HK$57 billion in MPF funds to move into ‘core fund’ option under new reforms
Major reform's launch next year will replace default investment arrangements, cap the fee and yield more stable returns on contributions
About HK$57 billion of Mandatory Provident Funds will be moved into the proposed simple "core fund" option to be launched next year, in a major reform to slash the pension fund's fee and to yield more stable returns.
A source familiar with the measure told the of the shift, ahead of the Mandatory Provident Fund Schemes Authority (MPFA) announcing details of the core fund reform today.
The change means all 19 MPF providers will be required to introduce a core fund next year for the almost 600,000 employees who did not choose how to invest their pension funds.
About one in four, or 25 per cent of the 2.5 million employees covered by the MPF, are invested in so-called default arrangements where their MPF providers put the pension money into funds that may charge high fees and produce volatile returns. Their contributions now represent 10 per cent of the total HK$574 billion in MPF funds.
The core funds will replace all default options and their fees are capped at 0.75 per cent, compared with the market average of 1.6 per cent.
The core funds will also adopt a simple investment strategy, with a mix of bonds and equities.
Each core fund will automatically cut down equity exposure with the age of the employee. The older he or she gets, the lower the equity holding in his or her core fund portfolio.
"The core funds would be passively invested but they could also produce a stable return. In comparison, some actively managed funds charge higher fees, but they may not always produce much better returns," the source said.
The authority has decided the core funds will be big players from day one, as it is allowing all HK$57 billion in assets now in the default investment options to be moved into the core funds.
All employees, however, will have the choice to opt out of being transferred into these core funds.
"All employees would be given the option to choose to move into the core funds or not. If those employees who are not in the default arrangement would like to join the core funds, they are welcome to do so," the source said.
The source said the MPFA would work out a transition arrangement with the industry players.
The reform will need changes in the law to require all 19 MPF providers to introduce the core funds by the end of 2016.
"The authority would encourage the providers to voluntarily launch the core funds even before the law change. This would benefit the employees a lot," the source said.
The reform came as the MPF scheme came under criticism for charging high fees and providing low investment returns.
The reform will bring fees down substantially as they are capped at 0.75 per cent.
The thousands of employees who do not choose how to invest their money could be assured their contributions will be placed in funds with low fees, and this may prompt fee reductions in other MPF funds.
"There are 450 MPF funds," the source said.
"Many employees are confused and they do not know how to choose the funds. The core funds would be a good solution to help them out."
THE BENEFITS
Standardises investment funds for all employees who do not choose how to invest their MPF contribution.
Fees capped at 0.75 per cent per year. Other MPF funds have no fee controls and market average is about 1.6 per cent.
Simple investment strategy with diversified approach by investing in a combination of stocks and bonds.
Lower risk strategy where the funds will reduce stock holdings according to the age of the employee. The older they are, the fewer stock holdings in their portfolios.
All existing default funds' assets will be moved to core funds but employees will be allowed to opt out.
Other employees can also shift assets from other funds to core funds if they choose.
