Towers Watson calls for fixed fees in MPF restructure

Consultancy Towers Watson has called for Mandatory Provident Fund (MPF) fees to be restructured to improve transparency and encourage greater competition among providers.

Philip Tso, director of investment services at Towers Watson, has questioned the efficiency of the present MPF system in Hong Kong, in which the overall fee is calculated at 1-2% of the net asset value of a member’s total balance.

This all-in fee encompasses investment management, administration, custody, servicing and auditing and accounting, although administration accounts for the largest portion, at about 50%.

But, as Tso points out, regardless of the total net asset value of MPF’s account, members still receive the same services from providers. “So why is the administration fee tied in with the net asset value?” queries Tso.

“As the MPFA [Mandatory Provident Fund Schemes Authority] lets the private sector run the system, I think instead of asking the providers to reduce fees, why not review the fee structure to be more in line with the interests of end-users?”

Having noted a reduction trend in MPF fees from providers, Tso says administration fees should be restricted to a fixed-amount, which over time will become a smaller percentage of MPF members’ total net asset balance. Their return net of fees will be enhanced, too.

“In the short term, members may not see the immediate benefit [of fixed-amount admin fees], but by the time their balance gets big [through long-term contributions], that fixed amount will become a very small percentage of the total net assets,” says Tso.

Further, Tso believes that the impending introduction of the Employee Choice Arrangement (ECA) will help to create healthy competition among providers as the market sees members move around.

“Maybe that’s why the MPFA wants to introduce the ECA, which can help to drive the fees to a level that is not necessarily cheaper, but more competitive,” he says.

Hitherto, the equivalent of 5% of an employee’s salary, generally capped at HK$20,000 per month, together with a 5% employer contribution, has had to be invested in a nominated MPF scheme. Under new arrangements set to be introduced in 2012 pending legislation, employees will be allowed to move their own 5% mandatory contributions to any scheme in the market.

Over the last decade, MPF assets have grown 5.5% a year to HK$365 billion ($47 billion) by the end of 2010. Towers Watson is projecting this will top HK$1 trillion by 2020, when each member could have an average of HK$500,000, tripling today’s average of HK$145,000 per member.

A total of HK$816 million of voluntary contributions were made by members last year. “It is a small amount compared with the total contribution of around HK$40 billion, but it shows that more people are using MPF as a savings vehicle for retirement, and we expect this will continue to grow,” says Tso.