Mandatory Provident Fund (MPF)

Low-fee reform of Hong Kong’s pension fund set to launch April next year

PUBLISHED : Sunday, 17 July, 2016, 5:53pm
UPDATED : Sunday, 17 July, 2016, 10:47pm

Reform of the Mandatory Provident Fund pension scheme that will introduce low-fee funds is likely to launch in April next year as pension providers are still working with the regulator on how to add curbs to the capped-fee elements, according to sources familiar with the situation.

Providers who worked closely with the pension regulator on the reform are now looking at the caps – a 0.2 per cent out-of-pocket expenses charge for various professional fees and a 0.75 per cent management fee.

When lawmakers passed the bill in May approving the reform, Secretary for Financial Services and the Treasury Chan Ka-keung said the reform, which had been scheduled for launch by the end of the year, could not be expected until the first half of next year.

However, a senior executive with one MPF provider told the South China Morning Post that the government still wanted the reform to happen soon and April 1 is the likely target date.

‘The government wants the MPF reform to proceed as quickly as possible to bring down overall fees and improve the image of the MPF. While the government had planned to launch the reform in the first half of next year, it now wants it to happen in the first quarter. However, many providers want more time to prepare,” said the executive, who requested anonymity.

“As such, with an April 1 launch looking likely, there have been a lot of meetings between the MPF providers and Mandatory Provident Fund Schemes Authority to sort out the issues,” he said.

The industry is now working on the mechanism to control the out-of-pocket expenses
Eleanor Wan, BEA Union Investment Management

The reform will be the biggest change to the operation of the MPF since it was launched in December 2000. The MPF, which covers the city’s 2.5 million employees, has been criticised for poor performance and fees that are higher than comparable overseas markets.

All MPF providers will need to offer a default investment (DIF) strategy fund, formerly known as a core fund, for the 600,000 employees who have not chosen how to invest contributions amounting to about HK$100 billion.

At present, there are no rules about how a provider invests MPF contributions for these employees and sometimes the funds invest in risky options which carry high management fees.

Under the reform, the HK$100 billion and the employees’ future contribution would all go into the new default investment strategy funds. They have a simple investment strategy which involves investing in stocks and bonds with the stock investment reducing as the employees get older.

The government initially wanted only a 0.75 per cent cap on management fees but lawmakers added the out-of-pocket expenses fee which is capped at 0.2 per cent.

The management fee covers monies paid to trustees, promotors or sponsors, investment managers, custodians and other service providers. The expenses fee covers a range of expenses, such as audit fees and legal costs.

Another MPF executive also said April 1 now appears to be the new launch date.

“Since guidelines are needed to the 0.2 per cent out of pocket expense, more time is needed for discussions and this has resulted in little chance of it appearing this year. April 1 is a reasonable target,” he said. “Time is also needed to educate the members of the MPF to understand what the default investment strategy fund is as this is something new for them.”

A spokeswoman for the MPFA said the authority had no comment on the reform’s start date, saying only that it would take time for the provider to prepare for the changes required by the law.

“While the original version of the bill subjected only management fees of the default investment strategy funds to a fee cap of 0.75 per cent of the net asset value of the funds, the passed bill also caps recurrent out-of-pocket expenses at 0.2 per cent,” she said.

“With this additional provision, MPF trustees have to revise their plans on product readiness, the scheme administration system, internal controls, the IT framework, etc, and a longer lead time than originally planned is needed,” she said.

“The MPFA is working at full speed with the government and trustees with a view to launching the DIS in the first half of 2017,” she said.

Eleanor Wan, the chief executive of BEA Union Investment Management, said the MPFA is working on the guidelines, and with the industry to update the administrative system.

“The industry is now working on the mechanism to control the out-of-pocket expenses. Indeed, the extra time will be good for preparation on administrative and operation issues. For employees, they also need to have a better understanding of the default investment strategy before making any decision on investment choices,” Wan said.

Hong Kong Investment Funds Association chief executive Sally Wong said: “All MPF providers are at full-steam ahead preparing for the launch; and are committed to making the default investment strategy reform a success.”