MPFA puts forward proposals to reform the MPF system
28 November 2012
News, Hong Kong
By Asia Asset Management
The Mandatory Provident Fund Schemes Authority (MPFA) has put forward proposals to the government to reform the MPF System in a bid to further drive down MPF fees to provide better retirement protection for the working population of Hong Kong.
At the MPFA Management Board meeting held last Friday, members agreed to suggest the government consider the following approaches in bringing fundamental changes to the system:
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 consider this level of reduction is not satisfactory.
“Retirement systems usually take 30 to 40 years to mature. The MPF System which will have its 12th anniversary in a few days is still a relatively new system. With the system entering its second decade of operation, it is the right time to consider more substantial changes.
“The MPF System is a social policy aimed at providing retirement benefits to the working population. Purely relying on market forces to set fee levels may not be enough and more needs to be done.
“The reform proposals are only conceptual ideas, they need to be thoroughly studied, analysed and, more importantly, debated in the community.”
In the short- to medium-term, the MPFA will work on the recommendations of the Consultancy Study on MPF Trustees’ Administration Costs (Cost Study), which was released on Tuesday (November 27).
The Cost Study was conducted by an independent consultant, Ernst & Young Advisory Services Limited (EY), commissioned by the MPFA to analyse the scheme operation costs of the MPF System, make suggestions on how to better achieve simplicity and cost reduction.
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, improve efficiency of the administration processes and simplify the system, thereby reducing operation costs. If all the administrative measures were implemented, and with the natural growth of MPF assets, the FER could be reduced by 60 basis points.
MPFA non-executive director and chairman of the MPFA Steering Committee on Consultancy Study John Poon pointed out that if the FER could be lowered, the scheme members’ net return would be higher. After considering EY’s findings and the recommendations, the MPFA considered that improvement measures would require the concerted efforts of 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 their way of managing 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.
Meanwhile, MPFA managing director Diana Chan said the MPFA is committed to further driving fees down and will immediately launch 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.
Ms. Chan said the MFPA will work closely with the industry, employers and scheme members on these programmes. A task force has already been formed with the industry to draw up various action plans.
The MPFA's Ms. Wu said: “The MPFA is as keen as everybody to see MPF fees come down further and faster. The MPF System affects more than two million workers and all employers. It plays an important role in shaping the retirement landscape in Hong Kong.
“We are determined to make the system better for the benefits of all members of the working population. The MPFA welcomes the public and all stakeholders to express their views in this regard, and looks forward to receiving direction from the government on how best to reform the system.”
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