What does the MPF reform mean for you?
What does the MPF reform mean for you as one of the 2.8 million employees or self-employed people who will automatically fall under the Default Investment Strategy fund introduced on April 1, 2017? Here is a simple guide:
What is the Default Investment Strategy reform?
All 32 MPF schemes run by the 18 MPF providers will need to set up a Default Investment Strategy Fund from April 1. It will have a management fee capped at 0.75 per cent and a cap on other fees at 0.2 per cent, bringing the total fee cap to 0.95 per cent. That compares with the market average of 1.57 per cent.
The fund will invest in bonds and equities but will start to reduce the investment in stocks when the employee turns 50.
Who will be affected by this reform?
If you have never chosen how to invest your MPF contributions, you will receive a notice from your provider within the next 42 days explaining that you have an investment choice to consider. If you do not reply, then your MPF contributions will be shifted automatically to the DIS fund and all future contributions will go into this fund too.
The Mandatory Provident Fund Schemes Authority (MPFA) said there are 600,000 employees with HK$8.2 billion (US$1.06 billion) of assets who have not given any investment instruction and may therefore be shifted to DIS.
If you open an MPF account after April 1, 2017 and do not make an investment choice, all your future contribution will go the DIS.
What does DIS invest in?
Each DIS scheme consists of mixed-assets funds investing in a combination of bonds and equity. The first one, called the Core Accumulation Fund, is more aggressive and will invest 60 per cent in global stocks and the rest in global bonds. Younger employees under the age of 50 will have all their assets invested in this fund.
The other fund is called Aged 65 Plus Fund and is more conservative. It will invest 80 per cent in bonds and 20 per cent in equities. Employees aged between 50 and 65 will gradually have their portfolio shifted from the Core Accumulation Fund into the Aged 65 Plus Fund so as to reduce the risk levels they face.
Can other members choose to invest in DIS?
Yes. The DIS is an investment option for any MPF members. Overseas experience shows that DIS is popular, with some markets seeing 80 per cent of members electing to put their money into it.
Will the fee cap be extended to the other 435 MPF investment funds?
The MPFA has indicated it has no intention of expanding the fee cap to other MPF funds. The idea is to allow investors to have a choice of selecting a low fee fund or an actively management fund.
What will be the impact of the DIS reform?
The reform is aimed at providing a standard approach for employees who do not choose how to invest. At present, different providers have different arrangements for members who does not provide instructions on their investment choice. Sometimes their money is invested in a fund with a high fee and a risk level which is not suitable for the employee. The DIS aims to offer a low fee, simple investment option.
The fee cap is expected to put pressure on MPF providers to cut their fee levels. This is potentially good news for employees but not so much for the providers who would receive less income from fees. Industry players expect this may lead to smaller providers leaving the market.