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Mandatory Provident Fund Schemes Authority said it is in advanced talks with pension providers on reform plans. Photo: Dickson Lee

MPF watchdog in talks with pension chiefs on plans to lessen risks

City's pension providers in talks with regulator to draw up plans to stop savers near retirement being pushed into expensive, high risk funds

An overhaul of the Mandatory Provident Fund (MPF) scheme is being readied in a bid to stop 600,000 of the city's most passive pension savers being pushed into some of the most high-risk, high-cost investment schemes in the market.

Darren McShane, chief regulation and policy officer and executive director at the Mandatory Provident Fund Schemes Authority (MPFA), told the that talks with pension providers on the reform plans were well advanced.

The plan is to give the roughly 25 per cent of the city's 2.4 million MPF members who do not actively make investment choices on their pension kitties a range of low-cost core funds that automatically adjust asset allocation in line with a customer's projected retirement date.

Darren McShane, chief regulation and policy officer and executive director at the Mandatory Provident Fund Schemes Authority (MPFA). Photo: Edward Wong
That would immediately cut the chance of a saver near retirement age seeing their MPF provider channel their cash into risky products with high charges.

The move comes after a public consultation by the MPFA won broad support for a proposal to make all MPF providers introduce a so-called "core fund" option from as early as next year. The funds would have a simple investment mix, with fees capped at 0.75 per cent.

"The consultation showed a broad agreement on the need to have a standardised core fund," McShane said.

"The MPFA is discussing with the industry the modalities of putting such funds in place."

The new funds would require managers to build a balanced portfolio of bonds and stocks, structured so that younger MPF investors got a greater stock exposure that automatically reduced nearer retirement. The exact asset allocation is being worked out, but those older than 50 are likely to have equity exposure of no more than 10 to 30 per cent.

Under current MPF rules, a 64-year old with just 12 months left to retirement could be 100 per cent invested in the stock market - the most volatile of traditional asset classes and which money managers typically say is unwise to be heavily exposed to close to retirement. The benchmark model usually suggests a much steeper skew to bonds as savers get older.

Equity funds are also often among the most expensive to manage, leaving unsuspecting savers with the worst combination of high-risk, high-cost investments.

McShane said the authorities would likely allow each provider to run its own core fund and let smaller players sell other providers' core funds rather than set up their own.

But he cautioned that core funds would not suit everybody. "People need to understand that low fee and simple investment may not fit their needs. Some might want to invest in higher-risk, higher-return products that fit their ages and retirement needs," McShane said.

Mark Konyn, chief executive of Cathay Conning Asset Management, said the core fund style of "de-risking the investment approach according to the age of the retiree" had gained popularity in many overseas markets.

Stephen Fung, chief executive of AIA MPF, warned that a core fund may not be suitable for everyone. "We strongly encourage members to carefully consider and proactively manage their MPF investment as per their risk tolerance level," he said.

This article appeared in the South China Morning Post print edition as: Watchdog moves to lessen MPF risks
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