed with the ‘sympathy mechanism’ that MPF members who have seriously illness could withdraw some money for treatment. However, she has concerns early withdrawal may also affect members’ retirement life in the future and said the authority may face dozens of difficulties and discussions before the actual implementation.

Kenrick Chung, director, MPF Business Development at Convoy Financial Services, said the proposal for early withdrawal may violate the initial objectives of setting up the city’s retirement system. He noted the government should take a cautious consideration for those criteria who can take money in advance from MPF.

Meanwhile, Ka Shi Lau, managing director & CEO at Bank Consortium Trust Company, said early withdrawal may not bring a significant impact on the company’s operating costs but she sees MPF members may need to risk their retirement savings may be less than expected as more options may be available in the future for early withdrawal.

She noted that the actual contribution level from members and employers are still relatively low in Hong Kong compared to some other Asian countries and would like to see further upside for that as to secure members’ retirement life.

MPF system to be reviewed

The Mandatory Provident Fund Schemes Authority will commission an independent consultancy study to simplify administrative processes to reduce fees.
Authority chairman Anna Wu said today the level of fees of fund schemes has always been a matter of public concern and there is room for further reductions, especially since the value of assets in the fund system has more than doubled over the past five years to $390 billion.
She said she hoped the study will assist the authority in understanding more about trustees’ operating costs and in proposing measures to reduce the costs to give more room for further reductions.
The authority will place newspaper advertisements tomorrow inviting expressions of interest for an open-tendering exercise for the consultancy study. The report is expected to be completed by mid-2012.
According to the authority’s assessment, the costs of scheme administration functions constitute the largest part of the fees for fund schemes.

Road to universal retirement protection

The Mandatory Provident Fund (MPF), as a form of retirement protection, was launched in December 2000. It is an employment-based, privately run plan under supervision of the Mandatory Provident Fund Schemes Authority (MPFA).

Since its inception, the MPF management fee has been criticized as very high while the returns are insufficient for providing a satisfactory retirement income.

The recent budget furor magnified the shortcomings of the MPF and sparked renewed calls for universal retirement protection that covers the entire population, not just the working population. The public outcry resulted in the cancellation of the government’s plan to inject HK$6,000 into every individual MPF account. Financial Secretary John Tsang opted instead for an HK$6,000 cash handout to eligible citizens.

Speaking to China Daily in an exclusive interview, MPFA Chairperson Anna Wu said the MPF was a result of extensive debates in the community over a few decades. It reflects a consensus showing a preference over a central provident fund or a universal retirement protection plan.

She noted Chief Executive Donald Tsang’s recent comment that it is difficult to run a universal retirement protection scheme without broad consensus in society. The MPFA has in the meantime introduced measures to enhance employee protection. Yet since there are strong voices calling for universal retirement protection, the government needs to respond.

"This is an unavoidable issue. The incumbent chief executive and the next chief executive must consider it thoroughly," she said. "It looks like the chief executive will do something but meanwhile we are striving to improve the scheme."

Wu recalled there were vigorous debates about universal retirement protection prior to 1997. Some held that citizens born, raised and resident in Hong Kong, should be entitled to retirement protection.

There were however worries that universal retirement protection funded by taxation would create a heavy financial burden. "Many people worried about ‘cross subsidization’, meaning the younger generations eventually would be called upon to subsidize the older generation," she said. "This particularly would be a heavy burden on young couples who would become the ‘sandwich’ class to raise their children and support the elderly at the same time."

In the end, the pre-1997 Legislative Council adopted a mandatory provident fund with accrued benefits for employees.

"The MPF is a semi-government and semi-private sector scheme based on a retirement protection model provided by the World Bank," she explained. "It provides partial but not full protection, as people should have personal savings while the government provides welfare such as public housing and health services."

Wu is aware of the criticism that management fees are too high, while money accruing in individual accounts is not enough to provide for retired life.

She quoted examples in foreign countries that retirement protection schemes take 30-40 years to mature. "In Hong Kong, the MPF scheme is only 10 years old. Due to the short time, the accrued amount is small," she said. "Also, the fees are expensive because the plan is run by commercial organizations."

The MPFA has asked those organizations to lower the management fees. "When the MPF was launched 10 years ago, the companies put in huge capital investment for training and computer systems," she said. "Now there is room for fee reductions since they have fully recovered their investment. We also ask them to simplify work procedures to minimize cost."

At present, employers and employees each contribute 5 percent of staff salaries to the fund, with the intermediary agencies chosen by the employers. To give employees more choices, employees will be allowed to choose intermediaries to supervise their part of contributions in a plan popularly known as the "semi-free travel plan".

She said: "Choices by employees will generate competition among the intermediaries to lower the management fees. In the longer term, we will consider a ‘total free travel plan’ to allow employees to choose intermediaries for all contributions".

The proposal has been submitted to the relevant panel of the Legislative Council (LegCo). The government plans to introduce a bill to LegCo, in the hope that it will be passed within the 2011-12 legislative session.

The MPFA also proposes to raise the lower salary limit from HK$5,000 to HK$6,500 and the upper limit from HK$20,000 to HK$25,000. The LegCo passed the lower limit on June 29, leaving the upper limit to be decided later.

