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  • Dec 20, 2014
  • Updated: 8:23pm
Jake's View
PUBLISHED : Thursday, 13 February, 2014, 1:24am
UPDATED : Thursday, 13 February, 2014, 1:24am

MPF 'scandal' of overcharging deserves scrutiny by SFC

Overcharging by MPF managers is one of the biggest thefts committed in Hong Kong

A price war is looming among Mandatory Provident Fund providers after Haitong International became the first fund house to waive investment management fees.

SCMP, February 11

It's a promotional gimmick, of course. Haitong has only a tiny slice of the MPF market and the waiver is valid for only the next three years. But it still provides an opportunity for putting matters into perspective.

The average annual fee charged by MPF funds is at present 1.71 per cent. In the United States the Vanguard 500 Index Investment fund charges its clients 0.17 per cent. Yes, that's right. With Vanguard you pay only one-tenth of what you pay with MPF.

You may say, of course, that there are differences. The Vanguard 500 fee is low because it is an index fund. You choose a market index and Vanguard then puts your money into the index stocks in the exact proportion in which they are represented in the index.

The MPF was devised [as] a free ATM cash machine for big banks

This doesn't take a great deal of effort, cost or brainpower but then fund management in general doesn't require much brainpower, going by the fact that only a small minority of active fund managers ever do better than the indices of the markets in which they invest. They don't tell you that when they pitch to you, do they?

But the point is that MPF funds are also effectively index funds. Every month the forced contributions roll in from 2.7 million people. The MPF manager then calls his dealing desk, says, "the usual" and goes off to lunch.

His minions then stick the money into whatever boring, go-nowhere stocks or bonds they have on their lists. The dust only gets blown off the paperwork when you retire and want to cash in. It's my bet that MPF managers do even less work than the Vanguard ones do.

It happens because the MPF was devised right from the start to be a free ATM cash machine for big banks. It is your employer, not you, who makes the choice of your MPF manager. He has no interests at stake in the MPF and he thus picks a big bank that can help him elsewhere.

This means that MPF managers are under no pressure to compete for your patronage and that you can do nothing about it when they charge you the moon for their services.

It also creates an administrative mare's nest. Every time you change jobs you add to a trail of different MPF accounts in your name. At the latest count, 180,000 people had four or more accounts.

This is not good, says Alice Law Shing-mui, the chief operating officer of the MPF Schemes Authority (MPFA), the government's oversight body. People ought to consolidate their accounts.

What she doesn't tell you is that you can only consolidate the personal half of your account. The employer half remains in that ever lengthening trail. And you can do it with your present employer only for one year's contribution at a time and only once a year.

This is what you call reform to stop reform. The MPFA makes a loud noise about change but first makes sure that nothing really changes. Strange as it may seem, your own government stands against you in this pillaging of your savings by big, mostly foreign-owned, finance houses.

Let's cut to the chase. Let's say that Vanguard fund managers are twice as competent as MPF managers and can therefore do for 0.17 per cent what MPF managers can at best only do for twice as much - 0.34 per cent. This would still mean that MPF managers overcharge you by 1.37 per cent (1.71 less 0.34).

On HK$514 billion of funds under management in the MPF at present this amounts to more than HK$7 billion a year. It is one of the biggest thefts committed in Hong Kong and it is committed every year.

Meanwhile, we have a Securities and Futures Commission that is supposedly established to protect small investors from investment sharks although in practice it is too busy indulging its strait-laced Victorian codes of morality on pipsqueaks whose activities cost other investors no more than bus fare.

Yoo-hoo, Mr Ashley Alder. As head of the SFC you might want to look at the MPF scandal for a change.

jake.vanderkamp@scmp.com

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This article is now closed to comments

pjp
Try asking your MPF manager for a report on their fees taken since inception. I did and it was a very long and painful process that took many months. After going through the hotlines and explaining what I wanted, it was only months later when I was given a "special arrangement" by a Manager that I was allowed to be given a lump sum figure verbally, but not in writing. At the time the MPF costs taken were approx. $30,000 compared with my gain of just a few thousand.
jmnicholson
MPF is a very expensive program. It also is quite small in amounts being able to put in vs other programs in other countries. While I do understand the need to set up a proper program with controls, there needs to be lower fees, more choices and hopefully higher limits of dollars allowed to contribute to make it a more effective and efficient program for retirement. The MPF is a failure as far as a retirement vehicle.
honger
Well said, Mr van der Kamp!
From the start, critics had pointed out the flaws and potential adminstrative tangles involved, but of course the banking/finance clout silenced all discussion.
No need to compare to Van Guard from the US. Just look at our neighbours Singapore and Malaysia. Malaysia - leagues behind HK where the finance industry is concerned - has a very successful Employees Provident Fund (EPF). Adminsitered by a statutory body rather than the maze of private fund managers as a sovereign fund, its returns are decent at about two to four percent higher than current interest rates. It has seldom, or never posted any negative rates. Ditto for Singapore's Mandatory Provident Fund (MPF), which is run along the same lines.A key feature also is that one is allowed to withdraw the funds earlier to buy a property, for medical purposes or if one is leaving the country.
In HK, the fund managers calls the tune, of course, with Alice Law backing them all the way despite the dismal performance and huge rip off as pointed out in your comment.
Please continue to champion this issue, Mr van der Kamp!.
jackwong18
Since its establishment, the MPF scheme has been criticized by any sensible employees. But let's admit - we are powerless to change because the government and the beneficiaries do not want to change.
The employees have no choice but to contribute on this tax-like pension contribution which are being eroded by inflation, investment loss and management fees. While this plan was a copycat to the Singaporean scheme, they don't follow Singapore to use the fund to acquire HK's public services (e.g. MTR, the cross-harbour tunnels or the shopping malls owned by the Link). The benefits are quite obvious - whatever extracted from the HKers are used to benefit the HKers, and it's inflation-proof, stable and management fee-free. It's quite funny that with so many government advisories they fail to see the benefits of it.
Honestly, I don't expect the current scheme will be changed or be scrapped in the future. It seems anyone making suggestions to the governments will be treated as dissenters - where the government will use whatever mean to suppress.
rpasea
The MPF scheme was set up for 3 reasons: a) to promote the fund industry in HK, b) to pump liquidity into the local stock market so the controlling families can continue to enjoy tax free capital gains and dividends in post-1997 HK, and c) to enable employers to escape severance payments. How to package the tax to cover this? Call it an MFP scheme.
pbhawk
Another example of all that is wrong in HK; in a prefect world Alice Law would be arrested and jailed for lying to her bosses, ie the people of HK.
realestate
If Service providers lose in their speculative investment from the MPF Funds, they are not liable to pay a dime to the MPF members (the ordinary people) while the govt has no safeguards in such an eventuality.The service providers rake in huge profits with the connivance of the govt. How outrageous and blatant can the MPFA get risking peoples old age retirement savings at the cost of speculative risk, the whole intent and purpose of MPF is lost if peoples savings cannot be secured for what it is meant ..shame on the Govt and the MPFA
caractacus
13 years after the fund started it is still apparent that it was not primarily intended to benefit the employees, but the banks and investment companies who rake off $8.5 billion in annual fees. Outrageous.
 
 
 
 
 

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