MPF should be in the workers' hands

The Consumer Council found huge variations in management fees with the MPF fund expense ratio (FER) - fees and charges as a percentage of the total fund size - ranging from 0.17 per cent to 4.62 per cent.

SCMP, October 16

I wonder whether the Consumer Council was really able to get to the bottom of this MPF cost scandal. Management fees are only one way in which our forced savings in this misconceived scheme are pilfered and the council has no powers to make the thieves reveal all.

Take the matter of sub-fund fees, for instance. When your MPF manager receives his monthly contributions you may think that he calls his brokers and buys so many board lots of China Mobile or Hutch and then charges you the dealing costs of these purchases plus his published management fee.

What he actually does, however, is route your investment through his headline fund to any of several other funds run by his management firm. These funds then charge the headline fund an additional management fee and you don't get to see what this fee is. Often your money goes several layers down, not just one, with fees all the way back up again.

Then you get initial buy and sell fees, dividend collection fees, fund transfer fees, consolidation fees and the list goes on. Dream of a fee that your fund manager could charge and I guarantee you that he is, in fact, charging you that fee. The biggest reason that almost half of the MPF funds lost money over the past five years is not poor markets but larcenous managers.

There is a simple way out of this conundrum, one which these managers saw 12 years ago when they devised the MPF (it was they who concocted the rules, not the government, don't fool yourself). They immediately slammed the door on this escape route. It is that you should be able to choose your own manager for your MPF portfolio. You would then be able to demand and get full fee disclosure and there would be real competition in this business.

Instead, it was appointed to your employers to decide for you who should manage your retirement savings and they made that decision mostly on the basis of the other financial services that these managers, or their related banks, offered.

Not only did this permit the managers to thumb their noses at you and charge you what they will (the employers don't care) but it has created a nightmare of administration. Every time you change jobs you get a new MPF plan with your new employer. Consolidating them is a huge headache and, of course, incurs big fees. The tangles of this employer-choice system became so ridiculous that the government decided to change things. Employee choice is now to be permitted but only for the employee's 5 per cent share of the contributions. The employer still makes his own choice for his 5 per cent contribution.

It's a solution devised by committee - worse than the problem. The tangle only grows greater this way.

The employers argued that they must still have some choice because they are allowed to set off their accumulated MPF contributions against severance and long-term service payments to employees.

Give the employees the full choice of manager, the employers said, and they will make bad decisions, in which case employers would face the prospect that they might not have enough money in the MPF to cover severance payments.

It's nonsense. Leave alone that most employees are less risk-minded than their employers (that's why they are employees), they can only choose their MPF managers from a government-approved list and they already have the full choice of the more or the less risky sub-funds offered by these managers.

Here is the simple fact: the MPF is structured to benefit the funds management industry. It may also provide retirement income for the wider population but, in terms of how the scheme was set up, this is a secondary objective. No, I'm not being cynical and, no, this secondary objective has not been achieved.

The only way to fix things is to give employees the full choice of their MPF manager. It is to be their money on retirement. They ought to have the full responsibility of the choice of who will provide it for them.

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