Employers meet requirements but little is done to help parties use funds effectively INVESTMENT ADVISERS believe most of Hong Kong's enterprises and their employees need more help from MPF providers and authorities to understand the choices available and how they can make the most of out of them. 'MPF providers have been excellent in ensuring employers comply with the requirements to put in place schemes for their employees, but little has been done to help these parties use the MPF effectively,' said Stephen Gollop, chief executive of Bridgewater, an investment advisory firm. Mr Gollop said that because most employers and employees did not fully understand the value that could be generated through an MPF scheme, many of them had become hugely apathetic when managing their options. He said many employers did not realise the cost of switching schemes was negligible, suggesting that enterprises which had signed up with underperforming schemes should be looking to review their choices and make a switch. 'No penalties [on transfers] are allowed under MPF rules. The only exception is on guaranteed funds, where the guarantee is extremely unlikely to be provided,' Mr Gollop said. 'However, most funds are slightly above the guarantee level so it is not important. Also, the cost of staying in such funds in terms of lost investment opportunity is likely to be much higher.' He said that because the choice of MPF scheme provider rested in the hands of employers, the administrative capabilities would always figure in the selection process. This would mean assessing MPF scheme providers on the basis of their general administration services, handling of employee contributions, record keeping and value-added services such as online member account and fund information tools and support services. Poor support from a scheme provider could have a significant financial impact. Transferring to an MPF provider that offered an efficient service could significantly reduce the number of man hours spent on unproductive administration and dealing with employee inquiries because there would be convenient direct access to information from the scheme provider, Mr Gollop said. Keeping administration simple may be why companies have not taken advantage of their right to sign up with more than one MPF provider and offer some choice to their employees. Mr Gollop said the simplicity of the MPF meant that aside from administration, employers needed to be concerned only with a few key aspects of an MPF scheme provider and its offerings when assessing its strengths and suitability. As part of necessary due diligence, an employer should consider the financial standing of the MPF scheme provider and its ancillary service providers, and assess its commitment to the MPF and whether it had built up a large enough client base to sustain the business over the long term. 'You need to know [the MPF provider's] future plans, which may include introducing new funds. However, I suspect many of the lower quality schemes have already given up because they have not achieved, nor will they achieve, critical mass,' Mr Gollop said. While media reports had focused heavily on MPF scheme charges, Mr Gollop believed that they were not the most important consideration and needed to be seen in the right context. 'Fees are important and all employers and employees need to understand what they are paying in a scheme. But we do not recommend getting too worried about charges in isolation,' Mr Gollop said. 'What we believe is a better measure is value for money. You can have very low charges on a scheme and in turn the provider has no ability to pay for good service or, more importantly, good fund managers.' Pegasus Fund Managers managing director Paul Pong said the difference in management charges between the most expensive and cheapest MPF schemes was about one percentage point. Mr Pong added that employers should also scrutinise the different fee structures for switching funds among different scheme providers. But Mr Gollop said the discrepancy in charges paled in comparison with the difference in performance. There was a 30 percentage point difference between the best performing Hong Kong equity fund and an average performing fund over the 12 months to October, and a sizeable 38 percentage point difference between the best and worst performing Hong Kong equity funds. Mr Gollop said the opportunity cost to employees from a poor choice of provider could be enormous even in the short term. Mr Pong suggested looking for an MPF provider with an established track record of delivering returns in the top quartile of the full spectrum of major MPF fund classifications. As an investment platform, Mr Gollop said an MPF scheme should ultimately be judged on the performance of its funds, in addition to its ability to offer a sufficiently diverse range of funds to cater for a diverse range of people. 'MPF is used by people from their earliest start in employment through to retirement. It could be the only source of retirement income for some or count as a very small percentage for others. Every person is different with potentially very different needs,' Mr Gollop said. 'Our belief is a wide range of funds is needed to deal with this diversity. The funds need to cover the full spectrum - risk, market spreads and currency diversity. 'Regrettably, due to understandable constraints put in place by the MPF authority, of the types of fund available and the relatively low contribution levels and charges, most providers are not giving much choice beyond certain lifestyle funds and the usual equity and fixed interest funds.' Mr Pong agreed that there was a need for greater diversity in funds available through the MPF platform. He suggested that there should be a radical loosening of restrictions governing funds which could be made available. 'I do not see a compelling reason why the MPF does not make the entire universe of Hong Kong authorised funds available to MPF savers,' Mr Pong said. 'The range of funds offered by the typical scheme provider does not offer enough diversity. MPF members could benefit from the availability of a cautious hedge fund, which would allow them to better protect and grow their savings during a bear market. 'Historically, stock markets spend 15 years rising and then 15 years falling. If MPF members do not have access to cautious hedge funds during a bear market, they stand to lose out on a significant potential return.' Regulatory change aside, Mr Pong believed MPF providers could do a lot more to serve the small and medium-sized companies, which make up the biggest group of employers in Hong Kong. 'Small and medium-sized enterprises - even companies with more than 100 people - are not getting much support or attention from MPF providers, especially in terms of education and information for scheme members. In addition, most SMEs do not have sufficient knowledge to make an informed choice of MPF provider. 'Unlike large companies, which hire specialist consultants to help them find the right MPF solution, SMEs do not have the scale or financial resources to justify that kind of expenditure,' Mr Pong said. To remedy the situation, Mr Pong suggested the MPFA should adopt a more active role in educating employers and establish an affordable consultation service for Hong Kong's smaller firms.