Jake's View

MPF 'scandal' of overcharging deserves scrutiny by SFC

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

PUBLISHED : Thursday, 13 February, 2014, 1:24am
UPDATED : Thursday, 13 February, 2014, 1:24am

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.