As Hong Kong’s MPF marks its 16 anniversary, experts call for simplification, greater integration with digital technology
The mandatory retirement fund is credited with raising awareness of retirement financial planning, although critics urge improvements
As the Mandatory Provident Fund marks its 16th anniversary on Thursday, industry experts advocate relatively minor changes that will reduce complexity and lower the costs of administration.
These include making greater use of digital technology, putting a ceiling on the number of different MPF accounts one can hold, and setting up a default investment option with low fees for those who don’t bother to choose an investment approach.
Since its launch on December 1, 2000, the mandatory retirement fund has grown into a scheme that covers 2.8 million employees and self-employed people. Employers and employees each need to contribute 5 per cent of monthly salary for the scheme, up to a combined HK$3,000 a month. The account holders invest the funds by choosing from a range of options with different risk profiles. The funds can be withdrawn from the scheme upon retirement at age 65.
Meanwhile, the MPF has faced criticism over high fees, poor investment choices and underwhelming performance.
According to Thomson Reuters Lipper, the worst MPF performing year was during the global financial crisis in 2008, which saw an average loss of 25.92 per cent. Meanwhile, 2009 was the best year, as returns bounced back an average 26.37 per cent. In the first 10 months this year, the average return is 2.95 per cent, which is on track to beat last year’s 2.95 per cent loss, and the 1.55 per cent gain in 2014.
The average MPF management fee is 1.56 per cent, which is higher than the 0.8 per cent annual charged for similar retirement fund products in the US.
However, Hong Kong lawmakers will address this issue through, among other things, introducing a default investment strategy, formerly called the core fund reform, in April next year. The reform will require all 18 MPF providers to offer one fund with a fee cap of 0.75 per cent. The option will come with a simple investment strategy suitable for the 600,000 employees who do not select an investment option for their pension fund.
Pablo Antolin, principal economist and head of private pensions unit for the Organisation for Economic Co-operation and Development, Financial Affairs Division, said the reform is important to bring the MPF into alignment with international standards.
“It is in the pension guideline set by the OECD that all retirement schemes should have a standardised default investment choice,” Antolin said in an interview in Hong Kong.
“The experience overseas is that many employees would choose to invest in this default fund ... I do not think the MPF system is too bad as it is following the OECD’s guidelines. In every country, there are complaints about fees.”
He said individuals may need to contribute more and delay their retirement age to help make up for the longer life expectancies. The average life span for Hong Kong women is 87.32 years, while the average for men is 81.24 years, among the longest globally.
Kevin Martin, regional head of retail banking and wealth management at HSBC, the largest MPF provider in Hong Kong, said digitalisation would be the most important reform for the pension scheme in the city.
“There are many enterprises in Hong Kong which still process MPF transactions manually, resulting in a lot of paper work and inefficiency. This is one of the reasons for the high level of administration costs,” Martin said.
“Using digital technology ... will enhance the members’ experience while being more efficient, thereby reducing administration costs and potentially lowering fees.”
The MPF could also be improved through increased consolidation of schemes, he said. There are 18 MPF providers offering 36 schemes with 429 fund choices.
“There are many schemes and fund choices in the market today. Greater consolidation of schemes would reduce complexity for members and bring better economies of scale with the potential to reduce expenses and fees,” Martin said.
The MPF is also working on using more electronic methods to handle documentation of the pension scheme, according to MPFA executive director of supervision Cynthia Hui Wai-yee.
“Following huge advances in IT capabilities in recent years, the MPFA is currently exploring an initiative tentatively called eMPF to standardise, streamline and automate MPF scheme administration,” Hui said.
“By making better use of electronic facilities, eMPF can help lower the operating costs of MPF providers – and consequently give further scope for reducing fees – while at the same time bringing greater ease and convenience to employers and scheme members in managing their MPF matters,” she said.
Hui said the MPFA has developed a preliminary conceptual model for the eMPF infrastructure and processes.
Hong Kong Investment Funds Association chairman Arthur Bacci praised the scheme for raising the awareness of retirement planning.
“As of September 2016, there was HK$655 billion of assets available for members’ retirement that would not have been available if MPF was not in place,” Bacci said.
To improve the system he called for a more streamlined approach.
“There are too many investment choices which in turn leads to member confusion. The regulations are overly extensive, burdensome and costly to comply with,” Bacci said.
Bacci also added that it would be important to develop post retirement investment solutions focused on income generation.
“All of the MPF products currently available are accumulation products and do not address the needs of retirees,” he said.
Elvin Yu, the principal at pension consultancy firm Goji Consulting, said there were simple technology-based solutions that would make sense, such as emailed account statements, while other information could be posted on websites instead of newspapers.
She added that many people have changed jobs over the years with the result that they have MPF accounts held with several institutions.
“I believe every employee should be required to combine their accounts down to a maximum two accounts,” She said.