Mandatory Provident Fund (MPF)

Hong Kong’s older pension plans outperformed city’s Mandatory Provident Fund, says Mercer

Orso plans had better returns across all fund types in 2017 and over five-year period

PUBLISHED : Wednesday, 13 December, 2017, 1:54pm
UPDATED : Wednesday, 13 December, 2017, 10:17pm

Despite having a strong year, Hong Kong’s Mandatory Provident Fund underperformed when compared with pension plans set up before its launch, according to a report released on Wednesday by global consulting company Mercer.

These pension plans, set up before the MPF was established in 2000, come under a different regulation, the Occupational Retirement Schemes Ordinance (Orso).

The MPF, a compulsory retirement scheme, covers 2.8 million people, while 4,431 Orso plans cover 372,270 employees, according to government statistics. The Orso plans outperformed the MPF in all types of funds this year and over the past five years, according to Mercer.

“Generally, there is more flexibility in Orso investments than in MPF funds, and fund managers have more room to perform better,” said Billy Wong, the wealth business leader for Mercer in Hong Kong, China and Korea.

“For instance, there are more investment constraints on MPF funds, such as the percentage of Hong Kong dollar holdings and the limitation of usage of derivatives. The fees of Orso funds are also generally lower.”

Hong Kong’s MPF pension scheme posts 19pc return in first 11 months, on track for best year since 2009

While the best-performing Hong Kong and China equity funds under the MPF have a return of 40.4 per cent year to date, the same category under Orso has a return of 47.7 per cent. On a five-year basis, the MPF’s Hong Kong and China equity funds have a return of 9.8 per cent, below the 12.6 per cent under Orso.

Mixed-asset funds, which invested in a mixture of bonds and equity, reported a return of 21 per cent year to date under the MPF, also below Orso at 22.1 per cent. On a five-year basis, the MPF mixed-asset funds had a return of 7.4 per cent, below the 8.5 per cent reported under Orso.

The Mercer report also showed investors are not interested in the newly launched default investment strategy funds under the MPF. A government reform introduced in April requires all 15 MPF providers to each offer one default investment strategy fund for members who do not choose how to invest. This fund has a simple investment strategy and its fee is capped at 0.75 per cent.

According to Mercer, default investment strategy funds only hold 2 per cent of MPF assets, which now stand at HK$780 billion (US$100 billion).

“This also indicates that members do not make fund choices based only on the level of fees, but will also consider the risk and return profiles of funds,” Wong said.

“We observed that Hong Kong members usually would like to see longer track records for funds before they choose. We believe it could take two to three years before members decide on whether to invest more into default investment strategy funds.”

Confused by MPF, Orso challenged?

The Mercer report also showed that satisfaction levels among employees covered by the MPF had not increased with its strong performance this year. Wong said the employees would like to see an increase of contribution to the MPF, to enhance protection for their retirement.

The report also showed that the MPF is still dominated by big players, with the top 10 providers holding 96 per cent of market share. The five smallest providers only have a market share of 4 per cent.