MR CHAN KIN-POR (in Cantonese): Before all else, President, I have to declare that I am a representative of the insurance sector. I would like to take this opportunity to respond to the views expressed by several Members earlier. Just now, a Member mentioned issues concerning the availability of several hundred funds on the market as well as how members of the public should make choices from such funds. I would like to say a few words about this. Actually, if members of the public participate in a scheme offered by a service provider, they can only choose from eight to 10 funds at most. Therefore, they can definitely not choose from 400-odd funds. Moreover, these funds are classified as high-, medium- and low-risk. So long as the public know the risk levels, they will not find it too difficult to make a choice. I hope the Government can step up its efforts in this regard to prevent people from developing the wrong impression that it is very complicated to choose from the funds. Actually, it can be very simple since the funds are merely categorized as high-, medium- and low-risk.
Furthermore, a Member mentioned that the fees charged by provident fund schemes provided for subsidized and grant schools are lower. Why? It is simply because the Mandatory Provident Fund (MPF) System carries many statutory requirements since it is a universal, mandatory system and it is compulsory for all employees to participate. Such being the case, there is a large gap between the MPF fees and the fees charged for provident funds. We can see that the fees will increase if some very complicated compliance requirements are added. For instance, a large number of employers of small and medium enterprises are still making contributions on paper and cheques, thereby giving rise to numerous problems. Should the Government fail to resolve these problems, I believe Members will still think that the MPF fees are high.
Next, I would like to say a few words about the operation of one of the proposed amendments to the Bill. Firstly, the industry has strongly requested the Government to adopt an opt-in approach, rather than an opt-out approach as currently proposed. If the opt-in approach is adopted, the accrued benefits of scheme members will not be transferred to Default Investment Strategy (DIS) accounts until confirmations from scheme members have been received. According to the Government’s present proposal, transfers can be made if no notice is received within a certain period. Obviously, the opt-in approach can definitely enhance protection for scheme members and prevent them from feeling dissatisfied as a result of losses incurred due to sharp fluctuations in the market and subsequently lodging complaints against MPF service providers. Unfortunately, the Government has eventually not taken on board the views of the industry and insisted on adopting the opt-out approach. It can thus be anticipated that complaints will definitely be lodged by scheme members in the future. I hope the Mandatory Provident Fund Schemes Authority (MPFA) can then exercise flexibility in handling such complaints and refrain from blaming the service providers. I would like to put this on record.
The discussion of the Bill this time around is focused on management fees. Actually, the MPF System was born at the wrong time since the repeated occurrence of financial turmoils in recent years has led to uncertainties in investment markets, including the stock and bond markets, and subsequently low investment returns. As a result, there is a growing concern in society about issues related to the management fees of MPF schemes, that is, the fund expense ratio (FER). The current management fees cover abundant manpower and clerical costs, as well as increasing compliance requirements. Nevertheless, the industry also appreciates the concern of society about the management fees and has been striving to achieve automation of the administrative work, with a view to reducing operating expenses. Over the past decade, the overall FER has been lowered from 2.1% in 2007 to 1.57% recently. I would like to draw Members’ attention to the fact that the management fees have already been deducted from the returns yielded, as I mentioned, since the implementation of the MPF System. I have repeatedly heard Members deduct management fees again from the return figures they mentioned, which was actually incorrect. After deducting the fees, the rate of returns we mentioned was actually 2.6%, which was even better than the 1.9% inflation rate recorded in the same period.
In fact, Members should make a comparison, too. Bank deposits can only earn interest at a rate of 0.01%, or 0.15% for a one-year term deposit. I hope this piece of background information can enable the public to gain a deeper understanding. Certainly, the industry hopes to make better efforts, but the current investment environment is very difficult. Nevertheless, we can see that the average return can still beat the inflation rate. Of course, if members of the public opt for low-risk funds, as if depositing their contributions in a bank, their return will definitely lag behind the inflation rate. I hope the Government can explain this causal relationship clearly to the public and strengthen public education on this front.
