Mandatory Provident Fund (MPF) has been operated for 12 years and it is not a short period. As a retirement protection plan, however, MPF is still far from maturity. Lately, it has been under repetitive criticisms. Frankly, MPF is a long term plan for retirement protection that would evolve and improve, but it does not mean that the scheme itself has any serious drawback. Many current problems, like excessive fees, arise from immaturity as well as systemic complexity and over-reliance on manual processing.
According to a study on administrative costs of MPF (the Study), retirement protection plans have five stages of development over a span of 40 years. In its 12th year of operation, MPF has only reached the second stage. Similar schemes in Australia, Chile, Great Britain and Singapore have been operated for some 20 to 40 years. To draw an analogy, Hong Kong is still in childhood but they have already grown up. The Study finds that scheme size and administrative costs are reversely correlated, i.e. the larger the asset the lower the cost. Our MPF is still small in scale. Comparing charge rates in Hong Kong with those in Australia (which is 30 times larger) and America (which is 60 times larger), for instance, is unfair. Adult and child are indeed incomparable.
In fact, administrative costs are inevitably high at early stages of retirement protection plans. Trustees invest hundreds of million dollars in computer systems for actuary and management. Processing of monthly contributions is more complex than ordinary funds. Overseas experiences show that charges would come down when scheme size reaches a critical mass. Hong Kong is strolling down the same path. On average, scheme charges have gone down from 2.1% in 2008 to 1.74% lately. The Study estimates that charge rate would fall further to 1.14% on implementation of recommendations with simplified and automated procedures.
We should not overlook another finding of the Study. If administrative and other charges are separately analyzed, the latter are comparable to other countries. They include service fees of investment managers, trustees and sponsors. Current levels are 0.99% for Hong Kong, as against 0.8% for Australia, 0.73% for America, 0.95% for Mexico. Thus, Hong Kong is in line with mature schemes elsewhere in this regard. The Study also finds that cost of sale is around 0.03% and probably inclusive of commission payable to intermediaries. As I understand, however, the commission rate is unattractive and intermediaries are unenthusiastic. Therefore, I cannot agree to an allegation that MPF contributions are eroded by intermediaries and sponsors. The culprit is high administrative charges. They are 0.75% for Hong Kong, as against 0.42% for Australia, 0.1% for America and 0.39% for Mexico. The gap is self-explanatory.
Higher administrative charges mainly arise from scheme services like support, collection and payment, etc. Substantial manpower is engaged to process millions of accounts each month and the work is costly. Hence, we could not bring down MPF charges without addressing the root cause. Automating administration and simplifying procedures are the right course ahead.
The Study also finds that annualized return of MPF net of charges to date is 3.4% p.a. on average. Performance is not poor, though unimpressive. Actually, MPF was not launched at good timing. The economy and market were in doldrums in 2000, adversely affecting investment yields. I have discussed this misfortune on different occasions and shall not repeat. In fact, financial knowledge of scheme members and their choices of investments also matter and directly impact on the rate of return. Fund statistics show that $60 billion out of $400 billion total MPF assets are in cash or bank deposits, earning almost zero return. Total return is unfavorably affected.
Members might pick conservative funds for low management fee, but their return is just 0.1% p.a. simply because 80% of assets are in bank deposits or cash. Actually, there is an alternative of lower cost but better return in the market known as Index Fund. Of course, investment risk is higher than conservative funds. Tracker Fund, for instance, offers return in tandem with the market, which is not necessarily worse than discretionary stock funds over time. Moreover, most Index Funds charge less than 1% fee. Although they might not match the appetite of those who are about to retire or risk averting, they are good choices for those who are not knowledgeable in investment. At least, charges payable are substantially less. Earlier, I have urged the Government to promote them and responses have been positive.
I now turn to my Amendments and shall explain their rationale. The Original Motion calls for abolition of an arrangement allowing employer’s contribution with aggregate return to offset Long Service Payment. I am neutral on this proposal but it is a key issue that should only be decided after thorough discussions among stakeholders and consensus is reached. It is a matter of labor relation. Employers have supported MPF on several conditions including an arrangement for offsetting statutory obligations. They should be consulted if there were any change.
Besides, the Original Motion calls for “full choice” and “single perpetual” MPF account for every member. I fully agree. My Amendment is just a clarification. It would substantially remove “retention accounts” and reduce administrative expenses. For your information, there are over 7 million MPF accounts for about 2 million employee and self-employed members. It is considerable wastage of administration, isn’t it? The sooner they are introduced the better.
The Original Motion also calls for capping fund expenses. In my view, this is a wrong approach for the right cause. It would not resolve operational problems of complexity and redundancy. After all, there is no objective benchmark. If the ceiling is too high, it would not serve any meaningful purpose. If the ceiling is too low, service providers would hardly survive and members would eventually have fewer choices. In my view, the best way ahead is still streamlining procedures and automation.
