If it’s broken, fix it!
Category: Asia, Hong Kong, Global
By David Macfarlane
MPF introduces reforms but still comes in for heavy criticism
Hong Kong’s MPF scheme introduced the long-awaited Employee Choice Arrangement (ECA) at the beginning of November. It’s now up to MPF members and employers to respond to this newfound capacity to manoeuvre funds and switch providers.
Darren McShane, executive director (regulation and policy) with the Mandatory Provident Fund Schemes Authority (MPFA), calls for patience and sensibility. “The ‘patience’ element is, they don’t have to do anything here and now; it’s a new right to exercise when they think it’s appropriate to exercise it. The ‘sensibility’ part refers to the issuance of publicity materials by the MPFA about the key factors it thinks people should take into account. “This is a service issue, members need to look at whether they want better services, a better range of funds and something that’s more suitable for them than they have at the moment,” he says.
The biggest concern, according to Ka Shi Lau, the managing director and CEO of BCT, one of Hong Kong’s largest MPF service providers and trust companies comprising both BCT Financial Ltd and Bank Consortium Trust Co, is that people will make changes to their portfolios for the sake of changing; there is no need for them to rush. “Rather than falling for sales pitches or taking advice from friends, members need to find out exactly what is most suitable for them. Our advice to MPF members is to not rush into making investment decisions, they need to look and analyse – and if they don’t know how to analyse, they should seek professional help,” she says.
The Employers’ Federation of Hong Kong (EFHK) has been committed to being the collective voice for employers in Hong Kong. In past decades, it has been heavily involved in debates on matters of employer concerns, including the MPF. Duncan Abate, chairman of the EFHK’s MPF Committee, says he believes MPF members will act cautiously and that there will not be a mad rush to switch funds between providers.
Likewise, Elvin Yu, head of institutional business, Greater China and Southeast Asia at RCM Asia Pacific Limited also says he doesn’t expect a significant change around in asset allocations.
With investor choice; there is now a real need for comprehensive investor education as well as guidelines for the MPF providers to follow.
Ms. Lau says: “Investor education plays an essential role, which is why BCT has put a lot of effort into it. We have looked at a variety of different approaches in order to target segments such as the younger generation. This can be achieved through appealing advertising campaigns and the use of tablet and smartphone applications, for instance. However, it is equally important that members are interested in learning.”
Investor education should also focus more on the post retirement phase, Ms. Lau points out. “Upon retirement, you will enter your third age which may mean another 20 to 30 years. So it is important to put into consideration your desired retirement life when planning for your retirement savings.”
Ms. Lau notes that it would be better if the regulators and the government could do more in regard to public education, as information from these sources can be considered more independent and authoritative. “Together we could achieve synergy, making the result more effective and far-reaching. I hope that the Investor Education Council that the government set up recently will produce some results regarding retirement issues,” she says.
Mr. McShane explains that the MPFA has been providing educational material about those ECA decisions for some time now, and has rolled out various educational campaigns, which were strengthened in the run up to ECA being introduced. He notes that equally important is the development of tools to help people make investment decisions. “This isn’t just down to the MPFA to provide, the industry must also bear some responsibility. For those things within our control, our website provides a lot of information and the mass media campaigns direct people to these resources,” he says.
Mr. McShane continues: “It’s a community-wide responsibility; investor education is a big issue that goes more broadly. And as the Investor Education Council (a government initiative) starts to put its proposals in place, which is across all the financial services sectors, some of those investor education needs will be met through what they can bring to the table.”
There has been a lot of negative press with regard to high fees and poor performance regarding the MPF scheme.
“We recognise that the levels of both fees and returns haven’t met with people’s expectations, so there are issues in regard to what can be done about that,” says Mr. McShane. On the fee front, the MPFA has already been proactive and engaged consultants to look at the costs associated with administrating the scheme [see box].
