Industry at odds with MPF’s core fund proposal

10 July 2014   Category: News, Asia, Global, Hong Kong   By Hui Ching-hoo

Market pundits believe the core fund initiative unveiled by Hong Kong’s Mandatory Provident Fund Association (MPFA) in June may deter MPF providers from providing more innovative products, while the proposed fee ceiling will not do enough to encourage players to improve fund performances.

The remarks come after the MPFA launched a three-month public consultation from June 24 on the proposal to enhance the regulation of default arrangements in the MPF system, by introducing a core fund as a standardised, low fee default.

Francis Chung, chief executive officer of MPF Ratings, said that the MPFA is heading in the correct direction by introducing life cycle or target date funds as a core fund. From the members’ standpoint, it is appropriate to reallocate their portfolio structure based on age, he said.

However, Mr. Chung said that the measure could be considered a “slap” for those schemes which offer conservative funds as their default. From a risk and return perspective, conservative funds are not sufficient to serve as a ‘default fund’ for MPF members in terms of meeting their retirement needs, he added.

On fee structure, the MPFA proposes to cap management fees of the ‘core fund’ at 1%.  

Mr. Chung holds a sceptical view on the fee ceiling though, and noted that low fees do not necessarily translate into better products. MPF Ratings emphasises value for money, rather than fee reduction in this context. For example, the fee cap offers little incentive for active management, which can add increments for members.

Furthermore, the initiative may indirectly penalise those schemes with age dependent funds as their default. Mr. Chung said that these schemes have shown innovation when the overall market has been reluctant to do so.

Hong Kong’s local fund industry has also voiced concerns over the core fund measure. Sally Wong, chief executive officer of the HK Investment Funds Association, has previously stated that the association has reservations about the core fund, given that it does not adhere with the principal that employees should select their MPF based on personal choice. She added that lowering the fee will pose a challenge to the industry, urging the MPFA to further optimise the MPF system so as to bring down operational costs.  

Mr. Chung echoed Ms. Wong’s view, noting that the core fund may direct the lion’s share of money to these funds. The diversion of capital, coupled with the fee cap, could stifle product innovation even further, he said.