Keeping people informed is crucial
Lively debate that keeps Mandatory Provident Fund (MPF) issues in the public domain are constructive, but the benefits of the long-term financial planning scheme need to be highlighted, according to prominent retirement fund manager RCM.
'One of the reasons MPF was introduced was to address the lack of awareness about the need for long-term retirement planning,' says Mark Konyn, CEO at MPF provider RCM Asia-Pacific.
'Unfortunately, some of the issues that have been chosen to drive recent debate have focused on the negative aspects of the MPF. The issue of administration fees and the government's plan to provide a HK$6,000 windfall for MPF members, which was reversed, have taken attention away from some of the key issues,' Konyn says.
He says important issues that need to be highlighted include the benefits of voluntary contributions, the lack of understanding concerning what Employee Choice Arrangement (ECA) means and the lack of awareness surrounding the objectives of the MPF scheme.
'The consensus among industry experts is that the MPF is still too small to help people address their financial needs in retirement,' Konyn says. 'We need to educate people and provide them with the right kind of information to help them make better financial provision for retirement.'
Konyn says, as Hong Kong couples tend to have fewer children, people who reach retirement age can no longer rely on the financial support they traditionally receive from their children.
In addition, longer life expectancy and anticipation of active retirement lifestyles will require more funding. 'If retirement planning issues are not properly addressed, the daunting responsibility would fall on the government, which most likely would involve some type of tax,' Konyn says.
He says when ECA is launched in July next year - after being deferred by the government last year - emphasis needs to be placed on the choices MPF members have to broaden their portfolios.
The introduction of ECA would allow MPF members to switch fund managers once a year. The ECA initiative could also provide employees with an opportunity to seek better investment services and could bring about a reduction in service charges.
A core reason cited by the Mandatory Provident Fund Authority for delaying member choice enhancements was that sales people and advisers needed more time to prepare.
Concern has also been voiced that among Hong Kong's 20,000 registered MPF intermediaries, commission rather than MPF members' best interests would take priority when advising a member to switch their account from one provider to another.
'We need to have positive discussions that go beyond the hoopla surrounding sales and sales incentives,' Konyn says.
'There is an underlying opportunity for members to fill some gaps in their portfolios and create a more competitive and transparent market place among service providers.
'It would also be a positive move if focus were placed on performance. Some of the larger service providers that have significant market share have tended to be sheltered from the performance aspect because they have obtained their MPF business by default.'
He believes once money starts to move around as directed by members, service providers will need to pay more attention to performance and compete for members' business.
However, Konyn cautions that ECA could lead to consolidation among MPF service providers, which could reduce competition. 'Consolidation, resulting in fewer players in my experience would not necessarily lead to a reduction of fees,' he says.
He says apprehension that the introduction of ECA could lead to members taking risks with their retirement savings based on impulse trading and short-term performance is unlikely to become a problem. The question has also been raised about members switching funds in an attempt to time or trade equity markets.
'It comes with the territory that wider choices for members could lead to some risk taking, but overall I don't think this will be a big problem. Although Hong Kong people are often thought of as financial risk takers, when the MPF was launched 10 years ago an initial fear was members would be overly conservative and put their contributions into low-risk strategies. There was concern that low-risk strategies would mean members gave up the opportunity to keep pace with inflation and grow their asset base, but this has not happened.'
He says RCM has been impressed by the way that most members have taken a balanced approach with most contributors' allocation to multi-assets funds, which have a strong equity bias.
'If you compare an individual MPF member's asset allocation choice with typical schemes, regulated under the Occupational Retirement Schemes Ordinance, which are allocated by an investment committee, there is not a lot of difference.'
He says one of the fundamental aspects of ECA is making sure there is easy access to information to help members make informed decisions. To help members improve their knowledge and awareness, Konyn suggests making more use of the internet and social networking channels to distribute MPF information.
He says the introduction of yuan-denominated MPF fund options would add an additional attraction to the MPF scheme. 'We have seen how keen Hong Kong people are to direct some of bank savings to yuan accounts. As a long-term investment concept, the provision of yuan MPF fund offerings would be a natural progression.'