MPFA to gauge opinion on low-cost, easy-choice alternative

19 March 2014   Category: News, Asia, Hong Kong   By David Macfarlane

Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA) will embark on a public consultation later this year to determine the feasibility of introducing a low-cost default alternative to the current MPF.

Darren McShane, executive director (regulation and policy) of the MPFA, explains to Asia Asset Management the background behind the proposal.

“By design, the MPF System allows employees to vary the investment risks they take on through making choices of investment funds. Making a choice of funds from the available range might not however be an easy decision for an average employee.

“The contributions of scheme members who have not made, or are unable to make, a choice will be invested in the funds as determined by individual scheme rules. These funds are referred to as default funds. Default funds vary in their investment approach between schemes and include mixed assets funds, guaranteed funds, money market funds, conservative funds, or life-cycle/target-date funds. As a result, the investment outcomes also vary significantly as between different schemes.

“Whilst the Employee Choice Arrangement (ECA) is about choice of scheme rather than choice of fund, it has opened up for employees’ consideration a wider range of funds. Consideration can now be given to over 400 funds available in the MPF system, instead of only being those funds within their own scheme.

“Although the MPFA and trustees have provided a wide variety of information, many scheme members said they do not have the time or the knowledge to make the choice.”

Features / objectives of the proposal

(i) Simplify investment decision with the setting up of an easy choice core funds

The MPFA is proposing to help scheme members simplify their investment decision by standardising the default funds for all MPF schemes. In addition to serving the needs of scheme members who have not made a choice, these default funds can be regarded as the “core funds” of the MPF System which will serve as an “easy choice” for an average employee.

(ii) Impose fee control and structure investment strategy to suit general employees

It is important that the “core funds” provide a good value, low fee outcome for members. The investment strategy will have to be specifically designed to meet the objectives of retirement saving.

One of the investment solutions under consideration is an approach that reduces investment risk over time, commonly referred to as a “life-cycle” or “target-date” approach. The asset allocation of life-cycle or target-date funds is automatically adjusted in accordance with the age of scheme members.

(iii) Better cost efficiency for the entire system

If many scheme members find the “core funds” an attractive choice and invest in them, either as a default or a deliberate choice, such funds will then achieve economies of scale and become a mainstream long-term retirement investment strategy, thereby making the entire MPF system more cost effective.

The introduction of “core funds” involves a broad range of issues which have to be further discussed and studied in detail. These issues include how to achieve more consistent investment outcomes, measures to deliver lower cost and fee structures, the preferred investment approach and how existing default investments may be affected.

Mr. McShane reveals the MPFA is working with international experts to study the potential impacts of different investment approaches and, as the first part of the public engagement exercise, has collected some initial views from different stakeholders including the MPF industry, labour unions and employers’ associations.

“While various structural possibilities were discussed with stakeholders, none of them were necessarily based on moving elements of administration to public bodies. A public consultation on the subject is planned for mid-2014,” he says.

Sticking to its guns

Last November, the management board of the MPFA endorsed the direction of enhancing regulation of default funds of MPF schemes to become the “core”, “easy choice” solution for scheme members.

Diana Chan, MPFA managing director, said at the time: “The MPFA is determined to help scheme members simplify their investment decision by standardising the default fund arrangement. With the “core funds” in place, scheme members will not be required to make a choice if they do not want to because they are too busy or find the task too daunting. Those who do not make an investment choice will have their contributions automatically invested in a strategy that has been designed as offering the best-fit average long-term investment solution. Meanwhile, all scheme members may also choose to invest in these “core funds” and the existing funds will continue to be available.”

She added: “When many scheme members find the “core funds” an attractive choice and invest in them, these funds will then achieve economies of scale, thereby making the entire MPF system more cost effective.”