Lower MPF fees may be in place by end of 2016
Management fee of core funds to be capped at 0.75pc from current 1.64pc
A proposal to reform the Mandatory Provident Fund to drastically bring down costs will be submitted to Legco this month, with a launch date set for end of 2016.
Under the reform, all MPF schemes will be required to have a "core fund" for those who do not specify how their contributions should be invested. The management fee of the core funds will be capped at 0.75 per cent - much lower than the current average of 1.64 per cent.
The HK$100 billion of contributions belonging to some 600,000 savers who make no investment choices will automatically go to core funds. Others, too, can opt for these funds, designed to help bring down management fees across the board.
This will be the biggest reform of the MPF since it was launched in 2000 for the city's 2.5 million employees.
Secretary for Financial Services and the Treasury Chan Ka-keung said the core funds would address public concerns over high fees and the difficulty of choosing funds.
"The fee cap is only the starting point. We expect it to have a benchmarking effect, driving fee reduction or consolidation of other MPF constituent funds."
After gazetting the proposal tomorrow, the government will submit the bill to the Legislative Council on November 25. A vote may be taken by the middle of 2016. If passed, all 19 MPF providers will by the end of next year have to provide at least one core fund in their 38 MPF schemes.
Eddie Cheung, deputy secretary for financial services and the treasury, said the scheme "will provide a better arrangement for the thousands of employees who do not know, or who do not want to make their own investment choices for their MPF".
The MPF has assets of about HK$600 billion. Within six months of the law change, all providers will serve the 600,000-odd undecided employees a notice for an opt-out option within 42 days. If they do not reply, their MPF assets and future contributions will automatically be moved to the core funds.
With about 16 per cent of all MPF assets moving to the low-fee core funds, providers are expected to come under pressure to cut fees for more funds as well, as other employees would have an incentive to switch to core funds.
Cheung said the new law would add investment restrictions on core funds to ensure fund managers progressively cut down on risky assets as employees near retirement.
Democratic Party lawmaker Sin Chung Kai said his party would support the law change, but added: "The 0.75 per cent fee cap should be reviewed and lowered later when core-fund assets get bigger. If core funds grow to HK$200 billion or HK$300 billion, it will have the economy of scale for more fee cuts."
Peter Tam, chief executive of Hong Kong Federation of Insurers, said the insurance industry had advocated a model of "opt-in" to allow undecided savers to stay with the current arrangement. Tam feels that is better than the "opt-out" model under which their funds are transferred to core funds if they do not object.
