MPF changes to create more marketing and admin work

Most fund managers agree that allowing employee members of Hong Kong's Mandatory Provident Fund (MPF) schemes to switch providers is a good thing for competition in the sector. But it will be hard work for the trustees and record keepers, says Scott Lothian, head of multi-asset at BEA Union Investments in Hong Kong. "The admin is going to be a nightmare for some people," he adds. The changes will also mean a greater focus on retail-type MPF marketing.

There may not be a rush of people switching when the changes take effect in January 2011. "We've seen similar things happen in Australia [when the superannuation fund sector moved to open architecture in July 2005], and not as many employees switched as some expected," says Lothian. "Maybe more will switch here though, as individuals tend to be more speculative."

It may be that members simply need time to get used to the idea of switching, as is suggested by a survey on the super fund sector published last week by Australian research firm Investment Trends. The proportion of industry super fund members looking to switch funds doubled between November 2008 and July 2009 from 8% to 15%. It's a similar story for active retail super fund members, with the proportion thinking of switching rising from 7% to 24%, according to The 2009 Investor Sentiment and Communications Report.

Meanwhile, it will remain difficult for employers in Hong Kong to switch providers. MPFs are "like velcro -- they have lots of 'hooks' to keep companies locked in", says Lothian, who joined BEA Union at the start of 2008. "Once an employer has chosen a provider, it is very hard to switch. And even after the new rules come in, it will still be difficult for employers to switch, even though the employee members will have increased flexibility."

Although fund managers do not have to worry about the increase in admin work, one area that will concern them is marketing, which will become more of an issue after the rule change. Some MPF providers have hundreds of thousands of members, says Lothian, and the biggest providers may even be close to a million; influencing all of these new MPF decision-makers will be easier for some than for others.

"It will turn [the MPF market] from an institutional into a retail type of business," he says, something that will benefit the firms with big marketing networks and strong brands. BEA Union lacks the former, but has the benefit of the latter in Hong Kong, says Lothian.

Competition is already fierce among MPF providers. "They are all pushing to be at the top of the performance tables by the time 'D-day' arrives," says Lothian. But it may become fiercer. "It's hard to get funds approved for MPF distribution, as it's quite heavily regulated," he adds. "But with the rule change coming in, there might be some firms not currently in the MPF market that will look to get funds approved by the MPFA [Mandatory Provident Fund Authority]."

The funds in question -- from managers such as BlackRock, for example -- may have to "jump through a few more hoops", says Lothian, but it wouldn't be such a stretch for some of them to do so. That would mean those managers could offer funds to the small number of MPF managers that use third-party funds on their platform.

"Asset managers with, say, Japanese stock market expertise could offer Japanese equity funds to local Hong Kong houses that are less strong in that area," he says. Lothian says he, for one, would welcome more choice, since there is such a major focus on the China and Hong Kong markets among fund providers at present.

BEA Union -- a joint venture formed in mid-2007 by Germany's Union Investments and Bank of East Asia in Hong Kong -- manages around $2.2 billion, just over half of which is accounted for by MPF-related assets. It has a share of the MPF market of around 4%.