On the surface, Manulife's retail Japanese Growth Fund and its MPF Japan Equity Fund look alike in more than just name. Both focus on similar sectors of the Japanese economy, and as of June eight of their top 10 holdings were identical. Unsurprisingly, their excellent three-year performance through to the end of August was nearly equal: a 72.83 per cent gain for the Japanese Growth Fund and a 72.23 per cent return for the MPF Japanese Equity Fund. But when it comes to the fees associated with the funds, the similarities end. In an apparent example of the effects of competition, the Japanese Growth Fund, marketed to all retail investors, lists annual management and administrative fees of about 1.85 per cent (and the manager also receives a bonus when returns are particularly high). The Japanese Equity Fund, on the other hand, offered as part of Manulife's Mandatory Provident Fund scheme, has base fees of 2.25 per cent. That difference is not slight. After 30 years, a fund with 2.25 per cent in annual fees could be expected to be worth more than 10 per cent less than one charging 1.85 per cent, assuming both otherwise had the same rate of return. Manulife is by no means unique in charging different fees for its MPF clients than those on the open market. For their part, providers maintain that some enrollees in their retirement schemes receive rebates that can reduce their fees by as much as half - although they do not offer figures on how common this practice is. Indeed, until recently, providers seemingly did their best to hide the fee discrepancies altogether. Only in 2004, sparked in part by a Consumer Council report that found that 100 different terms were used to describe fees, did the Mandatory Provident Fund Authority (MPFA) hand down regulations requiring providers to offer much clearer statements of their charges. 'On-going cost illustrations' that explain how much of a typical HK$1,000 investment in a fund is devoured by fees are now being phased in, while the MPFA is also creating new rules to make personal fees more explicit in annual benefit statements. But even as the impact of the fees becomes public, disclosure may not create much pressure for providers to lower their charges in the MPF system, which has grown into a fund industry cash cow approaching HK$200 billion in assets. The reason is simple: under the nearly six-year-old mandatory pension programme, employers are responsible for choosing the provider, but the fees come out of employees' accounts. The result, as MPFA executive director for regulation and policy Darren McShane admits, is that lower fees are not always the first priority for the people actually selecting the schemes. 'The practical reality is that there is a range of factors employers take into account,' Mr McShane said. 'Not all those factors will be employees' needs.' David Webb, the outspoken shareholder activist and a critic of the MPF system at large, is far more blunt in his pessimism. 'I don't expect that there will be much competition on fees simply because the people making the choices on service providers are the employers, and they have no interest in the outcome of the schemes,' he said. Mr Webb points to HSBC's Hang Seng Index Tracker Fund to illustrate how MPF fees appear to be influenced by forces other than supply and demand. HSBC is by far the largest MPF provider, and its tracker fund is among its most popular options, with nearly HK$8 billion under management. Yet despite the fact that as a fund mirroring an index, it requires virtually no active management, HSBC charges the same flat 1.95 per cent management fee for the tracker as for its other funds. Outside the MPF system, Mr Webb notes, investors can simply purchase shares of the exchange-traded Tracker Fund of Hong Kong - identical except for its annual fees of below 0.15 per cent. When asked about the charges, an HSBC spokeswoman responded: 'A simple fee structure is beneficial to our customers.' More broadly, MPF providers say their fees are dictated by the burden of additional regulation under the scheme. They cite the fact that their MPF funds are required to provide more services to members, and they note that employees are offered wide latitude to shift their investments between their provider's funds. And they point to the robust returns workers have received under the scheme even after fees are taken out - a Standard & Poor's Fund Services analysis released last week found that the total average return of funds in the MPF scheme from February 2001 to the end of last month was 25.35 per cent. By comparison, the Hang Seng Index during the period was up just 7.6 per cent. 'There is a lot of overhead cost to keep a fund running in the case of the MPF,' said Belinda Luk, an assistant vice-president at Manulife. But as assets grow, and fees assessed at a set percentage grow with them, the argument that costs need to remain as high as they currently are has drawn scepticism from outsiders. Philip Tso, a Hong Kong-based consultant with the international advisory firm Watson Wyatt, is one of many MPF watchers who argue that as the system is no longer taking on many new members, the cost of administration should stay relatively constant even as assets in a fund grow. But with fees charged as a percentage, providers are actually bringing in far more money every year. 'The increase in the assets has been quite significant,' said Mr Tso. 'If you are still charging 2 per cent on an annual basis, that's a lot of money.' Providers are also quick to point out that most retail funds - with the exception of Manulife - charge significant contribution fees up front, while virtually every MPF scheme waives that charge. But that 'load' is often used to pay commissions to third-party brokers or financial advisers, who are not necessary for an MPF fund in the first place. And because MPF investments are intended for the long-term, annual fees of 2 per cent are likely to take a far greater chunk of an account than an up-front 5 per cent charge would anyway. Another sign that firms haven't felt compelled to keep their fees down is the fact that within the MPF scheme, charges across providers vary: among the large providers that have already published their expense ratios, for example, Bank of China International-Prudential's Growth Fund had an expense ratio of 1.75 per cent last year, compared with 2.25 per cent for Fidelity's Growth Fund. Yet there is no obvious correlation between expenses and returns - in the case of the growth funds, BOCI-Prudential's has actually outperformed Fidelity's slightly over the past year. Contrary to some fears expressed at the time of the MPF's inception in 2000, the market has not consolidated to the point where providers have been able to raise their fees. But hopes that competition would drive fees down once providers began recouping their losses from the early years of the system - when they spent heavily setting up their schemes while earning little in return, since there was so little money in their funds - have not been realised either. Watson Wyatt's Mr Tso has proposed an alternative system whereby members pay a flat annual fee regardless of their holdings. While acknowledging that workers who have just entered the system or who have particularly small holdings might end up paying more, he said most members would pay less - and providers would still be able to cover their costs. Yet beyond disclosure, the government has expressed no interest in taking a firmer hand towards fees. In January, when asked about fees before the Legislative Council, Secretary for Financial Services and the Treasury Frederick Ma Si-hang maintained that distinctions in fees were not large enough to cause concern, and that the government's approach was 'principally to rely on market forces to set the price'. In the end, there is one wrinkle in the system that may lead to greater competition, particularly if members become more sensitive to fee levels. Under the MPF system, a worker changing jobs can choose whether to keep the benefits already earned with the old provider, take them to the new employer's scheme or select a third plan altogether. The result is that as the system gets more mature and more workers have portable savings to shop around, the economics of the MPF scheme could change. So far, big employers have typically received a better deal, since their greater bargaining power has allowed them to negotiate fee rebates. But if enough members have benefits they can transfer, Hong Kong's highly mobile labour market may shift some power to individual employees. In the meantime, the MPFA is hoping that as more investors become aware of how much they are being charged, they will start pushing their bosses to look for a better deal. 'If supported by transparency in information, those subtle pressures can be a bit more profound,' Mr McShane said. 'We are concerned with ensuring that supply and demand works as efficiently as it can.'