Dismal returns of MPF’s low-fee fund are a symptom of the scheme’s overall mediocrity

Stephen Vines says tinkering with the Mandatory Provident Fund won’t do much good, the scheme itself needs to go

PUBLISHED : Wednesday, 16 May, 2018, 1:15pm
UPDATED : Wednesday, 16 May, 2018, 11:12pm

The Mandatory Provident Fund is the gift that never stops giving for fund managers but, for everyone else, it remains a dud and, as a new report shows, things actually get worse for customers after alleged improvements have been made. 

The report from Convoy Financial Services, which monitors MPF performance, found that the “default” low fee fund scheme launched last April underperformed other MPF funds, returning an average of 2.82 per cent in the 13 months to April, compared to healthy double-digit returns for more or less anything with a heavy equity emphasis. 

Without MPF fix, Hong Kong employees’ pension savings at risk

Yet again the suckers who were led to believe that things were improving over at the MPF discovered that a strategy capping management fees at 0.75 per cent meant that the modest savings made were entirely overshadowed by the gains that could have been made in most other funds. 

The excuse for the poor performance of the MPF’s funds with low management fees is that the timing of their launch was unfortunate because, while equity prices soared, bond values largely languished. 

Tax change could allow retirees to siphon from annuity funds at 50

Top providers prepare for HK$1tr MPF with launch of industry body

The problem with this explanation is that bond prices rarely excite so there was a considerable level of predictability here and it really did not take a genius to look at the stock markets and discover that a big rally was under way. Surely, knowledge of what the markets are doing is precisely what fund managers are paid for. 

This was the year the Hang Seng Index rose 36 per cent – making the MPF gains look distinctly shabby

However, and this was cause for great excitement over at the MPF headquarters, 2017 was indeed a good year for other funds that collectively registered their best performance since 2010, with an average gain of 22.3 per cent. Sounds impressive, eh? But this was the year the Hang Seng Index rose 36 per cent – making the MPF gains look distinctly shabby. 

However, shabby is what the MPF scheme does best. From inception up to the end of last year, MPF funds, according the MPF Authority’s own figures, generated an annual average return of 4.8 per cent. In the same period, prices of shares in the Hang Seng Index more than doubled, implying that an investor who simply invested in Hong Kong blue chips would be doing way better than any MPF fund investor. Indeed, once dividend payments are added to the capital gain, the poor old MPF mugs are left trailing in the dust. 

The MPF, of course, does not make a simple comparison with equity performance but trumpets the claim that its funds managed to beat the average inflation level of 1.8 per cent during these 17 years. Setting the bar low for comparisons sure as hell makes them look better. 

Investors hunker down in conservative funds after market wobble

Here’s why you should be hands-on with your MPF

Layered on top of poor performance, concerns over high management fees have plagued the MPF since the scheme was launched in 2000 when the small number of companies initially chosen to participate abused their monopoly by charging an average of 2.1 per cent for management on top of other charges. Under pressure, these fees came down to an average of 1.74 per cent and have now inched a bit lower, to 1.56 per cent, a distinctly unimpressive figure at a time when the global fund management industry is reducing charges. 

During the life of the scheme, the MPF Authority has fiddled around with the way it works, increasing the number of funds, making transfers between funds easier and “even” giving employees a limited opportunity to select their own funds, as opposed to being confined to those chosen by their employers. What the scheme has singularly failed to achieve is an open and transparent system that gives investors the opportunity to secure maximum returns on their savings. 

Added to this unsatisfactory situation are current government attempts to solve the long-service payment offset problem which, since the establishment of the MPF, has complicated employers’ allocations for long-service payment. Employees fear that employers are somehow taking away their money, while employers are demanding vast sums of money if the current system ends. This is a mess entirely created by official attempts to boost the MPF scheme and tangle it up with existing employment laws on severance payments. 

Business leaders reject ‘unacceptable proposal’ to scrap offsetting mechanism

In an ideal world, meaning one in which bureaucrats are kept at bay, the MPF would be scrapped. Its 588 employees could be redeployed into doing something useful, and the roughly HK$500 million per year spent on running the authority would be saved. 

The bigger achievement would be to let employees themselves decide how to use their own money and put it in schemes that are not primarily of benefit to a small group of immensely wealthy fund managers. 

The bigger picture is that every time an attempt is made to tinker with the system, it either produces new problems or only marginal benefits; what remains is the stark reality that the MPF is fundamentally unfit for purpose. 

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster