Pension in the air
Imagine this scenario for Hong Kong's pension scheme, known as Mandatory Provident Fund (MPF): every month investors get a single, simple statement detailing all money they have put into MPF. Their fund gains money each year - perhaps not huge amounts but enough to beat the rate of inflation. Indeed, the pension is so well funded it could plausibly take care of a person in retirement.
Hongkongers might whoop with laughter at the optimism of such a plan. It's a fantasy, and miles from their experience (and yet somehow managed in Singapore and Malaysia).
Instead, this is what Hong Kong gets: a sprawling patchwork of funds with uneven returns that lately have veered to loss. As people move from job to job, they collect a new MPF plan with each employer, leaving a trail of inactive funds - there are 7.5 million of these so-called 'preserved' accounts.
There is no consolidated statement of investors' combined MPF savings. People might wonder, when they hit retirement age, how they might locate and claim back the perhaps dozens of funds they collected through the years.
Hongkongers participate in MPF because they have to (note that the 'M' stands for 'mandatory') and do so with an air of resignation.
'Honestly, I don't bother with the MPF scheme. We all know that we won't get enough money to support our retirement,' says Cathy Ho Kit-fan, an executive assistant, echoing the sentiment of many.
Those who are sceptical about Hong Kong's MPF plan would find ammunition in a May report by the consulting firm Ernst & Young, which was commissioned by three industry bodies.
The report finds that the total fees charged, and particularly administrative costs, on MPF are high by global standards (see The Week Explained, page 2, and chart, opposite page).
Meanwhile, recent performance on MPF funds has been poor. Most such funds have lost money in the year ending March 31, according to the Mandatory Provident Fund Schemes Authority (MPFA), a regulator. Equity funds dropped 11 per cent in the period. Mixed asset funds, the most popular MPF category, dropped 4.6 per cent (see table).
Well, it's a bad market. Interest rates are low. The euro-zone crisis has dragged down bond prices for more than a year. Slowing growth on the mainland has hit share prices. No asset class has been spared.
In setting up the MPF scheme in 2000, the government wanted a free-market solution that put no pension responsibility on the state, and that is exactly the plan they got. Of course, when the world experiences repeated financial crises, as has been the case since 2008, such a thoroughly market-based system can look volatile and risky. But it has always been thus in Hong Kong. No point in second guessing free market principles now, even on the sensitive matter of the state-sponsored pension plan.
However, Hong Kong's MPF system does have its anomalies, and these are what the industry is looking to address, and hopefully fix. For example, funds under the MPF tend to underperform against other non-MPF mutual funds in the same class. Wyman Leung, who analyses MPF funds for the financial advisory firm Altruist Financial, says higher-quality mutual funds tend to be absent from the MPF. He cites the example of the First State China Growth Fund, which he describes as one of the best China equity funds but which is not available within MPF.
And when a mutual fund exists in both MPF and non-MPF versions, the MPF version tends to generate lower returns. Leung points to the example of Sun Life MPF First State Hong Kong Equity Fund, which has returned an average of 15.6 per cent over the past decade. That's a terrific return. Except that the First State Hong Kong Growth Fund - its non-MPF equivalent - returned an average of 19.7 per cent over the same period.
It's unclear why MPF funds underperform in this way. The MPFA does impose restrictions on the funds, which could lower performance. For example, the association requires funds to only buy bonds that are rated single A or above, ruling out many higher-yielding bonds at a slightly lower investment grade.
It also rules out investment in unrated bonds. For example, the government-run China Development Bank issued a yuan bond in Hong Kong in 2010. Because the bond was unrated, it was ineligible for use in MPF funds, despite its implied sovereign backing and mass popularity among investors, according to Elvin Yu, head of institutional business, Allianz Global Investors.
Leung of Altruist suggests that because MPF funds do not carry upfront selling commissions and tend to have lower management fees than their mutual fund peers, they tend not to get the top talent seen on other funds.
There is some irony in this. As noted in the Ernst & Young report cited earlier, MPF funds have high fees. However, most of the fee is composed of administrative costs, so it generally goes to the trustee, not the fund manager.
