Hong Kong’s MPFA: responsible regulator or shying away from making fundamental reforms?
The MPF’s current structure is flawed in that it does not offer any choice of which fund manager manages your pension money
Logically, allowing MPF scheme members choice of funds should increase competition between funds and should, if the choice is made perfectly rationally, enhance pricing efficiency in the industry. However, overseas experience tells us that pension scheme members do not always behave in a completely rational manner. Evidence suggests that over time members have shown increasing apathy and inertia rather than use their powers to exert pressure through market forces.
Cheng Yan-chee,
Mandatory Provident Fund Schemes Authority
Letters to the editor, October 12
When this letter was published I had just left for a holiday. Late as I may be in reply, however, I cannot leave this unanswered.
Once again, a senior MPF administrator has confused the issue or shown that he does not really understand it.
It’s simple. You do not have the choice of the fund manager who manages your MPF pension money. This choice is made by your employer. All you can do is choose between different funds offered by the fund manager who is imposed on you.
This has several implications, the most obvious being that as you cannot sack him and as his performance is not a high priority for your employer, there is great opportunity for him to overcharge you and little reason why he should give your investments much of his time.
Overcharge you he certainly does. The average MPF management fee is 1.57 per cent a year, almost 10 times what you would have to pay for investment in a big exchange traded fund (ETF) that incurs marketing and redemption costs. These do not trouble your MPF manager.
Now, I am quite prepared to believe Mr Cheng that “members have shown increasing apathy and inertia rather than use their powers to exert pressure through market forces”.
There is a very good reason for this. MPF members have no power to exert pressure through market forces. They cannot choose their MPF fund manager and they cannot tell him to reduce his fees or lose his customers.
All they can do is pick one of a sheaf of funds he offers. These are differentiated by little more than their supposed level of risk and pretty much alike from one fund manager to another.
So what is all this talk of exerting “pressure through market forces” when people are not even allowed to choose where they will shop? This is not apathy or inertia. It is just a case of people having better things to do with their lives than pretend they are making real choices when they know they are not.
It also makes a nonsense of Mr Cheng’s further claim that too many choices can be counterproductive and “when facing a wide range of options, members may not be able to make an optimal and informed decision”.
The reason they cannot make an optimal or informed decision is that they do not have a wide range of options. In fact they have none at all. They can only shop at the company store and they have no say in the price charged them there.
The reason they [MPF members] cannot make an optimal or informed decision is that they do not have a wide range of options. In fact they have none at all
Telling them that they have free choice because, although forced to buy and forbidden to choose where, they are at liberty to choose between a few overpriced offerings, is an illusion of choice and an insult to their intelligence.
As much to the point, encouraging people to shuffle between different funds run by the same manager actually does them a disservice.
Leaving aside that churning an investment account is rarely a good idea for anyone but the stockbroker, why bother appointing a professional to do a job if you mean to do it yourself?
Pick the manager and then let him get on with the job. That’s the way to do it, except that in the MPF you are not allowed to do it.
It really is the crucial choice. If you cannot shop between different fund managers for the best and lowest price deal available, then you have effectively no choice. These MPF people always evade this obvious point and I just cannot understand why.
Thus to the real gem in Mr Cheng’s letter – “As a responsible regulator, the MPFA does not shy away from making fundamental reforms.”
Oh, yes, it does.
