The Mandatory Provident Fund (MPF) is a compulsory pension fund designed by the Hong Kong government as a major protection scheme for the aged and retired residents. Most employees and their employers are required to contribute monthly. A 2012 study by the Consumer Council shows that almost half of the MPF funds have posted losses in each of the past five years.
Options limited in cutting pension fund charges in Hong Kong
The issue of charges has long been contentious amid complaints that captive savers are being milked by fund management and fund administration companies.
A 2012 study found the average fund expense ratio in the city was 1.74 per cent. This was the highest among several markets profiled in the report, including Britain and Singapore.
While fee levels remain under scrutiny, industry representatives say there are limits to what can be done.
"The MPF market in Hong Kong is still young compared with other pension markets. On average, the fund expense ratio is coming down although it may not be as fast as some stakeholders would want to achieve. Obviously, the market wants to see a fast reduction," said Elvin Yu, who heads a pension committee at the Hong Kong Investment Funds Association.
Charges have a significant impact on an investor's long-term returns. In one example provided in a Consumer Council report on the MPF, an account accruing HK$2,000 monthly for 30 years, assuming a 5 per cent average gross investment return, would lose HK$220,000 over the period if fees were increased from 1 per cent to 2 per cent.
Since 2007, the average fund expense has dropped 17.48 per cent and is now 1.7 per cent, according to data from the Mandatory Provident Fund Schemes Authority, which oversees the MPF.
Fees vary from 4.32 per cent for the AMTD Invesco Target 2048 Retirement Fund to 0.23 per cent for the Fidelity Conservative Fund. In October last year, the regulator reported assets managed in MPF funds topped HK$500 billion.
Fund expenses represent fixed and percentage-based costs involved in running a fund. These include charges by fund managers, administrators, trustees, lawyers and fund sponsors. Despite their prominent role, fund managers take only about a third of the total fee.
Last month, Haitong International announced it would waive its MPF fund management charge for three years. Fees will now range from 0.37 to 0.58 per cent, down from 0.9 to 1.68 per cent. This suggests Haitong normally keeps between 41 per cent and 35 per cent of the total fee.
This is a high percentage share by market standards and reflects Haitong's size as one of the smallest players in the MPF marketplace. With greater asset size, the charges should fall given economies of scale.
"If balances were higher, fees would be lower," said Jeremy Gadbury, the head of pension research firm Gadbury Group.
Highlighting the success of epass, an online MPF account transfer system launched in 2012, Yu said the industry was looking at ways to reduce administration costs and fees.
One suggestion is to reduce fund choices. This would push more money into the remaining funds. Another is for a government cap on fees or a requirement that fees on a set number of funds fall under a fixed level.
An analysis of the leaders and laggards of mixed asset funds, those that contain a blend of equity and bond holdings, found a 24 to 31 per cent differential in fees between the top and bottom-performing funds. Those at the top on average boasted lower fund expense ratios. The top performers were also all below the mixed asset class average fund expense ratio of 1.86 per cent, according to MPFA data.
Research by Gadbury comparing actively managed MPF Hong Kong equity funds against the lower cost index tracking MPF Hong Kong exchange-traded funds found that actively managed funds over an 11-year period were in line with the market.
Lower fees are not the only criteria to use when picking funds, but they do help.