Hongkongers love to complain about their Mandatory Provident Fund. The government launched the plan in 2000 to address citizens' retirement needs. It implemented a fully free-market solution, handing the fund management and administration to the private sector.
All well and good, and fully in keeping with the city's laissez-faire philosophy. However, the government made people's participation in the plan mandatory and, furthermore, let employers choose the MPF trust and fund manager used by employees. This resulted in bad outcomes for some. A Consumer Council study released on October 15 found that almost half (45 per cent) of MPF funds lost money over the past five years.
MPF fees are also high. In May, consulting firm Ernst & Young issued a report finding that Hong Kong's MPF fees averaged 1.74 per cent per annum, much higher than average charges in pension schemes in Australia (1.21 per cent), Singapore (1.41 per cent) and Britain (1.19 per cent).
Some funds charge very high fees. The AMTD Invesco Target 2048 Retirement Fund involves total yearly charges (fees and expenses) of 4.62 per cent, according to the Mandatory Provident Fund Schemes Authority, a regulator.
The MassMutual MPF Guaranteed Fund involves total expenses of 3.86 per cent.
MPF administration is also unwieldy, as it is managed by 19 different trustees that come attached to the 464 funds involved in the scheme.
People change jobs, and they tend to acquire a new MPF fund with each employer. They leave behind a trail of shut, or preserved, accounts. People lose track of their MPF plans. They don't know where their money is, and because administration is not centralised, they cannot get a single, simple statement of their holdings.
The scheme, in other words, has had much of the downside of a free market (high fees, low regulation and no centralised administration) with little of the upside (choice, competition).
That is why the long-awaited Employee Choice Arrangement, which arrived November 1, is getting so much attention. Finally individuals can choose their own fund provider, presumably one with the lowest fees and most attractive returns.
The liberalisation will give people an incentive to consolidate their funds. After all, if you want to move your current MPF plan to a new fund provider, you might as well gather up all your existing funds and make a mass move. (See sidebar for explanation on how to consolidate funds).
The liberalisation gives people choice and empowers users. But never underestimate the MPF planners' ability to disappoint - the plan only goes halfway.
Employee Choice does not apply to the matching funds contributed by an employer, which will stay with the old trustee and fund provider.
This is because, under current legislation, employers can offset payments made to workers' MPF against long-service payments or severance payments. As a result, the MPFA will have to find a way for employers to keep track of the money they have contributed if it is to become fully portable, too. It has started to look at ways of doing this.
Meanwhile, people will still have to live with split accounts, at least with regards to their employers' contributions.
People can also transfer contributions they paid into MPF funds held with previous employers to a new scheme of their choice.
Inconveniently, people who do switch from their employer's MPF provider can only move their funds once a year, and have to apply to do so once a year. (See The Week Explained, linked). New contributions made by them and their employer will still be paid into the original MPF account selected by the employer. Workers can then transfer their contributions to the new fund the following year.
The Employee Choice also only applies to mandatory contributions, and does not affect voluntary contributions.
Wyman Leung, director of the investment services department at Altruist Financial Group, advises everyone to consider whether they should switch provider, but he stresses that not everyone will need to change.
He adds that people should reassess whether they are still with the best provider at least once a year.
Leung says people should not just look at the number of funds a provider offers, but should focus on how much choice there is in terms of the different sectors, asset class and regions in which they can invest, as well as how well the different funds are performing compared with their peers.
For example, does a provider only offer regional bond and equity funds, or does it also have single country funds, sector funds (such as health care) or yuan funds?
"Some providers have more than 30 fund choices, others have only five. Ten to 15 funds is likely to be enough," says Leung.
Picking a fund will depend a lot on your attitude to risk, as well as how close you are to retirement. For example, if you are 30 years away from giving up work, you can afford to take a greater investment risk than if you will need the money within five years.
The MPFA has a website (mpfa.org.hk ) that describes the investment objectives and level of risk of the key MPF fund types, such as equity funds and bond funds. It also gives guidance on which funds suit which type of investor.
Having chosen a fund type, it is then important to compare the charges and past performance of the same type of fund offered by the different schemes. Leung advises people to look at returns going back at least five years, and preferably 10 years, to see how a fund performed in both a bull market and a bear market.
Charges on an MPF fund are made up of three components: the trustee's fee, the administrative fee and the fund management fee.
Trustee and administration fees are meaningful - the Ernst & Young study found that they make up most (67 per cent) of total MPF charges. However, these fees tend not to vary much from trustee to trustee. It is a kind of fixed cost of MPF.
Fund management fees are more variable, and people have more control over this expense. They can comparison-shop among funds. Tse advises people to look at the fund expense ratio, which measures a fund's total expenses, including the management fee.
The MPFA website offers an excellent online tool that lets users look up the expense ratio of all MPF funds.
Kelvin Lee, head of institutional business at Schroder Investment Management in Hong Kong, says any fee discussion needs to be balanced with a look at what a fund does, and its returns. Some funds are more ambitious and involve more active management, which might involve higher fees. The fund returns might justify the fees.
He says: "If you look at the fees charged by different providers, the difference is only about 20 basis points. But performance difference for the same category of fund can be between 4 per cent and 5 per cent per annum between the best performing manager and the worst performing one."
Although MPF providers are not allowed to charge fees when members switch providers, and there are no bid-offer spreads for people buying and selling units, people need to be aware of other possible costs to switching.
Bonnie Tse, chief executive of AIA Pension and Trustee, advises people with money in guaranteed funds to check if there is a restriction on withdrawing their money.
Lee also reminds people that they will face an "out of market risk" every time they change provider, as they will have to sell all their units in one fund, convert them into cash and buy units in their new fund. It is possible that markets could move against them during this period.
People who have changed jobs many times in Hong Kong may have lost track of some of their previous MPF accounts.
The good news is that the MPFA keeps a centralised database of these accounts, which are known as preserved accounts.
To track down a preserved account, members can download an inquiry document from the "forms section" of the MPFA's website, and send the completed form back to the MPFA, along with a copy of their Hong Kong ID card. Or they can visit one of the MPFA's offices and show their ID card.
Tse says: "People may have too many preserved accounts to manage, but if they consolidate those accounts under one service provider, they will realise they have accumulated a lot of money."
Workers should also remember that not changing provider is also an option, if they feel their current plan is doing well.
MPF: The Basic Facts
The Mandatory Provident Fund was introduced in Hong Kong by the government in 2000. It is a market-based plan that covers those workers who never had any kind of pension.
Every month the worker and the employer each contribute 5 per cent of the worker's salary, or up to HK$1,250. Any extra contribution by the employee is voluntary and, given there is no tax incentive to contribute, many don't. The employer chooses the provider, which can be a bank, insurance company or fund manager. The employee then decides how to allocate his or her contribution, depending on the appetite for risk.
At the official retirement age of 65, a worker withdraws a lump sum, including any investment gains.
How To Make That Move
Fill in "Employee Choice Arrangement - Transfer Election Form", downloadable from MPFA website
If employee already has an MPF account with the trustee they can submit the form to the new MPF provider
If not, they need to contact the trustee first to arrange for a fresh enrolment
The original and new MPF providers will check the information and the original provider will sell the investment fund unit to cash in and send a cheque to the new provider
The new provider will invest in funds selected by the employee. The process takes between six and eight weeks
Once the transfer is completed, the employee will receive a transfer statement from their original trustee and a transfer confirmation from the new trustee
An employee can only transfer his or her own contribution once a year. The employer's contribution is not movable, it will stay with the original provider
- The contributions of both employer and employee will continue to the paid to the original provider. The employee can transfer his or her portion to the new provider one year later