Laying the nest egg
Everything you need to know about moving your pension fund, by Nicky Burridge
New regulations came into force at the beginning of November giving employees more choice in where the money in their Mandatory Provident Fund accounts is invested.
For the first time, workers are allowed to select their own trustee and fund for contributions they have paid into the MPF.
With recent research by the Consumer Council showing that nearly half of all MPF funds have lost money during the past five years, the change could not come at a better time.
We look at what the new rules mean for workers, and how they can make the most of them.
The new rules
The new rules, known as the Employee Choice Arrangement, enable workers to transfer mandatory contributions they have paid into an MPF fund to a new trustee and scheme of their choice.
People can also move MPF contributions they made when they worked for a previous employer, enabling them to consolidate their savings in one place if they want to.
But workers cannot move money paid into the MPF by their employer.
Any new MPF contributions they make will also still be paid into the scheme selected by their employer, although workers can move the money to a scheme of their choice after a year.
People can transfer money to a new scheme at any time, but they are only allowed to move it once every calendar year.
Cynthia Hui, executive director (supervision) of the Mandatory Provident Fund Schemes Authority (MPFA), a regulator, says: "The implementation of the Employee Choice Arrangement will give employees greater autonomy and encourage them to manage their MPF investments more actively, based on their personal needs.
"The move will further enhance market competition, resulting in trustees providing better products and services, and further reductions in fees."
Who should change?
Belinda Luk, senior vice-president of pensions and group business at Sun Life Financial Hong Kong, advises all MPF members to review the performance of their current scheme and consider whether it is meeting their needs.
She says: "People should compare the value of the contributions they made against the market value of their funds.
"If they are making reasonable returns of a few per cent a year, it is not really worth switching.
"But if they find from their statement that they are only breaking even, they should begin the thinking process."
Kelvin Lee, head of institutional business at Schroder Investment Management in Hong Kong, also advises people to make sure their fund meets their current investment needs.
He says: "If you are young and have 30 years before retirement, you should typically have around 90 per cent of your assets in equities."
Equities generally produce the highest investment returns over the long-term, but they also have the highest level of investment volatility.
This volatility makes them less suitable for people who are close to retirement, who should generally focus on preserving their capital, rather than growing it.
As a result, it is important that people regularly review their MPF to make sure they are still investing in the most suitable asset class for their life stage.
Workers should also consider whether they are happy with the service they are receiving from their current MPF provider, as well as taking into account how easy it is for them to manage their account and monitor the performance of their funds.
Who should stay?
Even if your fund is not performing as well as you had hoped, there will be some circumstances under which you are better off staying where you are.
Luk explains: "In the very unfortunate scenario that your contribution has a year to date loss of 50 per cent, you will have to examine what caused the loss."
She says the loss might be caused by people making the investment at an inappropriate time, as consumers often fall into the trap of "buying high and selling low".
She says if this was the case, it could be worth keeping the units in the hope that the fund's value rebounds.
But she added: "If the reason is plainly due to overall unsatisfactory fund performance, then you should act quickly and select a fund or scheme that could give you better returns in the long run, to help you recoup the loss."
She also advises people to think hard before moving money out of a guaranteed fund.
Luk says: "If you exit a guaranteed fund, you may lose the guarantee the scheme promises.
"In a low interest environment this may not be a wise thing to do."
Choosing a new provider?
Robert Flux, director of Simmonds (International) Financial Associates recommends that people take a holistic approach when choosing a new provider.
He suggests investors should look at the choice of funds, their performance and the fees, as well as the financial stability of their provider.
He says: "Firstly, you should choose a provider with the right fund links and features for you, given your stage in life, risk profile and objectives.
"Charges would then be a huge deciding factor as these can vary considerably and therefore impact your overall performance.
"I also suggest checking the financial rating, longevity and stability of the provider, especially in these uncertain times."
But Lee reminds people not to simply opt for the provider with the most funds.
He says: "The number of fund choices to me is not the key issue."
Instead, he suggests that people focus on whether a provider has good funds that meet their current investment needs.
Choosing a new fund?
Deciding what type of fund you want to be in is an important part of picking a new provider because you will need it to provide a good fund in this area.
The Mandatory Provident Fund Schemes Authority divides funds into six core types, which it ranks according to the level of investment risk they pose.
Its website includes a section detailing the main features of these different fund types, their risk level and what type of investor they are most suitable for.
