MPF managers under fire for fees amid Covid-19 rout

Hong Kong’s Mandatory Provident Fund (MPF) providers are coming under renewed political and market criticism after recording their worst-ever quarterly loss in the first three months of this year, yet still pocketing high management and administration fees.

That has prompted calls for fees to be cut, while the broader financial stresses have led to some calls for savers to be allowed to withdraw funds. But defenders of the system say a modernisation of the system should reduce fees and argued that allowing too much early access to the funds would greatly reduce their efficacy.

The Covid-19 pandemic has hit financial markets across the world since February, and it led MPF schemes to incur estimated losses of as high as 16.59% in the first quarter of this year. The average individual contributor to the MPF schemes suffered a loss of HK$50,000 ($6,450) of their savings, said Paul Tse, a lawmaker in the legislative council earlier this month.

However, MPF trustees have pocketed management fees amounting to over HK$10 billion, irrespective of whether their funds made gains or losses, he added.

The fund expense ratio of the MPF funds on average stood at 1.45% as of end March 2020. The Mandatory Provident Fund Schemes Authority (MPFA) has frequently come under criticism for how high this cost is. However, Secretary for financial services and the treasury Christopher Hui said in a written reply to Tse that the expense ratio had dropped from 2.1% in 2007.

Net of fees, the MPF system returned 12.2% in 2019, after losing 9.3% the previous year.

MPF system annual investment returns since inception in 2001 

The government and the MPFA will continue to refine the MPF System, with a view to lowering the fee and expense level of MPF funds, he added.

Sally Wong, chief executive of the Hong Kong Investment Fund Association (HKIFA), is receptive to this perspective. She noted that “about two-thirds [of the fee] are non-investment management related, in particular administration. Thus, the focus should be on this chunky part,” she told AsianInvestor.

Wong believes the MPFA is doing the right thing with its plan to launch eMPF, a new centralised e-platform that offers one-stop digital-based services in 2022. She argued that this will help further reduce the administration costs, particularly if default MPF updates and benefit statements are converted from paper to electronic format.

Hong Kong's MPF schemes had HK$969.45 billion ($125.05 billion) of net assets as of December 2019. All-told, 15 trustees offer 441 constituent MPF funds, according to MPFA.

SAVE FOR FUTURE

In addition to criticising the high management costs of the funds, lawmaker Tse proposed that the government immediately allow employees to withdraw half of their MPF contributions’ accrued benefits to help them cope with financial strains imposed by the pandemic.

However, Wong believes this would be an unwise precedent to set.

“One should not be fixated on short term returns when one considers MPF investments. It is about the long-haul and the dollar cost averaging mechanism helps one to smooth out market volatilities and you can in fact buy more fund units during down market,” she said.

If people are allowed to withdraw some of their retirement savings from MPF trustees to address their short term needs whenever there is downturn or distress, it would be hard to maintain the integrity of the system, she added.

It would also exacerbate a chronic pension savings shortfall that looks set to worsen in the aging territory.

Like many other developed economies in the world, Hong Kong is facing onerous challenges in pension provisions, with a declining birth rates and an aging population.

More than half (53%) of the respondents to a new survey by St James’s Place Wealth Management Asia (SJP Asia) forecast they will not have enough money saved to sustain the lifestyle they want in retirement.

Almost one-in-eight (12%) respondents believe they will need to work past retirement age owing to this lack of savings, with almost two-thirds (65%) concerned about being a financial burden to those closest to them, according to the study, which was released on Thursday (May 21).

Two-third of people in the survey also said they don’t know how to save for their retirement. It is important that the government ramps up financial education for retirement planning, Matthew Deeprose, Hong Kong head of business at St. James Place, told AsianInvestor.

Some of the pension savers’ concerns include lacking understanding around tax planning matters and having to make lifestyle sacrifices that contributes to making retirement planning difficult. More than half (56%) said it was a major source of stress in their lives, according to the study.