Why there’s no longer any reason to refuse employees the choice of their MPF managers
The government’s proposal to scrap the severance benefit offset in Hong Kong’s compulsory pension scheme could mean real competition in the MPF market
Hong Kong employers will be subsidised for 10 years with taxpayers’ money...after the scrapping of a controversial pension fund payment system
SCMP, January 6
We start with a fundamental principle of investment, to wit that the price of any financial asset is a function of the income that this asset generates.
Thus stocks are valued on the basis of their price earnings ratios, bonds on their yields to redemption, investment property on its net rental income. It all boils down to the same thing.
Now to the Mandatory Provident Fund. The financial asset of the system itself, rather than the pension money managed through it, is based on the fee and other income collected by the fund managers who manage your MPF money. The most recently appraised value of this asset is HK$129 billion.
We know this is so because in the most recent sale of its business by one manager to another, Standard Chartered sold a 2.4 per cent share of the MPF market to Manulife for US$400 million. Take out your calculator and you will see that this values 100 per cent of the MPF business at HK$129 billion.
Thus here is the big question. What did Stanchart do to make its MPF business worth US$400 million?
Think about this. If you save some money from your pay every month and you use it to buy your home, then you have a financial asset for which you worked hard.
But all that Stanchart did was apply for appointment by the MPF authority as an MPF fund manager. It saved nothing, it paid nothing and it invested next to nothing for this appointment.
Consequently you might expect that it would be paid a reasonable fee for managing MPF money but nothing to make it rich - just enough to compensate it for its efforts and no more. The value of being an MPF manager, over and above this fee, would then be HK$1. Instead it turned out to be US$400 million.
And this is all the evidence I need to prove that the MPF is a finance industry rip-off practised on the retirement savings of Hong Kong working people.
I should not need to tell you that big American mutual funds charge fees as low as 0.15 per cent for services for which MPF managers charge 1.5 per cent. That US$400 million payment already tells you that the MPF is a rip-off.
I should not need to say that MPF managers are not telling you the truth when they claim they need high fees because they face stiffer management requirements. These requirements just boil down to so much computer programming. The big mutual funds actually face higher costs in marketing and redemptions.
But you know this anyway. That figure of US$400 million tells you so.
And now to the point of today’s column. The reason that MPF managers can charge such high fees is that they are appointed by employers rather than the employees who are the real beneficiaries. The employers don’t care quite so much.
And the reason that the system was structured to give this choice to employers is that they are required to pay severance benefits to long term employees who lose their jobs. These severance benefits can be set against the employer’s share of MPF contributions.
Thus if an employer’s share of MPF benefits for any worker comes to HK$100 and the severance benefits would be HK$80, then he need pay no severance benefits at all.
And what the employers then said on formation of the MPF was, “Look here, if you give our employees the choice of their MPF manager they’ll pick the wildest punter they can find and then they’ll wipe out their MPF savings and we’ll have to front up severance benefits that we wouldn’t otherwise have to pay. Thus you must let us make the choice.”
It’s nonsense, of course, but now it no longer matters even if it were true.
Now the government intends to scrap this severance benefit offset.
Which means there is no longer any reason at all, good or bad, to refuse employees the choice of their MPF managers.
Which would mean that we could now have real competition in the MPF and eliminate the rip-off at last.