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.
MPF changes first step on road to reforms
'Semi-free walk' which begins tomorrow is the first stage of more proposed reforms aimed at aiding the worker, says the MPFA's Diana Chan
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From tomorrow, the city's 2.4 million workers will be free to choose their own Mandatory Provident Fund provider, giving them a much-needed say where their nest egg is invested.
But complaints over the fees charged by providers, who were previously chosen by employers, are expected to continue, and may be the harbinger of further changes to the 12-year-old pension scheme.
At the end of next month the Mandatory Provident Fund Schemes Authority would announce a range of reform proposals to reduce fees, Diana Chan Tong Chee-ching, managing director of the MPFA told the South China Morning Post recently. Possible options include adding a cap on fees as well as a mandatory requirement that all schemes have at least one low-fee investment choice.
The Consumer Council earlier this month released a survey indicating MPF investment funds had average fees of 1.73 per cent, higher than overseas markets which charged as low as 0.5 per cent of the asset under management. The Hong Kong fees have fallen from 2.1 per cent in 2008.
"The MPFA is not happy with the speed and level of fee reduction. MPF assets have reached almost HK$400 billion and the providers should have room to reduce fees further," Chan said. "Capping the fees would definitely be one of the measures we would consider."
Established in 2000, the MPF is a compulsory retirement scheme requiring employers and employees to each pay 5 per cent of salary, up to a combined HK$2,500 a month, to an MPF provider such as a bank or fund company. Workers can access their contribution plus any investment returns at 65.
A major criticism of the MPF has been that it allows employers to choose the provider while employees cannot switch even if they are unhappy with the services, fees or performance. Allowing employees to choose providers is intended to add competitive pressure.
Many employees want more, however. The official name of the policy is the Employee Choice Arrangement but people are more familiar with "semi-free walk", because if the workers decide to change, they can transfer only their own accumulated contributions to a new provider once a year free of charge.
The employer's accumulated contributions will stay with the original provider, as will new contributions from both the employer and the employee for the next year. At the end of that year, the employee will be able to transfer their part of contributions to the new provider.
Sandy Iu, an accountant, said: "That is so complicated. Why doesn't the government just let the workers choose the providers they want to pass on all contributions, including those from the boss? The MPF is my retirement fund and I should have full power to manage it,"
Chan said the authority wanted to introduce a "full free walk" to allow employees to transfer the entire MPF portfolio to the provider they preferred.
"But this will be a long-term goal as it won't be easy to achieve," she said. "The MPF was set up in a way that was employer-based and it let 250,000 employers determine the providers in order to eliminate administrative burdens. To let all 2.4 million employees freely choose their providers and to make it so they could transfer at any time would effectively change the whole structure of the MPF into an employee scheme."
If employees could freely change providers and shift their contributions around frequently, it would be difficult for both employers and providers to handle the administrative work.
The MPFA was studying all options to solve these problems, she said, such as introducing a central data system or requiring an employee to have only one permanent MPF account.
MPF providers believe allowing employees to choose will bring fees down but are opposed to a cap.
"MPF is a 12-year-old boy today but if the desire is to have it operate like a 21-year-old, capping a fee is like using artificial drugs to stimulate a faster growth. One has to consider the side effects," said Rex Auyeung, Asia president of Principal Financial Group. "The MPF industry is going through its normal course of development where fees will continue to come down as the volume increases and the competitive level increases."
Desmond Ng, chief operating officer and head of sales and marketing, Asia ex-Japan, of Invesco Hong Kong, said: "We do not see the imminent need for the government to add a cap on fees when market competition seems to continue to drive fees down. We believe market competition after the implementation of the employee-choice arrangement may further drive the fees down."
Bank Consortium Trust managing director and chief executive Lau Ka-shi said employees should be allowed to shift their entire MPF portfolio to the providers of their choice.
"In the long run, full portability of MPF accounts is the direction. However, there are factors to be considered," she said.
BEA Union Investment chief executive Eleanor Wan said it would be ideal that employees had the flexibility of choice for their retirement portfolios.
"However, the concept of savings and investment for retirement still needs further education in Hong Kong," Wan said. "For example, employees are always concerned with the current market movement over long-term investment strategies. They pay little attention to investment strategies that are suitable for their different life cycles," Wan said.