Employees require investment incentives
Viewed by the government as an important cornerstone of Hong Kong's retirement planning processes, the Mandatory Provident Fund (MPF), which has about HK$350 billion under management, is still regarded with indifference by many employees who make their monthly contributions.
Last year's Towers Watson MPF Survey revealed that while most employees believe present contributions are insufficient, employees and employers have no idea how much is required at retirement. In addition, most employees either do not know or could not remember which type of funds their MPF contributions were invested in. At present, members have on average HK$140,000 invested in their MPF accounts.
'There is a certain amount of misunderstanding surrounding the MPF scheme, it will continue to take time, but awareness is generally improving as the sums invested continue to increase,' says Naomi Denning, Towers Watson managing director of Investment Services Asia-Pacific.
Like many financial professionals, Denning believes MPF members' interests could be stimulated if the government were to introduce incentives such as a tax break to encourage voluntary MPF contributions to supplement other retirement investments. The Towers Watson survey indicates that the majority of surveyed employees are willing to contribute more into their MPF if higher tax-relief or employer-matching incentives are provided.
Denning and her colleagues have also been vocal on the issue of administration fees, one of the highest components of MPF management costs. She says it is worth looking at the United States retirement scheme model where administration fees are charged at a flat rate. 'If we see aggregate fees levels come down, MPF contributors may recognise the cost-effective structure of the MPF scheme could supplement their investments. If this were to happen they could also discover that MPF funds might be cheaper to invest in than some mutual funds,' Denning says.
In February, Hong Kong's largest MPF provider, HSBC Insurance, announced it would cut management fees on three of its lower-risk funds by 20 to 40 per cent. Across the three funds, assuming employer and employee both contribute HK$1,000 per month, a MPF member would save HK$5.20 to HK$12 per month. Meanwhile, MPF provider AXA also announced it would reduce management fees by 46 per cent on average to a range of 0.99 to 1 per cent across a range of funds.
Philip Tso, Towers Watson director of Investment Services Hong Kong, says a number of larger employers are looking at the logistics of providing their employees with more than one MPF service provider.
'Employees are making it known they want better providers and more choices.
'If employers are able to work with more than one provider, it would open the way for increased competition,' Tso says.
He points out because of the logistics involved, it would only be feasible for large employers to work with more than one provider.
Tso says when the Employee Choice Arrangement (ECA), which was deferred by the government last year, is introduced in July next year, MPF members should avoid the temptation to use their retirement funds as if they were investing in the stock market.
'Attempting to time the market rarely works. MPF contributors should take a long-term view and let their MPF investments ride the cycles that inevitably occur in economic markets,' he says.
When launched, the ECA facility will allow MPF contributors to have a wider choice regarding who they select as their MPF service provider and more control over asset allocation.
According to Towers Watson, while service providers are offering a higher number of investment funds, most of the time there is a low take-up rate from members.
Most members believe six to 10 funds are sufficient with the majority of MPF members contributing from one to three funds. With nearly 1.1 million MPF accounts and HK$64 billion under management, Manulife, launched seven new retirement funds that have an automatic asset-allocation mechanism.
Manulife say the new suite of funds is tailored for MPF members who may be too busy and have less time to monitor their MPF investments, and who are looking for simple and hassle-free MPF solutions.
Luzia Hung, CEO of Manulife Provident Funds Trust Company, says members only need to take one simple step - pick a retirement fund with maturity date that best matches their normal retirement age and Manulife's investment professionals will take care of the rest.
She says the funds are structured so that the investment manager responsible for each fund will rebalance the asset allocation of the underlying portfolio regularly, starting from a relatively higher proportion in equities and becoming less aggressive by including a higher proportion of fixed-income investment as the fund comes closer to maturity.
'A mixed-asset fund with automatic asset rebalancing saves members the trouble of having to build their MPF investment portfolio by rearranging the asset mix themselves on a regular basis,' Hung says.
'This way, members can stay focused on their investment objective of achieving potential returns in the long run and avoid reacting subjectively to economic ups and downs.'