Mandatory Provident Fund (MPF)

Why won’t Hong Kong’s government let us take back our MPF?

PUBLISHED : Wednesday, 12 April, 2017, 4:04pm
UPDATED : Wednesday, 12 April, 2017, 11:01pm

It is time for scheme members to take control of their MPF...

-- Cheng Yan-chee, Chief Corporate Affairs Officer, Executive Director, MPF

Letters to the editor

I agree. It’s time for the working people of Hong Kong to take back control of their Mandatory Provident Fund, way past time.

The problem is that our government won’t let us do it, and the MPF Schemes Authority obscures the real obstacle, as Mr Cheng has done in his letter to the editor, which he devotes to a red herring called the Default Investment Strategy.

Here is the big cheat at the heart of the MPF: You cannot choose who manages your retirement money for you. That choice is made by your employer.

It was done that way because when the government was putting the MPF together in the late 1990s it went to the fund management industry for advice.

“What would you like for dinner, Mr Wolf?” the bureaucrats asked in effect.

What Mr Wolf liked for dinner was high sky-high management fees, and his way of getting them was to stop people from shopping among fund managers for the best deal they could find.

Let the employers make that choice, Mr Wolf said. They know more about these things than their workers do.

And so it was done. Mr Wolf’s cynical reasoning that employers would not really care how much their employees were charged in MPF fees proved correct. Even now, after years of protest, the average fee is 1.56 per cent a year, far higher than in the purely private sector where Mr Wolf must restrain his appetite.

Mr Cheng and his colleagues will tell you that this is not so. They say that running MPF accounts is a costly business and no one can really make excessive profits from it.

I say the truth of the matter is exactly the opposite. There are no selling expenses for MPF funds and Mr Wolf is under no compulsion to perform (the beneficiaries can’t fire him, remember).

The supposedly heavy clerical burden, meanwhile, is mostly a matter of low cost computer drudgery. The only heavy thing in MPF business is the excessive blizzard of confusing but self-congratulatory paperwork from both Mr Wolf and the MPFA.

A sample – “The DIS adopts aged-based de-risking.” Adopts what?

But I can do better in proving the rip-off than just giving you the details here of how it’s conducted. I have a confession to it from Mr Wolf himself.

It comes in the form of the price at which Standard Chartered Bank last year sold a 2.4 per cent share of the MPF market to Manulife. That price was US$400 million (HK$3.1 billion), which values the entire MPF at HK$129 billion.

Understand this well. Running an MPF fund requires very little investment. You have to prove that you meet the capital requirements but you round trip this capital.

You show it to the authorities but you don’t have to tie it up. You leave it at work pretty much as it had been.

In costs, you have office rental, salaries, data processing equipment leases and a few recurrent sundries, all paid for immediately out of the fee income you generate. You invest next to nothing. Why then should you be paid any more for it than next to nothing?

In cold fact, MPF management is only worth more than next to nothing if your fee income is more than you need to cover your costs, plus a minimum required return on very little investment.

But this fee income in the MPF business is so outrageously more than next to nothing that the participants in the business value the prospects of continuing to receive it at HK$129 billion.

They have confessed to this in the price for a small share of the business sold by one of them to another.

Hello, Mr Wolf.

What makes it worse is that depriving you of the choice of your MPF manager also creates unnecessary headaches for you.

You will have as many MPF accounts when you retire as you have had employers over your career, all different. What lunacy.

You’re right, Mr Cheng. We need to take back control of our MPF. Why do you refuse to let us do it?