High management charges are the real weakness of the MPF
The offsetting process is not the primary weakness of the Mandatory Provident Fund scheme, as some claim. But abolishing it would help us rid ourselves of something that truly is unfair
Any analysis of the Mandatory Provident Fund (MPF) Scheme has concluded that its primary weakness is the offsetting process. This offsetting seriously dilutes MPF savings for many employees.
Letters to the editor,
Victor Apps, chairman, Study Group on Retirement Protection
No, the offset is not a weakness at all. But we should indeed be rid of it as an obstacle to reforming the real weakness at the heart of the MPF, to wit the high management charges that have made the MPF a pot of gold for the likes of Mr Apps’ former employer, Manulife.
First, that offset. The idea here was that long service employees suddenly left in the lurch when their jobs vanished should have their employers give them a cushion payment calculated on a formula based on their years of service. This was done.
Then along came the MPF and the employers argued that if their share of the MPF contributions at any time exceeded this cushion payment then they should not have to pay double for this cushion. They should be allowed to offset it against their MPF contributions. This was also done.
And I just cannot see the injustice that so many other people find here. The purpose of the cushion payment is still upheld. Employees who are let go still collect as much in severance payment as they previously did. Nothing that they had before is taken from them. But in order to curry popular support for his non-election five years ago, our former chief executive Leung Chun-ying promised to get rid of the offset and his inability to do it offered a perfect opportunity for sniping at him. I’m happy. Let us not, however, confuse the target and the occasion for the target shooting.
And now to Mr Apps’ former employer. Manulife paid Standard Chartered US$400 million a year ago for its 2.4 per cent share of the MPF management business. Work that out and you will see that this values the entire MPF management business at HK$129 billion. This is a blatant and humongous rip-off. These MPF managers make no investment in the business that they do not expense from current revenues. We simply gave them a gift, free of charge, that they value at this enormous HK$129 billion.
It is worth that much because of an average management fee of 1.56 per cent a year when comparable exchange traded funds that do more work in marketing and management charge little more than a tenth as much. And the reason it remains so high is that MPF managers and employers convinced the government early on to give the choice of manager for each beneficiary not to that beneficiary but to his or her employer.
The specious argument they made is that employees would choose irresponsible managers promising impossible returns and, when this inevitably ended in grief, the employers would still be due for severance cushion payments that might otherwise have been covered by their MPF contributions. It is a specious argument because there is no evidence that Hong Kong people are profligate in this manner. The reverse is rather true. In any case they would not have their full choice of MPF manager. They would still have to pick from a government approved list.
But now let’s say that we abolish the offset provision. Employers would then no longer have reason to demand that they be the ones to choose MPF managers. Employees could then shop for their managers and competition would prevail in this market at last. The management fees would plummet.
And Victor Apps’ former employers might then find that what they bought for US$400 million is no longer that much. Oh, what a terrible fate that would be for something that should never have been priced so high. Oh, how I would cry.
So let us indeed abolish the offset. It is itself not unfair but abolishing would help us rid ourselves of something that truly is unfair.