More MPF changes coming, but friction remains

As Hong Kong's Mandatory Provident Scheme Authority releases its 15-year performance review ahead of reforms due this year, the city's funds industry still sees issues to be tackled.
More MPF changes coming, but friction remains

Among the new initiatives due for rollout this year under Hong Kong’s Mandatory Provident Fund (MPF) Scheme are a global balanced reference portfolio and a centralised system for administering MPF payments. 

But fund managers are still unhappy about certain aspects of the coming reforms, such as those regarding fee caps, as the Mandatory Provident Fund Schemes Authority (MPFA) last week celebrated the 15th anniversary of the pension system.  

The centralised electronic contribution and payments system is under development, and a report is expected from the MPFA in the first quarter of this year. The system is likely to reduce administration costs, said Philip Tsai, non-executive director of MPFA.

And it has been welcomed by the funds industry. Art Bacci, vice chairman of the Hong Kong Investment Funds Association (HKIFA), told AsianInvestor that “a centralised system for administering MPF payments would be very helpful”. He pointed to the success of Chile’s approach, where 98% of employer schemes are integrated into a central system.

However, Bacci, who also heads the Hong Kong group at MPF provider Principal Financial, added: “The pain point for the industry is in the contribution processes”. He pointed out that with a relatively high 20% average staff turnover in Hong Kong and relatively small amounts of MPF contribution being fed into personal accounts, it was an administrative headache for providers to keep track of members and help them maintain their contributions.

Portability of contributions from one job to the next would solve this, but that initiative is hampered by the rules allowing employers to offset long service or severence payments with accrued benefits derived from employer contributions

HKIFA is also working with MPFA on developing a reference portfolio with index constituents to reflect a global balanced approach and thereby encourage members to diversify their portfolios.

However, friction remains between the MPFA and the funds industry, having surfaced again last year when the authority unveiled its plan to cap management fees for a default product.

Cost is a major issue for both scheme members and asset managers, as was highlighted by opposition to the MPFA’s fee-capping recommendations, which are now before Legco and expected to be introduced later this year. The maximum fee on the default investment scheme (DIS) will be set at 0.75%, well below the current industry average of 1.6%.

The move was a response to mounting criticism of the MPF system’s failure to generate the right level of consistent returns for members and to perceived high charges on the underlying funds.

While the funds industry should not be forced to adopt passive management, said MPFA, “the fee cap, disclosure and benchmarking will likely drive them towards adopting such an approach”. An MPF report last year said its research showed that actively managed MPF funds had not delivered better returns than passively managed ones.  

However, the DIS will have active and passive options and will be structured like target-date funds in the US, where members under the age of 50 have a 60/40 equity/bond split and those over 50 are transitioned steadily to a 20/80 allocation.

Where costs can be saved, said Bacci, is by companies that carry out both the asset management and back-office servicing functions under the scheme. Bank Consortium Trust, Manulife and Principal are among such scheme providers, and he noted that Principal was interested in further acquisitions, having acquired Axa’s MPF business after it pulled out of the MPF market in 2014 in a $335 million deal.

Meanwhile, the MPFA marked its 15-year anniversary with the publication of a performance review and guidance notes for members on how to manage their MPF for long-term success.

At the end of last November, the system had $590 billion in assets, of which, one fifth ($114 billion) comprised investment returns over the entire 15 years. The 15-year annualised rate of return of the system has been 3.1%, exceeding average inflation of 1.8% over the period (see table).

Annualised IRR of MPF system
Period Anualised IRR
Dec 2000-Mar 2002                           -4.9%
Apr 2002-Mar 2003                 -10.7%
Apr 2003-Mar2004 22%
Apri 2004-Mar 2005 4.70%
Apr 2005-Mar 2006 12.30%
Apr 2006-Mar 2007 12.40%
Apr 2007-Mar 2008 4.50%
Apr 2008-Mar 2009                 -25.9%
Apr 2009-Mar 2010 30.10%
Apr 2010-Mar 2011 8.70%
Apr 2011-Mar 2012                  -5.6%
Apr 2012-Mar 2013 6.40%
Apr 2013-Mar 2014 4.20%
Apr 2014-Mar 2015 6.40%
Apr2015-Nov 2015                   -5.9%

The MPF system has relatively high exposure to equities (some 60% of total MPF assets and Hong Kong equities in particular (almost 40% of total MPF assets). Private pensions in OECD countries, by contrast, hold an average 40% exposure to equities.

MPF rates of return vary widely. For instance, the 15-year cumulative return for equity funds amounted to 83%, while that for conservative MPF funds, which invest mainly in short-term deposits and short-term bonds, was a below-inflation 12.9% thanks to persistently low interest rates. 

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