The DIS proposed by the Government will bring enormous benefits to the 2 million scheme members, since their investment returns can thus be raised. If the $60 billion assets which have yet to adopt the DIS are used as the basis for calculation, it is estimated that the return to be yielded for scheme members may increase from 0.3% to 3% following the implementation of the DIS. Of course, this is just a forecast or projection. However, if it is really implemented, it is estimated that the annual return to be yielded for scheme members can be increased by $1.6 billion, and the management fees can also be suitably lowered. Therefore, the industry supports the Bill.
In the past two years, the industry has been giving support through action and striving to complement the MPFA with respect to the requirements of the Bill by making a considerable number of recommendations and forging a consensus, for instance, agreeing to setting the fee charged in relation to the DIS at an annualized rate of 0.75% of the net asset value. Members should not think that this is only a small sum, for it is used for making payments to a large number of people, including trustees, administrators, investment managers, custodians, sponsors, promoters, and so on. Just now, many Members questioned why out-of-pocket expenses had to be charged on top of the fee. It is because out-of-pocket expenses should actually not be included in the 0.75% fee. Moreover, such expenses vary. Very often, in the interest of scheme members, the persons concerned are compelled to seek more and more legal advice. It is because more auditors will be required if there are more and more requirements in law. Are we going to restrict the number of auditors and disallow their charging of fees? This explains why the calculation of out-of-pocket expenses as a separate item is a more suitable arrangement.
The industry has also devoted plenty of time to advising on the DIS, rationalizing the wording of the Bill, improving the details of the de-risking mechanism, and stating support for the Bill. Moreover, it has co-ordinated various government departments in carrying out inspections of the computer administration system without affecting its daily heavy workload. It has been working very hard and proper preparations have already been made to launch the system according to its original plan at the end of this year.
On the making of payments, it has taken lengthy studies and consultation before the trust companies can collaborate with fund managers and sponsors to finalize product designs and the arrangement of capping the management fee at 0.75% with out-of-pocket expenses to be added separately. It is estimated by the industry that this fee-charging arrangement cannot make ends meet at the initial stage, and subsidies will be required. However, if changes are made to the Bill because of the amendments ― Members should be aware of the large number of amendments to be proposed today ― the industry will have to make a lot of efforts again, in addition to consulting various parties including fund managers, sponsors, and so on, thereby making it impossible for the work to be completed by the end of 2016. As a result, more losses will be incurred. Since these amendments will make operation more difficult, small and medium service providers are expected to have a high chance of pulling out of the market.
Although Members are entitled to proposing amendments, I hope they can understand that we will face endless trouble should the amendments adversely affect or change the outcome of consultations conducted on the Bill, as those consultations will thus be rendered meaningless. The purpose of consultation was originally to promote understanding of the implications of the Bill on various fronts, including the difficulties encountered by operators in enforcing the legislation, technological issues, cost issues, and so on. After a lengthy period of in-depth understanding and discussions, the Government finally proposed the Bill after striking a balance between the interests of operators and scheme members. But unfortunately, members have merely looked at the discussions held by the Bills Committee and the Government’s responses without going through a similar process before proposing their amendments. I must point out that members often have their own positions and, what is more, ballot considerations. Given that this is the election year, this problem has become even more serious. Should this atmosphere be left to continue to develop, it will do no good to this Council as well as Hong Kong as a whole. I consider this violent approach of overturning the outcome of consultations absolutely unreasonable and completely in violation of the fairness principle of free market.
Let me cite the amendments now proposed to the Bill as an example. It has taken two years to consult the industry on the originally proposed amendments. Moreover, the industry has devoted a lot of time, resources and efforts to assisting with the drawing up of the DIS. If the outcome of a two-year consultation can be changed easily, what is the point of consultations by the Government? Is there any need for further consultations to be held in future? How can the outcome be convincing? I was once asked these questions by some industry stakeholders: Why has Hong Kong changed to become a rascal? How can they continue to do business? I was rendered speechless.
This is why I think that if some amendments unacceptable to the industry are passed, it is only right for the Government to withdraw the motion and conduct consultations afresh. Although the Government may heed the views expressed by Members on the amendments, fresh consultations are required because many recommendations made in the amendments are practically infeasible. Therefore, if some of the amendments passed later on will have an adverse impact on consultation or even overturn its outcome, the Government should seriously consider withdrawing the motion and conduct consultations afresh. With respect to the various amendments, I will speak again when the amendments are debated together in a joint debate. Thank you, President.