This week in asset owner history: Hong Kong's MPF reform

Hong Kong’s Mandatory Provident Fund (MPF) scheme has long been trying to optimise its administration system and cut costs for fund managers and members by building a centralised platform.

With work on the eMPF platform finally underway and due for launch 2025, the city’s pension industry has high hopes for the system to help them cut operating costs and enhance the competitiveness of their products under a more transparent approach.

The Mandatory Provident Fund Schemes Authority (MPFA) started to study the feasibility and cost benefits of a centralised e-platform in 2014.

When MPFA celebrated the 15th anniversary of the pension system in January 2016 and issued a 15-year performance review, the authority released several new initiatives, including a globally balanced portfolio and a centralised system for administration.

The centralised electronic contribution and payments system was under development, and a report was expected from the MPFA in the first quarter of 2016, AsianInvestor reported back then.

The system was likely to reduce administration costs, Philip Tsai, non-executive director of MPFA, said at that time.

CONTRIBUTION CONFLICT

However, fund managers were still unhappy about certain aspects of the coming reforms.

“The pain point for the industry is in the contribution processes,” said Art Bacci, then vice chairman of the Hong Kong Investment Funds Association (HKIFA).

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 was hampered by the rules allowing employers to offset long service or severance payments with accrued benefits derived from employer contributions.

After years of discussions, Hong Kong’s Legislative Council finally passed the bill to abolish the MPF offset arrangement on June 9, 2022. It will come into effect in 2025 at the earliest.

LOW FEES

On the other hand, cost has been a major issue for both scheme members and asset managers. Back in 2016, the default investment scheme (DIS) was not yet introduced, with some industry players against the fee-capping mechanism for DIS products.

The maximum fee on the default investment scheme (DIS) were to be set at 0.75%, well below the current industry average of 1.6%.

It was officially offered in every MPF scheme on April 1, 2017. As of late 2022, DIS accounted for 8% of MPF’s total market share and ranks third in MPF net inflows, according to data compiled by MPF Ratings.

“Their low fees are often highlighted but its diversification benefit is as important. DIS’ primary fund, the core accumulation fund, invests broadly in global equities, including the US equity market. The benefit of this was seen in October [2022] where the fund option produced positive returns compared to other mixed asset options and local equities,” noted Francis Chung, chairman of MPF Ratings in November 2022.

PLATFORM SOLUTION

With different “pain points” resolved along the way, the so-called eMPF, a centralised MPF management platform finally gathering steam recently, when MPFA got the legislature’s nod to start building the system in 2021.

The platform will offer a one-stop online system to 4.5 million MPF scheme members, 300,000 employers as well as fund managers.

Through the platform, all parties involved would be able to manage the pension scheme, access account details, and members can switch funds and consolidate accounts, on a real-time, secure and paperless basis.

In this way, the operation will be more efficient, operating costs can be saved, leaving room for further management fee cuts, especially for smaller asset managers that don’t have their own back-office system, noted a senior manager of an MPF trustee told AsianInvestor in a previous interview in 2022.

Together with a governance report requirement that MPFA announced in late 2022, the eMPF platform will also enhance the transparency of the MPF scheme by allowing members to compare performance of different managers in a centralised platform, the senior manager said.

As of the end of 2022, total MPF assets were estimated at about HK$1.05 trillion ($133.9 billion), according to MPF Ratings.