After almost a year of consulting with the general public, the finance industry and other stakeholders in the Mandatory Provident Fund (MPF) industry, the Government in the form of the Financial Services and Treasury Bureau (FSTB), together with the Mandatory Provident Fund Schemes Authority (MPFA), in March 2015 released their findings with regard to trying to “Provide Better Investment Solutions for MPF Members”.
You may start by asking “Why?”
Were investment choices being offered to MPF members so bad that something else was needed?
Had MPF funds underperformed other investment choices?
You might also ask why this was not thought to be necessary when the MPF started 15 years ago.
In effect, the Consultation conclusions are that the Government as led by the MPFA and FSTB, is mandating that all MPF providers will be required to provide a “Default Investment Strategy” (the use of the word “core fund” has been deleted) for all MPF members that either don’t select an investment choice at outset, or wish to avail themselves of it in the years preceding their retirement.
What this in itself means, is that there needs to be made available lower risk fund types that can be used together, to enable MPF members to reduce the potential volatility of the investment return in their MPF accounts during the 15 years prior to retirement. Further, that the funds selected for this purpose are required to have lower fee structures, maximum 0.75% per annum, than existing funds. Ideally, the Government would probably like the funds used for this purpose to be “index funds” or Exchange Traded Funds (ETF), both of which have significantly lower fees than “active” funds, where the manager can potentially achieve better returns (although currently there is no clarity on the benchmark index against which these funds would be measured).
Exactly why use of a combination of funds, which would most likely mean a choice of Global Equities and Global Bonds, in varying proportions, would produce a “better investment solution”, when in all probability it might also achieve a lower rate of return than existing Balanced Growth Funds, is not at all clear. Whether the split of 60%/40% or 70%/30% between these types in the years immediately prior to retirement can solve a problem that most MPF Members didn’t know existed is debatable. What is clear however, is that as a result of this development the MPFA are in effect imposing a lower fee regime by default, on the providers, which is not at all welcome in our free society.
The Hong Kong MPF has been under serious pressure from both the media and Hong Kong legislators in recent years because of a perception that members are not getting either good value for money or decent investment returns.
The value for money argument is based around the notion that fees and charges for MPF products are too high, and that they should be lower, possibly equivalent to the levels applicable in a number of other countries that have similar types of pension schemes. Of course this fails to grasp the fact that the Hong Kong MPF has only a limited market to attract assets from, i.e. the working population of Hong Kong, whereas most of the other locations it is being compared with have both a much larger population, often more than 10 times that of Hong Kong, and a longer history of offering pensions products and thus a larger total pool of assets for which money is managed. Average fees for MPF funds is put at around 1.75%pa, but this compares quite favourably with the fee rates for most Hong Kong mutual funds. Further, there are generally no initial charges when buying MPF funds, which is not the case for mutual funds.
Then there is the issue of whether the returns achieved by MPF funds have not been good enough. Quite clearly, these funds can only do as well as the underlying markets in which they are investing, thus if a market goes down, so will the fund invested in it. It is more constructive to compare MPF funds directly with their equivalent mutual fund, where they might have a broadly similar investment objective (bear in mind that MPF funds are mandated to have a minimum 30% Hong Kong dollar holding). Yet there is no evidence of underperformance here. Equity markets have been difficult over the last 10 years with a lot of volatility, despite that, many have in the first quarter of 2015 hit new all-time high levels, leading to positive investment returns for investors. A cursory glance at comparative performance data between MPF and equivalent mutual funds reveals that the MPF version has often done better, consistently over multiple time periods.
The Government’s objective in forcing MPF providers to offer “default investment strategies” is also to cater for the high number of new members that (apparently) fail to tick an investment choice box when signing up. Some might argue this is because there are too many choices available in the first place. Typically the number of different funds most MPF products offer is between 8 for the basic schemes (or simple?) and 20+ for the advanced (or “Super”) schemes. Others argue that people are too lazy to tick all the boxes in filling up forms. Either way it now becomes incumbent on MPF advisers to ensure their clients do tick all the boxes!
So will it work?
Probably! It is inevitable that with so much public skepticism of the MPF, many uninformed members will choose the option of least resistance and lowest fees. That won’t be the wrong choice, but it might not be the best either!
[Stewart Aldcroft is CEO of Cititrust Limited and Senior Adviser and Managing Director of Citi Markets & Securities Services. The views expressed in this article are his own and do not reflect Citi policy.]