Industry weighs MPFA proposals

Opinion is divided on recent proposals by Hong Kong’s Mandatory Provident Fund Authority (MPFA), which could see the introduction of fee-capped core funds and a move to more passive investing.

While some observers – such as active fund managers – call into question the viability of the plans, others see them as in line with global thinking. 

The MPFA is consulting the public on whether to introduce a core fund or funds with an annual management fee of 0.75% or below. The consultation ends on September 30, and the authority will present its findings to the government late this year or early next.

Investment strategies for such funds could include automated portfolio management along the lines of lifecycle or target-date funds, which reduce a member’s exposure to risky assets as they approach retirement. Members who did not specify how they want their contributions invested would have them automatically paid in to the core funds.

The MPFA proposals are intended to address complaints that the pension fund is too expensive, by creating a standardised, low-cost investment product. The average Fund Expense Ratio of all MPF constituent funds dropped from 2.1% in 2007 to 1.69% this May, a reduction of some 20%, according to the Financial Services and Treasury Bureau.

However, Eleanor Wan, chief executive at Hong Kong fund house BEA Union Investment, questioned whether the proposals would be workable. As most new funds are very small, they tend to lack economy of scale, which could have an impact on performance, she argued.

Another MPFA suggestion that has drawn ire from some industry members is its proposal to encourage the use of exchange-traded funds in core funds to keep costs down.

The average expense ratio of actively managed equity products is 1.88%, while for index-tracking funds it is 0.98%, noted the MPFA. It also cited a study conducted by the Polytechnic University of Hong Kong, which found that “actively managed MPF funds do not deliver better returns than corresponding passive index-tracking funds”.

Does this mean the role of active managers would diminish?

“We don’t see how this could be said to crowd out active managers, which would still have a role in the vast majority of choice funds,” said Darren McShane, the MPFA’s chief regulation and policy officer.

However, “passive funds only give you market volatility and market returns”, said Elvin Yu, head of institutional business for Greater China and Southeast Asia at Allianz Global Investors.

“As active managers, we still believe in actively managing strategies to beat the benchmark,” he said, adding that the average expense ratio of AllianzGI’s MPF funds is 1.3%.

To comply with a fee cap, Yu suggested AllianzGI could create a core fund of funds investing in products already on its platform, such as growth, balanced or money-market products. Similar to a lifecycle fund, allocation of the core fund would de-risk as members approach retirement.

Yu said he is generally supportive of fee caps, although he suggested that the MPFA should consider giving the industry time to adjust to any changes. “If it demanded that our fee is capped at 0.75% from day one, that would be a big challenge for providers,” he said.

Others have suggested a different approach from the current plan to have core funds that offer a standardised strategy across providers.

“If you are also prescribing that all 19 MPF providers and all 41 schemes have got to have a fund that has similar characteristics, then what is the point? It’s not a marketable prospect,” said Stewart Aldcroft, Hong Kong chief executive of CitiTrust, which acts as a trustee for several MPF scheme providers.

“I am coming round to the idea that a series of centrally offered core funds made available for all MPF products, managed possibly by the [Hong Kong Monetary Authority] with advice from say Towers Watson or Mercers, would actually be a better solution."

The funds could be run on a multi-manager, multi-strategy basis, with allocations made directly to local managers at cost-effective fees, Aldcroft suggested.

But the proposals do have supporters in the industry. If implemented, they could help increase member engagement, provided the core funds were simple to understand, said Benjie Fraser, global pensions executive for investor services at JP Morgan in London.

“The core fund approach and fee transparency strike me as a good start and are in line with current global thinking,” he noted. “If anything, [the MPFA] is ahead of markets like the UK, which are introducing similar value-for-money frameworks in April next year.”

Around 25% of MPF members are in default funds, whereas that figure is as high as 85% for US pension funds, noted Fraser.