Since the minimum wage, with its hourly rate of HK$28 has come into effect, people earning HK$5,824 per month have become subject to MPF contributions. "Knowing this will reduce their take-home pay, we find it necessary to revise the lower limit," she said.

Wu is optimistic the LegCo will pass the resolutions. "Those who veto the new lower limit will incur serious political consequences," she said. The MPFA at first proposed to raise the upper limit to HK$30,000, she revealed. Though the business sector is not pleased, she believes the community is capable of bearing with the new arrangement.

The MPFA has heard calls from employees to permit withdrawal of money in individual accounts before 65. The age restriction as it stands, is stipulated by law, she said, but the MPFA is considering a mechanism for partial release in special circumstances.

For instance, some citizens may urgently need money when they are out of work, or have to pay housing mortgages, unexpected medical costs or university education for their children. "We are doing a study on whether payment may be released to employees before 65 on compassionate grounds and if yes, how much shall be released," Wu said.

"We do not agree to withdrawal in full because this defeats the purpose of retirement protection. We also oppose withdrawal by account holders who become unemployed, because those people should seek social security in such circumstances."

MPFA ‘has nothing to do’ with HK$6,000 payout fiasco

Anna Wu believes that, as a member of the Executive Council or a member of the chief executive’s cabinet, she is obliged to abide by "collective responsibility" and "confidentiality" rules. She also reckons that, as part of the political team, Executive Council members have a duty to promote and, at times, defend government policies. One example is members’ participation in the political reform "Act Now" campaign last summer.

She is unwilling to comment on Financial Secretary John Tsang’s sensational U-turn which scrapped the HK$6,000 injection into Mandatory Provident Fund (MPF) accounts and opting instead to distribute the money in cash to eligible citizens. Wu did stress that the MPFA had no direct relation to the chaos.

She also declined to say whether the Financial Secretary had discussed with her, his proposal to inject the funds into the MPF or his subsequent withdrawal of the proposal.

She said she fully understands the fury and frustration of those who opposed the HK$6,000 injection, preferring instead to receive an immediate handout in cold cash.

Through her two years as a cabinet member, Wu said she understands that Hong Kong politics is so torn apart that the administration has no steady support in the Legislative Council, yet political parties who hold the votes cannot be the ruling party.

"This will prompt them to act like the ‘opposition party’ and this is a big headache," she observed. "We shall discuss the viability of a coalition. Otherwise, the government and the legislature will go separate ways. This is very difficult for the government, because it has to beg for votes and bargain with political parties every time it launches new policies."

Wu recalled that in the 2008-09 Budget, Tsang announced an injection of HK$6,000 into the accounts of MPF holders earning less than HK$10,000 a month to help the low income group. This year, the injection was extended to all the HK$2.5 million MPF account holders including the big earners.

The injection, like the electricity allowance, was well-received then and was considered an innovative idea, she said.

But this year’s proposed injection fuelled a strong backlash of public opinions.

"Many people who do not have MPF accounts, such as housewives, were unhappy because the injection would only benefit working people," she commented.

"The law stipulates that MPF account holders can only withdraw money at 65. But since inflation is riding high and has caused food prices to soar, people are dissatisfied and they want instant money to solve their immediate needs."

"It is necessary to understand why the people were furious," she said. "If we look back, it was the unbalanced distribution that sparked people’s fury. It had no direct relation with the MPF, which is only a means of money distribution to the people, but people blamed us at the same time as blaming the government."

MPFA to review withdrawal options this year

The Mandatory Provident Fund Schemes Authority (MPFA) has started to review the modes of MPF withdrawal and plans to submit its preliminary recommendations to the government within this year.

The MPFA is to study different withdrawal options, including the present lump-sum payments arrangement, programmed or phased withdrawals, and annuities.

Chan Ka Keung, Secretary for Financial Services & the Treasury, said: "We keep an open mind on the modes of withdrawal of mandatory provident fund benefits. The primary consideration is it can meet the needs of scheme members to achieve better retirement protection."

"We will liaise closely with the authority on the review and take appropriate follow-up actions regarding the review results, including consultation with the Legislative Council Panel on Financial Affairs and listening to public views," he added.

In addition, the current rules do not allow MPF scheme members to withdraw their accrued benefits until they reach the age of 65. The authority only allows scheme members to withdraw MPF in advance unless they are proved death, total incapacity, permanent departure from Hong Kong, or retire earlier at the age of 60. Early withdrawal is also allowed for small account balance which the total accrued benefits are not exceeding $5,000.

積金局檢討強積金提取方式

財經事務及庫務局局長陳家強表示,強制性公積金計劃管理局已成立工作小組,檢討提取強積金累算權益的方式,今年內向政府提交初步建議。

陳家強今天(7月13日)回覆立法會議員李卓人的提問時表示,積金局在檢討中會考慮強積金制度過去10年的運作經驗及所收集的意見,並參考海外不同地區的提取方式和經驗,研究不同的提取方式,包括現行的一筆過提取、定時或分期提取、以年金方式提取,或結合上述方案的安排等。

他說,當局對強積金的提取方式持開放態度,重點是要切合計劃成員的需要,達到改善退休保障的目的。 當局會就有關檢討與積金局保持密切聯繫,並就檢討結果作適切跟進,包括諮詢立法會財經事務委員會及聽取公眾的意見。