Another proposal of the Original Motion is low-fee inflation-linked fund provided by non-profit making entities operated by the Government, public bodies or voluntary agencies. Its feasibility is questionable. If a public body or voluntary agency lacks experience, it would be incapable of managing investment funds. If it then engages extra financial expertise, how could charges be reduced? Moreover, lacking economy of scale would mean higher administrative charges. If the Government or HKMA were asked to take up the offer, it would mean indirect subsidy by taxpayers. In fact, both are unwilling to come forward. Worst still, it would be more costly for the Government than private sector to manage investment.
I also agree on consolidation of MPF accredited funds. When funds lack subscription, administrative charges would be high. If they were consolidated, there would be savings in administrative costs. That said I stress that stakeholders should be consulted on changes, without which any cost/benefit is hardly achievable. Similarly, I support more stringent supervision of scheme sponsors. Decent relationship between sponsors and stakeholders should be established for the benefit of members.
Finally, I call for educating the public in managing own MPF accounts and the right concept of long term investment for retirement. MPF is an investment vehicle itself. People who know financial management would adjust their portfolios in response to market trends. In longer term, they are more likely to earn above-average returns. However, it is essential that the public have financial knowledge. Therefore, I have tabled a motion on promoting education in wealth management in the last term of this Council. It does pay for the Government to educate the public and students financial management. The entire community would benefit. That said some index funds of MPF are suitable for those who afford to take some risk but do not know much about financial management. I ask the Government to promote index funds and encourage trustees to offer more choices for the benefit of the public.
Motion on
“Comprehensively reviewing the Mandatory Provident Fund Scheme”
to be moved by Hon TANG Ka-piu
at the Council meeting of 10 January 2013
Wording of the Motion
That the Mandatory Provident Fund (‘MPF’) Scheme has been implemented for 12 years since December 2000, and its effectiveness has always been of major concern to society; according to the statistics of the Mandatory Provident Fund Schemes Authority (‘MPFA’), at present, there are over three million employee’s contribution accounts and around four million preserved accounts in Hong Kong; as at September 2012, the net asset values of approved constituent funds under the MPF Scheme reached HK$412.4 billion; yet, the expensive MPF administration fees, the lack of supervision over fund performance and the erosion of contributions by intermediaries and sponsors, coupled with the use of the accrued benefits derived from employers’ contributions to offset severance payments and long service payments, have become the major loopholes in the MPF Scheme which directly affect employees’ retirement protection; in this connection, this Council urges the Government to:
(1) abolish the mechanism whereby the accrued benefits derived from employers’ contributions under the MPF Scheme are used to offset long service payments and severance payments, and retain Hong Kong employees’ rights to severance payments or long service payments under the relevant provisions of the Employment Ordinance, so as to provide employees with better retirement protection.
(2) implement a full portability arrangement for the MPF Scheme to enable employees to choose trustees on their own, establish ‘one lifelong account’ for employees and credit the MPF accrued benefits derived from employer’s and employee’s contributions to this account, so as to prevent them from having multiple preserved accounts due to change of jobs, and require trustees to introduce a simple and easy to understand method to inspect accounts similar to that of ‘bank books’, so as to enable employees to better manage their MPF accrued benefits;
3) enact legislation to set a ceiling for the Fund Expense Ratio (‘FER’) of MPF funds, and require trustees to set out the actual amounts and ratios of various fees and FER in the annual reports issued to employees.
4) strengthen the regulation of MPF investment products, regularly review the sales practices of intermediaries and establish a mechanism for facilitating people to claim losses;
5) set up a public trustee that operates under the Government, a public body or a voluntary organization which charges lower administration fees, and provide low-risk capital preservation funds which are guaranteed to be inflation-linked for employees to choose, so as to achieve the objective of increasing competition to make other trustees to lower fees and improve performance;
6) rationalize and eliminate substandard MPF funds to reduce total fund expenses, and establish a monitoring system under which the total amount of fees charged by MPF funds are linked to performance;
7) regulate sponsors of MPF Schemes, enhance the monitoring of Scheme sponsors’ performance and profits, and establish a clear tripartite relationship among Scheme sponsors, intermediaries and contributors;
8) step up law enforcement to combat default contributions, including sentencing employers convicted of contravening the law to immediate imprisonment, and blacklisting the law-breaking companies concerned in the tendering exercises for government services as a penalty, etc.;
9) amend the legislation to reform the Occupational Retirement Schemes (i.e. ‘provident fund’) system, requiring that when employers implement the provident fund, the vesting scales of the provident fund offered by them to employees are no less than the total amount of employers’ contributions under the MPF Scheme, so as to plug the loopholes in the provident fund;
10) establish an inter-bureau group to implement, within the term of the current Government, the various proposals for improving the MPF Scheme put forward by MPFA on 26 November 2012, and regularly report the progress to the Legislative Council; and
11) study the implementation of a universal integrated retirement protection system in addition to the MPF Scheme, so as to make up for the inadequacies in the MPF system.
