Mandatory Provident Fund

New deal: MPF’s Default Investment Strategy slashes charges in half

Permissible charges are set at no more than 0.75 per cent of net asset value for the services of trustee, administrator and investment fund manager plus 0.20 per cent for recurrent out-of-pocket expenses

PUBLISHED : Friday, 05 May, 2017, 12:10pm
UPDATED : Tuesday, 09 May, 2017, 3:49pm

The new MPF Default Investment Strategy (DIS), which came into effect on April 1, is designed to meet two objectives.

The first is to provide a prudent investment plan for scheme members who have not made their own choice of MPF funds. Their contributions will now be invested through the DIS, with a view to achieving steady returns, managing investment exposure, and automatically reducing risk as individual members move closer to retirement.

The second is to impose statutory fee control for the two DIS constituent funds. Permissible charges are set at no more than 0.75 per cent of net asset value (NAV) for the services of trustee, administrator and investment fund manager, plus 0.20 per cent for recurrent out-of-pocket expenses.

The fee cap is roughly half the average level charged on existing MPF funds, and it will be regularly reviewed in the next three years for possible further downward adjustment. This recognises that fees charged have a significant impact on long-term investment outcomes. And the hope is that setting a benchmark of less than 1 per cent will push scheme providers to move more quickly in the same direction.

“Previously, MPF contributions made without an investment choice – a survey found that applied to about one-quarter of the 2.7 million employees involved – would go into the scheme provider’s default investment arrangement,” says Cheng Yan-chee, chief corporate affairs officer and executive director for the Mandatory Provident Fund Schemes Authority (MPFA).

“The trustees would follow their own rules for investing in conservative, guaranteed or other funds. There were no clear requirements, so the relevant scheme members were exposed to different fee levels and investment returns.”

The DIS now offers a standardised, low-fee investment solution, which balances long-term trade-offs of risk and return. It considers the needs of average MPF members and, by law, requires each scheme provider to offer the two DIS constituent funds, which will basically have a similar framework under all schemes.

One is the Core Accumulation Fund, or CAF, of which around 60 per cent will be held in higher-risk assets, such as global equities, while the remaining 40 per cent goes into lower-risk assets such as global bonds. The other is the Age 65 Plus Fund, or APF, with about 20 per cent in higher-risk assets and 80 per cent allocated to more conservative fixed-income instruments.

The fee cap of 0.75 per cent of NAV is notable, and we hope it helps to address a common criticism of MPF funds. The average fee charged in the market is 1.6 to 1.8 per cent
Cheng Yan-chee, chief corporate affairs officer and executive director, Mandatory Provident Fund Schemes Authority

The agreed mechanism dictates that contributions made by scheme members before the age of 50 will be fully invested in the CAF. From then on, the trustee will automatically start to move about 6.7 per cent of an individual’s assets from the CAF to the APF every year until the age of 65. By that point, all of a member’s assets administered under the DIS will have migrated to the APF.

The two constituent funds are designed to be neither too aggressive nor too conservative. The strategy is to strike a balance between risk and returns, while minimising the possibility of an extremely bad outcome as scheme members near their 65th birthday.

“The aim is to provide better retirement protection for individuals who said they don’t know how to choose funds or don’t have time to,” Cheng says. “In planning the DIS, we consulted OECD experts and made reference to international experience to devise something suitable for the local market.”

Existing members, who have previously chosen other funds, can now choose to invest through the DIS as a low-fee alternative. They simply have to submit a switching request to their trustees. In due course, they could also switch out of the DIS funds at any time in line with standard MPF rules.

“The fee cap of 0.75 per cent of NAV is notable, and we hope it helps to address a common criticism of MPF funds,” Cheng says. “The average fee charged in the market is 1.6 to 1.8 per cent, but when it comes to DIS fees, all scheme providers and trustees have to follow the law. One objective for the government and the MPFA is to provide a benchmark on fee cap levels. Already, around 40 funds have cut their fees; they know they will lose out in terms of market share if they don’t.”

A major administrative push is under way to ensure holders of the roughly 600,000 MPF accounts with no investment choice indicated are duly notified. This reminder may indeed prompt them to specify their fund preferences. If not, their existing benefits and future contributions will be invested through their trustee’s DIS constituent funds as from September.

“We are monitoring the situation and are in daily contact with trustees to assess progress,” Cheng says. “We are also relying on responsible employers to relay the message to their employees about the DIS now being in place and offering options for everyone to consider. Already, this new arrangement has ‘woken up’ a lot of people who see a new investment strategy and a fee cap, which could be very attractive for them.”

Cheng notes that the MPFA has made a commitment to Legco to review the fee cap regularly in the next three years. Also, trustees will be required to report on the performance of their DIS funds every six months to ensure all interested parties are kept fully informed of developments.

“In some ways, this is only the beginning,” Cheng says. “It is agreed that trustees will set up some kind of reference portfolio for their DIS funds. If actual performance deviates by more than 2.5 percentage points, they will have to explain to us and, of course, we will follow up. Also, with around 400 MPF funds in the market, we expect to see more fee reductions. In that respect, the DIS funds are now a benchmark.”