Hongkongers can hope for better returns on their pension-fund investments under proposals put forward by the Mandatory Provident Fund Schemes Authority which, if adopted, could see fund management fees cut by as much as HK$1.2 billion a year.
The estimate was contained in an authority report released yesterday on a year-long study on ways to improve the MPF system. It was prompted by mounting public discontent at high management fees for MPF funds.
The authority said Hong Kong could emulate countries that rely more on electronic methods to settle payments and process data, and consolidate personal accounts. Among its key recommendations, the authority suggested imposing a cap on fund fees, requiring the provision of a basic low-fee default fund, and allowing non-profit groups like trade unions or social enterprises to operate MPF schemes to enhance competition.
In Hong Kong, the fund-expense ratio - which measures the fees and expenses of an MPF fund as a percentage of fund size - is 1.74 per cent on average. The rate of net return on funds is about 3.4 per cent a year.
The study found administration costs made up about 0.75 of a percentage point of the 1.74 per cent, which amounted to HK$2.7 billion in total.
Although the authority said the fee level had already come down from 2.1 per cent in 2008, it was still high compared with Australia's 1.21 per cent, the United States' 0.83 per cent and Chile's 0.6 per cent.
The consultancy's analysis showed a potential cost reduction of HK$1.2 billion a year by 2018 if its recommendations were put into practice. This would be a lowering of the administrative cost to 0.4 per cent from the current 0.75 per cent.
But authority non-executive director John Poon Cho-ming, who was in charge of the study, said: "Lower costs do not necessarily mean lower fees. It may be unrealistic to expect fees to be reduced by $10 if costs are cut by $10. Trustees may make use of the money thus saved to invest in improving efficiency, say through IT development. Members would subsequently benefit from this as well."
Former unionist legislator Ip Wai-ming, of the Federation of Trade Unions, urged the government to play a bigger role in retirement protection.
Ip said: "It is unrealistic to expect unions to operate MPF schemes. We simply do not have the expertise to do it."
Authority chairwoman Anna Wu Hung-yuk agreed the system needed to be reformed and the government might have a role to play. "Purely relying on market forces to set fee levels may not be enough," she said. "More needs to be done."
But Sally Wong Chi-ming, chief executive officer of the Hong Kong Investment Funds Association, warned about making structural changes to the existing system, saying they could bring unintended consequences. If the government took part, for example, "some people may think it would guarantee their investment returns".
Secretary for Financial Services and the Treasury Bureau Professor Chan Ka-keung said the government welcomed the authority's proposals and would consider them.