Motion on
“Comprehensively reviewing the Mandatory Provident Fund Scheme”
to be moved by Hon TANG Ka-piu
at the Council meeting of 10 January 2013
Motion as amended by Hon CHAN Kin-por
That, given that the Mandatory Provident Fund (‘MPF’) Scheme has been implemented for 12 years since December 2000, and its effectiveness has always been of major concern to society; according to the statistics of the Mandatory Provident Fund Schemes Authority (‘MPFA’), at present, there are over three million employee’s contribution accounts and around four million preserved accounts in Hong Kong; as at September 2012, the net asset values of approved constituent funds under the MPF Scheme reached HK$412.4 billion; yet, the expensive MPF administration fees, the lack of supervision over fund performance and the erosion of contributions by intermediaries and sponsors, coupled with however, MPF as a long-term retirement protection system still has inadequacies at present and is in need of improvements having regard to its actual operation; at the same time, the use of the accrued benefits derived from employers’ contributions to offset severance payments and long service payments, have become the major loopholes has become one of the most controversial issues in the MPF Scheme which directly affectaffects employees’ retirement protection; in this connection, this Council urges the Government to:
(1) abolish consult the stakeholders on the study of the abolition of the mechanism whereby the accrued benefits derived from employers’ contributions under the MPF Scheme are used to offset long service payments and severance payments, and retain and the retention of Hong Kong employees’ rights to severance payments or long service payments under the relevant provisions of the Employment Ordinance, so as to provide employees with better retirement protection;
(2) implement a full portability arrangement for the MPF Scheme to enable employees to choosetrustees MPF schemes on their own, and amend legislation to establish ‘one lifelong account’ for employees and credit, requiring each employee to have one MPF account only and crediting the MPF accrued benefits derived from employer’s and employee’s contributions to this account, so as to prevent them from having multiple preserved accounts due to change of jobs, and require trustees to introduce a simple and easy to understand method to inspect accounts similar to that of ‘bank books’, so as to enable employees to better manage their MPF accrued benefits while achieving the objective of reducing MPF administration fees, thereby creating room for reduction in fees and charges;
(3) enact promote the automation of MPF administration and operation to streamline work processes and reduce administration expenses; and should automation ultimately fail to effectively reduce administration expenses, the Government should study the feasibility of enacting legislation to set a ceiling for the Fund Expense Ratio (‘FER’) of MPF funds, and require trustees to set out the actual amounts and ratios of various fees and FER in the annual reports issued to employees of MPF funds;
(4) strengthen the regulation of MPF investment products, regularly review the sales practices of intermediaries and establish a mechanism for facilitating people to claim losses;
(5) set up a public trustee study whether the setting up of a non-profit-making serviceorganization that operates under the Government, a public body or a voluntary organization which charges lower administration fees, and provide low-risk capital preservation funds which are guaranteed to be inflation-linked for employees to choose, so as to can effectively lower administration fees and achieve the objective of increasing competition to make other trustees to lower fees and improve performance;
(6) rationalize and eliminate substandard MPF funds to consult the stakeholders on the consolidation of MPF schemes and funds to achieve better cost-effectiveness and reduce total fund expenses, and establish a monitoring system under which the total amount of fees charged by MPF funds are linked to performance;
(7) regulate conduct a study on regulating sponsors of MPF Schemes, enhance the monitoring of Scheme sponsors’ performance and profits sponsors, and establish a clear tripartite relationship among Scheme sponsors, intermediaries and contributors relationship between Scheme sponsors and the relevant stakeholders;
(8) step up law enforcement to combat default contributions, including sentencing employers convicted of contravening the law to immediate imprisonment, and blacklisting the law-breaking companies concerned in the tendering exercises for government services as a penalty, etc.;
(9) amend the legislation to reform the Occupational Retirement Schemes (i.e. ‘provident fund’) system, requiring that when employers implement the provident fund, the vesting scales of the provident fund offered by them to employees are no less than the total amount of employers’ contributions under the MPF Scheme, so as to plug the loopholes in the provident fund;
(10) establish an inter-bureau group to implement, within the term of the current Government, the various proposals for improving the MPF Scheme put forward by MPFA on 26 November 2012, and regularly report the progress to the Legislative Council; and
(11) study the implementation of a universal integrated retirement protection system in addition to the MPF Scheme, so as to make up for the inadequacies in the MPF system; and
(12) step up investor education to enable the public to have a more in-depth understanding about MPF and the concept of long-term retirement investments.
Note: Hon CHAN Kin-por’s amendment is marked in bold and italic type or with deletion line.