MPF bureaucrats fiddle while money burns
Sometimes, Hong Kong bureaucrats manifest a kind of genius; unfortunately it is an evil genius which might be better described as an uncanny ability to deceive. This evil genius has come to the fore again with a plan to fiddle around with the names of funds in the failed Mandatory Provident Fund (MPF) scheme.
As returns from investments in MPF funds shrink and a growing realisation emerges that the scheme's main beneficiaries are the banks and investment houses providing the funds, the MPF authority (under external pressure) has come to the conclusion that its Capital Preservation Fund might not do what the name suggests.
Naturally, there is no intention to change the way the MPF operates but there does seem to be a desire to fiddle on the sidelines. From the start, the MPF was claimed to be a better means of providing for retirement needs by insisting that both employees and employers contribute to a savings vehicle that would somehow produce better returns than anything individuals could hope to secure through their own efforts.
Unlike employees in North America and Europe, Hong Kong workers have a high propensity to save, and a much greater degree of financial literacy than their counterparts overseas. However, bureaucrats decided it would be better if their savings were channelled into a small number of funds chosen by the MPF authority and, of course, run by those bastions of financial probity known as banks and investment houses. There was never any suggestion of contributions to this fund from the public purse (although this has now happened in the face of the financial crisis) but an insistence that hard-earned wages and equally hard-earned company resources should be channelled into the pockets of a select group of finance houses which would have the exclusive right to sell investment funds.
It came as no surprise to learn that this enabled these finance houses to gorge on the public by making lavish charges for their investment services. Investor activist David Webb and, subsequently, the Consumer Council have found that the expenses levied are, on average, more than 2 per cent per annum. This may seem modest but, over time, the costs to investors are considerable - about 55 per cent in a 40-year lifespan.
Were investors free to choose their own investment vehicles, those of a conservative disposition might well have opted for, say, tracker funds, which reflect the entire span of blue-chip investment in most markets and levy management fees which are a tiny fraction of those charged by the MPF providers. Investors not tied into the MPF would find it much easier to shift their funds at short notice, as the investment environment changes, which it has with alarming rapidity in recent months.
Over a year ago, I wrote about how, just to add insult to injury, the MPF authority had gone to some lengths to mislead the public about the returns achieved by the funds operating under its umbrella. By employing the well-known trick of using an internal rate of return, which inflates yields in good years and disguises poor performance in bad years, the authority regularly pumps out misleading figures. And this is before taking away the scandalously high management charges, which diminish the ultimate value of this investment. It also, incidentally, ignores the equally absurd cost of maintaining the authority itself.
Let us be very clear about the extent to which the average MPF investor is short-changed: they would have received a higher return simply by tracking the Hang Seng Index.
As we enter a period of severe financial turbulence, MPF investors are stuck in these lacklustre funds with little hope of escape. While their hard-earned cash evaporates, the genius of the bureaucrats is being devoted to finding a new name to disguise their failure.
A new updated edition of Stephen Vines' book Market Panic: Wild Gyrations, Risks and Opportunities in Stock Markets is published next week
