Jake's View

PwC study misses the point entirely of a possible central MPF registry: real choice for beneficiaries

A central database would allow people to churn their investment choices more often – certainly good for MPF managers and their stockbrokers, but pity about we the beneficiaries

PUBLISHED : Wednesday, 20 September, 2017, 5:45pm
UPDATED : Wednesday, 20 September, 2017, 11:18pm

The Mandatory Provident Fund, the city’s pension fund, would benefit from a centralised database, a push to digitise transactions, and differentiating members by income and age, according to PwC

– SCMP Business, Sept 20

I am amazed, I truly am, that researchers of the standing of PwC should conduct a study on the MPF and yet miss the enormous flaw at the heart of this forced retirements savings scheme.

This was not a study carried out for the MPF Authority or, as far as I can make out, for any other arm of government. Thus PwC cannot offer even the lame excuse that it was told what to say. They missed it all on their own.

It’s quite simple. If you were told that you can buy any clothes you like but you can only buy them at the Wing On department store, wouldn’t you think that the people at Wing On might rub their hands in gleeful joy and jump to raise their prices?

This is what we have in the MPF.

You can choose between any number of MPF fund options for your retirement savings, right from funds that hugely underperform the Hang Seng Index to those that underperform it by only a small margin.

But within this range you may only choose from those offered to you by the fund manager appointed by your employer.

You have no say in this most important choice of who will run your money. It’s like being told you have free choice in clothes because you can buy anything you want, but only at Wing On.

And given that these fund managers are mostly arms of bigger financiers whom your employer is wise to keep onside for his own corporate purposes, he has no incentive to look after your interests at the possible cost of his own.

I remain even more baffled that the MPF Authority, the government supervisory agency that is meant to safeguard your retirement interests and mine, consistently takes the side of the fund management industry against us

Consider just a few of things that go wrong with this botch-up of a system.

On retirement you will carry not just one retirement account but as many as you have had employers over your working career, all of them run by a different fund manager.

The obvious fix to this administrative foolishness is to put all MPF accounts into one central registry run by the MPF Authority and give you the choice of manager. When you then change jobs you can carry your single MPF account with you to your new employer.

And PwC (I love that random use of capital letters) does indeed recommend a centralised database, but only because it might reduce the use of paper and, additionally, allow people to churn their MPF investment choices more often.

This is something that PwC somehow considers to be a good thing, which it certainly is ... for MPF managers and their stockbrokers, pity about the beneficiaries.

But the study entirely misses the real point about a central registry, namely that this is the way out of what I call the “Wing On Syndrome” of denying real choice to MPF beneficiaries. PwC just slid right over it and didn’t see it. Astounding.

And now consider the cost to you of not having the choice of who runs your money. The average MPF administration fee is 1.56 per cent of funds under management. That’s 1.56 per cent a year off the top for your manager, which has left you with an average return of only 2.8 per cent a year from inception.

Bear in mind that 1.56 per cent is not the full figure. You additionally pay for switching between funds and you bear the dealing costs that your MPF manager incurs.

In contrast you can go to the Hong Kong arm of the second biggest fund manager in the world, Vanguard, and buy one of its exchange traded funds for a total expense ratio of only 0.18 per cent.

Look at the decimal point again. That’s not 1.8 per cent but 0.18 per cent, a fraction of the MPF rip-off, and Vanguard bears marketing and redemption costs that your MPF manager does not carry.

Puzzled as I am about PwC’s blindness, however, I remain even more baffled that the MPF Authority, the government supervisory agency that is meant to safeguard your retirement interests and mine, consistently takes the side of the fund management industry against us.

Why does it so fiercely resist the obvious fundamental reform?