Trustees watch over the funds on behalf of investors. They are a layer above, and separate to, fund managers. They often assume the administrative role of a fund, which means they keep track of all the details about the funds on behalf of investors, such as their returns, a service for which they collect fees.
Lau Ka-shi, chairman of Hong Kong Trustees' Association, says administration fees are high partly because most Hong Kong employers are small, family-run businesses. The trustee has to liaise with each business to ensure it is making contributions for its workers. It's a lot of work, particularly as small businesses contribute a tiny amount of money to MPF.
Small businesses don't like MPF because it is time consuming and expensive. They participate grudgingly.
'You hear a lot of employers complaining about MPF. It's a pain in the neck,' she says.
It can be a pain in the neck for trustees, too. Many workers at small firms are casual - they float in and out of plans. People often do not fill in forms correctly. Monthly contributions can be minimal.
Lau, who is also the chief executive of BCT Financial, which provides trustee services, says she once received MPF details from a cha chaan teng on a tea-stained table mat. She also once received an individual MPF contribution for HK$7.50, which she processed.
MPF administration fees are high partly because the system is so bureaucratic. It is heavily paper-based - users have to sign documents and mail in forms, and all this has to be handled manually. Simon Lee Siu-po, a lecturer at Chinese University, gives a personal example. Lee changed his job and asked to move his MPF plan to the fund selected by his new employer. He had to photocopy his identity card, sign documents and physically mail his request to the trustee. After a few weeks, the trustee said that Lee's signature did not match their records, so Lee had to repeat the steps - a process that took months.
Kelvin Lee, head of institutional business at Schroders, a fund manager, goes as far to suggest the government should take over administration of MPF plans, following the examples of Singapore and Malaysia. This would make the government the central distributor of MPF statements, giving people one simple summary of their pension savings. There would be no need to consolidate accounts or keep track of long-dormant funds. 'It would make things a lot simpler,' says Lee of Schroders. 'We can use Singapore as a learning example.'
Few expect the government to take over MPF administration. It does not want the hassle or responsibility. The trustees won't want to give up the fee stream. 'It's not a lucrative business, but it is a business,' says Yu of Allianz. 'There would be resistance.'
But there is slow momentum in the direction of progress for MPF. The industry-sponsored Ernst & Young report was a step forward. It revealed a problem: the administration charges are too high.
Meanwhile, the MPFA has commissioned its own Ernst & Young report (due this summer), this one looking at the specific ways to cut administration fees.
Separately, the association is hoping to introduce the long-awaited Employee Choice Arrangement (ECA) this November. The plan will let individuals choose their own MPF scheme. This will create some competitive pressure on the funds, and will lower fees.
The authority is also working on an electronic platform for trustees to share data on users. The idea is that, on implementation of the ECA, a lot of people will change funds quickly. The platform will help trustees track the fund flows easily and cheaply. The plan will take MPF a step towards some sort of centrally administered plan, making it easier for people to track and consolidate their pension funds. Costs should come down, and returns should come up, albeit fractionally.
Once people get comfortable with choosing their own MPF funds, it will be a short step to merging their pension into a single account. People will then be able to get a single unified statement of their MPF savings.
Moreover, people will quickly converge on a small number of funds and trustees. This will create economies of scale and lower fees. As particular funds grow in size they will start to attract some of the more talented fund managers, improving performance.
The industry is also very aware that people find MPF bureaucratic and user unfriendly. Slowly, they are working to improve the situation, perhaps by centralising the administration of all funds.
'We feel the pressure from the public and members. We hear their voices,' says Lau of the Trustees' Association.
It's a long way from the dream scenario described in the first paragraph, but it's progress. And maybe some day Hong Kong will get a pension plan that is as good as Singapore's.
What is MPF?
The Mandatory Provident Fund was introduced in Hong Kong by the government in 2000.
It is a market-based plan that covers those workers who had never had any kind of pension.
Every month the worker and the employer each contribute 5 per cent of the worker's salary, or up to HK$1,250. Any extra contribution by the employee is voluntary and, given there is no tax incentive to contribute, many don't.
The employer chooses the provider, which can be a bank, insurance company or fund manager. The employee then decides how to allocate his or her contribution, depending on the appetite for risk.
At the official retirement age of 65, a worker withdraws a lump sum, including any investment gains.