Is it a good idea for the HKMA to manage the MPF?
Is it a good idea for the Hong Kong Monetary Authority to manage the Mandatory Provident Fund?
That is a question raised by some lawmakers recently as they debate on a bill to reform the pension scheme.
Lawmakers who support the idea believe there is a good fit between the two institutions, as the HKMA already has the necessary staff and internal controls to manage large fund flows, as it does currently on behalf of the Exchange Fund. They also believe this could help bring fees down as the HKMA is a public body while other MPF providers are profit-making organisations. Another argument is that the HKMA could probably achieve better returns.
Let’s look at the investment aspect. In the first quarter the Exchange Fund reported an investment return of HK$24.1 billion, up 190 per cent from the same quarter a year earlier as strong gains in bonds and foreign exchange holdings offset losses in its stocks investment.
In comparison, the 451 MPF investment funds returned an average negative 0.88 per cent for the quarter. The main reason for the underperformance by the MPF is because more than half of all MPF assets are investing in equities.
Among the HK$592.58 billion of MPF assets, 40 per cent of them are investing in pure equity funds while 38 per cent are in mixed assets funds that invest in both stocks and bonds. Pure bond funds only represents 3 per cent.
The Exchange Fund, in contrast, has 73 per cent of assets in bonds and 27 per cent in equity.
The result is that the Exchange Fund tends to outclass MPF providers during periods when bonds outperform equity The opposite is also true, such that MPF providers outpace the Exchange Fund during bullish periods for stocks.
Then let’s look at the cost issue. Some lawmakers believe the annual management costs levied by the MPF providers is excessive. The average annual fee is 1.58 per cent, which is higher than the US, where such retirement savings accounts are typically charged 0.8 per cent.
However, other overhead fees related to the MPF are not accounted for in the management fees. Additional charges are levied through administration fees on paper work and registration of accounts.
If the HKMA was to take up the reins of the MPF, it would need to hire additional staff, so its likely that their charges would also increase.
To bring the administrative costs down, however, it could push for more wider adoption of digital technologies.