Pension fund scheme heads for shake-up

Some see a single, low-fee scheme arising from a consultation addressing default funds, but others see it as another way to press providers on costs

PUBLISHED : Monday, 17 March, 2014, 2:27am
UPDATED : Monday, 17 March, 2014, 2:52am

For those frustrated by the high fees, limited choices and the paperwork of the government-mandated pension plan, relief may be in sight. The main regulator overseeing the Mandatory Provident Fund scheme is about to launch a public consultation that could radically change the plan.

The new arrangement was likely to result in full fund portability, a centralised database tracking everyone's contributions and lower fees, said Keith Pogson, a senior partner in financial services in the Asia-Pacific for consultancy EY, which was tapped to write a major report on the pension scheme in 2012.

"It achieves a political agenda in terms of a low-cost provision [of MPF services]," said Pogson.

It's a tactical move ... to embarrass the industry into lowering their fees
Glenn Turner, Altruist Financial

In November last year, the Mandatory Provident Funds Schemes Authority said it wanted to increase regulation of default funds. It is expected to launch a public consultation on the matter next quarter.

The idea is that for people who find MPF fund selection to be confusing, they would be dropped into a default fund. This is not controversial. MPF providers already offer plans - typically money-market funds - that default onto users if they do not specify a fund.

What is controversial is a view that the MPFA wants to create a single, low-fee scheme that would become the preferred choice for most people. Some in the industry suspect further that the government will take control of the scheme - with the MPFA or the Hong Kong Monetary Authority managing the fund, which would be a de facto nationalisation of the MPF.

"One option is to create a standard core fund managed centrally by a third party or by the MPFA itself," said Kelvin Lee, the head of institutional business for Schroders Hong Kong.

Stewart Aldcroft, a senior adviser for Citi's securities and fund services, said: "If you create a default fund, would it not be more attractive to MPF members to have a single core fund that is centrally managed by the Monetary Authority but in line with a strategy that is recommended for it by [consulting firms] Towers Watsons or Mercer?"

These concerns are amplified by the expectation that the new default fund will quickly grab the lion's share of MPF funds. Indeed the language of the MPFA statement is that it wants the default fund to be the "core" choice for the public. This mimics the language of financial planners, who talk of core-satellite investing strategies, with the core fund at the centre of one's portfolio, holding the most capital.

"We are worried that the market would interpret it as being endorsed by the government and then go blindly into the core fund, and then you have half the market in that core fund," said Elvin Yu, the chairman of a pensions committee for the Hong Kong Investment Funds Association.

Others believe the government wants nothing to do with the MPF - it is too unpopular - but is using the consultation exercise to pressure scheme providers to cut their charges.

"It's a tactical move by the government to embarrass the industry into lowering their fees," said Glenn Turner, the chief operations officer for Altruist Financial.

It is well known that the Financial Services and Treasury Bureau is unhappy with the MPF. The fees are too high, largely because there are too many plans, with 477 funds on offer. Each fund cuts away at the base at which management and administration fees can be levied.

The 2012 EY report on MPF found that, while average fund management fees of about 0.57 per cent were "lower than expected", MPF funds involved high operating fees and expenses, or an estimated 1.17 per cent. This was thanks to "the small number of contributing members and a small asset pool".

The MPFA expects that, simply by being a low-cost option, many users will choose the default plan, helping it achieve scale.

"If many scheme members find the core funds an attractive choice and invest in them, either as a default or a deliberate choice, such funds will then achieve economies of scale and become a mainstream long-term retirement investment strategy, thereby making the entire MPF system more cost-effective," said Darren McShane, an executive director of the MPFA.

Pogson expects the MPFA consultation will be about creating a template for the default scheme, which will be adopted by several or perhaps all MPF providers.

He said that this would involve "full portability", or the ability for the public to switch out of their current plan chosen by their employer, and go into the default fund of their choosing.

He added that full portability would necessarily involve the creation of centralised database of all MPF plans, which he envisions would be managed by the MPFA. This would give users, for the first time, a consolidated statement of their contributions to the MPF.