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.
The Week Explained: MPF Choice
Here's the good news and the bad news. As of last week employees can benefit from the new Mandatory Provident Fund Employee Choice Arrangement scheme. The bad news is that the choice will be limited in a most surprising way.
The idea is to give employees a better choice of fund providers for their part of the MPF contribution. The employer's contribution will remain in the hands of whichever company they selected for this purpose in the first place.
So far, so bad but what is not generally known is that although employees will have an annual opportunity to switch funds they will not be able to transfer new payments in their funds.
In other words only existing investments can be transferred; all new payments will have to go to the original fund selected by the employer although they too can be moved after a year and, assuming that MPF contributors have the energy to do so, they can repeat the transfer on an annual basis.
Furthermore, employees can only transfer funds they contribute to a plan, not their employer's contributions. That money stays with the fund provider selected by the employer. (See cover story, linked).
It is unclear why this restriction lingers because anyone choosing to transfer must be doing so because they are not satisfied with their current fund manager. Yet they are stuck with that manager until they change jobs or the MPF Schemes Authority (MPFA) grasps the nettle and gives employees a full choice of where their funds are invested. The authority is mulling the idea of allowing employees to switch all funds from the original provider but the mulling is taking a while.
And while they are thinking about this they should also be thinking about allowing employees to shift the employer's contribution because although the employer has a statutory obligation to make these contributions they are made for the benefit of retiring employees not retiring employers.
Also on the MPFA's radar are ways to cut the high fees levied by the small group of authorised MPF scheme providers, an issue that has been much discussed. The charges are among the highest in the world and these companies are already fighting a rearguard action to maintain this lucrative windfall.
One of the arguments they have been deploying is that investors should focus less on the charges and more on the performance of the funds. It may be wise if they exercised greater caution in using this line of defence.
Last month the Consumer Council published a study which showed that nearly half the MPF investments made in the past five years were money-losing and even the very best funds only managed to achieve an average annual return of 5-6 per cent. The average return was 0.24 per cent, in other words, less than the rate of inflation, thus, in real terms, producing a loss.
The fund providers have argued that this is a difficult time for investors and that other fund managers have also had difficulties securing good returns. A recent report by the data provider Lipper found that in the past 20 years only 40 per cent of equity funds run by European-based fund managers were able to outperform the benchmarks of the markets in which these funds were invested. This finding closely mirrors that of others, which show that fund managers end up making less money for their investors than could have been achieved by buying exchange traded funds (ETFs) that simply mirror the performance of the markets.
As the MPF fund providers are, without exception, also in the more general fund management business it might be thought that they would be more reticent in highlighting the inadequacies of their industry.
This brings us back to the matter of ETFs, already much discussed on these pages, but not discussed enough at the MPFA. An excellent case could be made for adding the HK Tracker Fund to the list of approved MPF investments, affording better returns than the other MPF providers and at a fraction of the cost.
No doubt this would provoke a new outbreak of dismay from the existing MPF clique and they would muster up all sorts of arguments about Tracker Fund's lack of experience in this field, and so on. But they cannot say they are offering a better deal for investors - surely this is the bottom line here.