At one end of the scale are equity funds, which invest at least 70 per cent of their assets in shares, while at the other end are conservative MPF funds, which aim to preserve capital and invest in short-term bank deposits and short-term bonds.
In the middle are bond funds and mixed funds, which split assets between bonds and equities, as well as guaranteed funds.
Workers need to decide how much risk they are willing to take with their money, as this forms a key part of deciding what asset class or fund type best suits their needs.
As a general rule, the higher the level of risk, the higher the potential returns are likely to be over the medium to long term.
But higher risk funds also usually have greater investment volatility.
People should also consider what geographical areas or asset types they think will perform well.
Luk suggests workers develop their investment appetite from a macro point of view. She says: "Do you believe in Europe or Asia? Do you think equities will outperform bonds in the long-run?"
She adds that people can choose to invest in more than one fund in the MPF, so they can use different funds to spread the risk if they want to.
Having decided what type of fund you want to invest in, the next task is to compare the funds in this category offered by the various providers in this market.
The MPFA's website has a fee comparison table in which it lists the average fee for different fund types, as well as enabling consumers to compare the actual fees charged by individual funds.
The fees are expressed as a fund expense ratio (FER), which measures a fund's total expenses as a percentage of the fund size.
The FER for MPF equity funds ranges between 0.51 per cent and 3.88 per cent.
Generally speaking, the lower the ratio, the better.
But Luk warns people not to get too hung up on the charges for funds. She points out that the variation in fees can be as little as 0.2 per cent to 0.5 per cent for some types of MPF funds, but the difference in the returns can be as much as 3 per cent a year, based on historical performance.
She says: "If a particular fund keeps performing better than its peers, and there's no evident change to future investment philosophy, then the consideration of performance should override the fee. You pay for where the value is."
Sun Life's sister company, BestServe, has produced a website called MyMPFchoice.com which gives an impartial comparison of the past performance of all MPF funds.
The tool enables investors to compare the returns made by different funds that they are interested in, over different periods, based on either lump sum or regular contributions.
While it is important to remember that the past performance of a fund does not guarantee its future return, looking at past performance can be indicative of whether or not an investment strategy is working in the current investment climate.
Lee advises people to look at the past performance of a fund during the past five or even 10 years.
He adds that workers should also try to find out more about the style of the fund manager, such as whether they take an aggressive or conservative approach.
Making the change
Once workers have chosen their new provider and fund, the final stage is to have their contributions moved.
To do this, people need to fill out an Employee Choice Arrangement Transfer Election Form, which can be downloaded from the MPFA's website, and submit it to the new trustee they have selected.
If they do not already have an MPF account with this trustee, they will need to contact them to be enrolled into their MPF scheme.
The new trustee will then contact their existing provider on their behalf and arrange for the fund units bought with their mandatory contributions to be cashed in.
The money will be sent by cheque to the new trustee, who will use it to buy units in the fund of the worker's choice.
The whole transfer process takes between six and eight weeks to complete.
Unfortunately, the individual has no control over when their old units are sold and their new ones purchased.
As a result, the transfer process does involve an element of investment risk, as people could end up selling their old units on a day when the price is low, and buying their new units at a time when the price is high.
But Flux, director of Simmonds Financial, stresses that this potential risk should not put people off switching if they are in a badly performing fund or one that does not suit their investment needs.
He says: "I wouldn't imagine being 'out of the market' for such a short period of time would have much impact at all.
"The only times it would are if the switching process takes considerably longer than it should."
It is important to keep reviewing your MPF fund and provider on a regular basis.
Luk, of Sun Life Financial, says: "It is a good habit to review your MPF savings every year, even if your appetite to risk hasn't changed."
She says people should look at the fund performance and see if it has produced the returns they thought it would. If it did not, they may need to make a change.
It is also important to consider the impact inflation is having on your money.
If annual returns on your fund are lower than inflation, the value of your investment will actually be falling in real terms.
Peter Kende, chairman and founder of financial adviser Financial Partners, warns: "If inflation is high, running at 7 per cent, your money halves in value every 10 years.
"Even if inflation is low at 2 per cent to 3 per cent, the buying power of your savings pot will still halve over 25 to 30 years."
If returns are failing to keep pace with inflation, it may be worth considering increasing your contributions or switching to a fund with a more aggressive investment strategy.
As with all financial decisions, those considering changing MPF provider should take independent financial advice.
It is also worth remembering that you can move your money at any time, so it is not a decision that needs to be rushed.