“Aside from that,” continues Mr. McShane, “we’ve also said that in response to the whole range of thought balloons that have been floated over the last month or so by various people, we are looking at what elements of the system can be changed to produce better outcomes in terms of fees predominantly. Ultimately, if there are issues concerning the structure of the system, that’s outside our control – but we can raise these issues with the government for their consideration and, if necessary, action.
“If the real outcome is that the MPF is actually quite an expensive system that is in need of restructuring, not a lot can be done by the MPFA. The bigger issues about whether the system could be better designed to produce better outcomes and matters concerning public policy would ultimately involve the government.”
Mr. Yu of RCM says as the MPF system continues to develop with growth of assets, there will be room for further fee reductions. For example, he says, “by improving efficiency of the administration processes. Currently, our fees are 1.28% on average, which is lower than the average fee of 1.74% in the market.”
Ms. Lau hopes a more objective approach can be taken when it comes to discussing fees in particular. “For example, we should find a counterpart to do an apples-to-apples comparison for the MPF system. People often compare Hong Kong to Singapore; however, Singapore is centralised; the contribution rate is around 35%, whereas Hong Kong is only 5% plus 5% and has a cap which is quite low. You can barely find such a rate in other pension systems,” she remarks.
“It’s actually not easy to build an economy of scale with a cap on the current maximum level of relevant income, which is HK$1,250, not to mention that most pension systems have had at least 40 years to mature while the MPF has only had 12, argues Ms. Lau. “Hong Kong has total MPF savings of around HK$400 billion while Australia has trillions. On the other hand, the US, the UK and Australian pension systems are very much tax-driven – this is not the case with the MPF. If there were more voluntary contributions and the assets increased substantially then the denominator would allow providers to reduce the fees.”
Calls for a more flexible MPF system
On November 27, the MPFA put forward proposals to the government to reform the MPF system in a bid to further drive down MPF fees.
Suggested fundamental changes include:
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 / or
4. Introducing a not-for-profit operator to operate a simple and low-fee MPF scheme.
MPFA Chairman Anna Wu said: “The MPFA is acutely aware of public concerns over the fee levels of MPF funds. We have made efforts in the past to bring fees down, and fees have come down from 2.1% in early 2008 to 1.74% in 2012, but we don’t consider this level of reduction satisfactory.
In the short- to medium-term, the MPFA will work on these recommendations from the Consultancy Study on MPF Trustees’ Administration Costs (Cost Study), which was conducted by an independent consultant, Ernst & Young Advisory Services Limited (EY).
The consultant analysed the average fund expense ratio (FER) of 1.74% and found that administration costs made up 0.75% of the 1.74%, investment management fees 0.59% and scheme sponsor charges, trustee profits, member rebates and others 0.4%.
The consultant developed five strategic recommendations to, amongst others things, improve efficiency of the administration processes and simplify the system, thereby reducing operation costs. If all administrative measures were implemented, and combined with the natural growth of MPF assets, the FER could be reduced by 60 basis points.
After considering EY’s findings and the recommendations, the MPFA concluded that improvement measures would require concerted efforts from four parties:
1. Trustees and sponsors: launching low-fee funds investing in equities and bonds for each scheme, and stepping up promotion of these funds;
2. Scheme members and employers: changing the way they manage their MPF accounts, e.g: Scheme members need to consolidate their accounts and choose funds that suit their needs; More employers should use electronic or online services;
3. MPFA: continuing to carry out improvement measures, including facilitating trustees to adopt electronic platforms for various processes, and to merge less efficient schemes / funds; and
4. Government: clearly defining the role of the MPF in Hong Kong’s retirement protection, making legislative changes as and when necessary.
In response to the EY report, the MPFA launched four programmes, to:
1. Urge trustees to introduce various types of low-fee funds for each scheme and to promote these funds;
2. Facilitate trustees in further automating and streamlining their administration processes;
3. Facilitate members in consolidating their personal accounts; and
4. Facilitate trustees to merge smaller scale or less efficient schemes / funds.
Discuss: If it’s broken, fix it!