MPF fees may halve payout: watchdog
Warning on pension fund costs
People could end up paying more than half of their total retirement benefits to banks, insurance companies and other fund management firms in fees to look after their pension investments, a Consumer Council study has found.
Highlighting the need for greater fund transparency and increased consumer choice and education, the findings show that a 1 per cent annual management fee could equal about 23 per cent of the retirement benefits over a 40-year period, assuming a 5 per cent annual investment return.
With a 3 per cent fee, 52 per cent of the benefits would go to the fund provider. Most Mandatory Provident Fund schemes charge annual fees of between 1 per cent and 3 per cent.
'I think a lot of consumers are not very aware of the existence of the fund expenses and how they are calculated,' said Larry Kwok Lam-kwong, chairman of the council's community relations committee.
'They are also not aware of the impact or effect of the fund expenses on the overall performance of the fund, particularly when it is compounded over 30 to 40 years.'
The results come after new Mandatory Provident Fund Schemes Authority chairman Henry Fan Hung-ling flagged in May efforts to introduce reforms that would allow employees the option of choosing the trustee of their funds. This would increase consumer choice and could force fund providers to cut fees.
They also come a few days after the Mandatory Provident Fund Schemes Authority launched the first phase of its Fee Comparative Platform, which provides the average, highest and lowest fees and expenses for six MPF fund types.
The second phase, expected to be launched by the end of the year, will allow people to compare the charges of individual funds through the public disclosure of details of the fee structure of individual MPF funds.
The ratio measures the cost of managing a fund by dividing the operating expenses by the average dollar value of the managed assets. The expenses vary widely but generally include the manager's fee, charges for record-keeping, custodial and trustee services as well as legal, accounting and auditing costs. They are deducted from the fund's assets and lower the return to investors.
Last month, the then secretary for financial services and the treasury, Frederick Ma Si-hang, said the authority was discussing with the industry the possibility of allowing employees to select the trustee regarding their own contributions. The aim is to encourage more market competition and drive down fees.
Currently, the employer selects the trustee, which gives fund providers less incentive to lower fees. For employees the only way to switch trustee is to change jobs.
Employers and employees must each pay 5 per cent of a staff member's monthly salary - up to HK$1,000 each - to an MPF scheme run by a bank, insurance company or fund management firm.
Shrinking pot
Effects of 3% annual fee after 40 years on accrued balance of HK$3.05 million (assuming total contributions of HK$2,000 per month and 5% annual return)
Their cut: HK$1.58m
Your cut: HK$1.47m
