All Mandatory Provident Fund schemes must introduce a low-fee core fund from 2016 for employees who do not know which fund to choose for their pension contributions.
Under a plan proposed by the pensions regulator, it has for the first time also set a cap on management fees, at 0.75 per cent for the core funds, compared with a market average of about 1.4 per cent. The total fee is also limited to 1 per cent, against an average of 1.69 per cent.
There are 600,000 employees with a pension pool of HK$60 billion who do not select the funds in their MPF pension scheme.
"The initiative is aimed at addressing two major concerns of scheme members, namely high fees and not knowing how to select funds," said Anna Wu Hung-yuk, the chairwoman of the Mandatory Provident Fund Schemes Authority, as she announced a three-month consultation on the plan.
The proposal comes in response to criticisms against the high fees and poor performance of the MPF, which was introduced in 2000. The 41 schemes run by 19 providers cover 2.5 million employees, with total assets of more than HK$500 billion.
The schemes allow staff to choose how to invest their money, but 24 per cent of them have never made any choice and left it to their MPF providers to invest in default funds.
Diana Chan Tong Chee-ching, the managing director of MPFA, said there were no standard default fund requirements.
"Some providers use growth funds as default funds. These can bring higher returns but are too risky for those who are to retire soon. Some providers define conservative funds as default funds, which are safe but returns are too low," Chan said.
The regulator proposes using core funds as the default. They can only invest in index fund products to maintain low costs, with their fees capped.
"By standardising the default fund and capping the fee, core funds could become the benchmark in fees and hopefully force other fund fees to come down," Wu said.
Legislator Sin Chung-kai welcomed the proposal. "There are more than 400 MPF investment funds, which are far too many. The employees do not know how to choose between them. The core funds would help make the choice simpler," he said.
Hong Kong Investment Funds Association chief executive Sally Wong Chi-ming said the fee cap "would inevitably pose challenges for the industry", adding she had reservations over the use of core funds as default funds.
"We don't wish to give employees the impression that since there are default funds, they don't have to do anything," she said.