MR CHAN KIN-POR (in Cantonese): Deputy Chairman, first of all, I declare that I represent the insurance sector. I believe members of the public must be very angry when they learnt of the latest negative return of the Mandatory Provident Fund (MPF) System, and they will thus refuse to listen to any explanation. But I think that they really need to know the actual situation and truly understand the investment environment in recent years. They need to learn how to secure better returns under this complex MPF System. Only such understanding and knowledge can be of real help and use to the public.
Several Members have pointed out that MPF schemes charge high fees but yield low returns. I wish to share my view. I agree that management fees should gradually lowered when the assets managed by the MPF scheme increase. As a matter of fact, the fund expense ratio (FER) of MPF schemes has dropped by 25% from 2.1% to 1.57%. The FER indicated by an Ernst & Young report four years ago was 1.74%, and the FER now is just 1.57%, representing a 10% decrease. Hence, the Government should adopt further measures to facilitate automation and computerization, and simplify the administrative and compliance requirements. It is only in this way that management fees can continue to decrease.
Talking about low returns, I believe members of the public will also feel that the world has indeed changed. In the past, we could live on the interests generated by fixed deposits in banks because the interest rates for fixed deposits then could be as high as 4% to 5%. But in recent years, savings account deposits can only yield an interest rate of 0.1%; even if the principal is as much as $1 million, a one-year fixed deposit will only yield an interest of 0.15%, which is just $1,500 a year or $4.1 a day. The money is not even enough for buying a newspaper. As for the bond market, the return rate is also at a record low because bond interests all over the world are on the low side. The stock market has also dropped by 30% to 40% from its peak. Against such a bleak backdrop, the returns of MPF schemes are actually not that bad.
The annualized rate of return of MPF schemes from 2000 to March 2016, after netting management fees, was 2.6%. Please note that this return rate, which has already netted all fees, is higher than the 1.9% inflation rate in the same period. However, if people invested their money in low-risk funds, their returns would definitely be lower than the inflation rate. Hence, the Default Investment Strategy (DIS) now proposed by the Government precisely seeks to secure a better return for MPF scheme members by linking investment risks with their age. It is hoped that the return rate for existing assets without any default investment strategy, which amount to $60 billion, can be increased from 0.3% to 2%-3%. Given that other MPF scheme members can also opt the DIS, it is estimated that many scheme members will change to the core fund, which will bring about substantial adjustment to the overall MPF return and lower the management fees. This is a good policy and should be implemented as soon as possible.
Next, I will express my views on the amendments. The first amendment puts forth the idea of an all-fees-inclusive approach. As Members may know, the existing administration system adopted by the sector, as required by the law, uses day as the calculation unit. The same goes for calculating fees for fund withdrawal and trustees. However, out-of-pocket expenses (that is, compensation fund levy, auditor fees, legal charges, postage and printing fees, and so on) are not charged and paid daily, and thus cannot be calculated on a per day basis.
The first amendment seeks to include out-of-pocket expenses in the 0.75% fee cap, which means that the calculation of out-of-pocket expenses has to change to a per day basis. This will create loads of technical problems difficult to solve. As a matter of fact, the Financial Services and the Treasury Bureau and the MPF Schemes Authority (MPFA) have already confirmed that this is unenforceable. I personally met with the MPFA and it indicated that it would have no alternative but to impose a fine of several hundred thousand dollars on each service provider every day because it had to enforce the law, or The Ombudsman would bring it to task.
So, Members need to understand that many things are easier said than done. Someone says that there is always a person who is willing to continue to provide the service no matter how much the service charge is reduced. But regrettably, that someone who made this remark is not the service providers and he himself is unwilling to do so. He is only a bystander. I hope these bystanders will keep their mouths shut because they are only capable of making unenforceable suggestions which the sector cannot cope with and affect the livelihood of tens of thousands of people. I hold that the Legislative Council should not endorse an amendment which is confirmed unenforceable.
According to government information, mixed assets funds with an asset size of $100 million and below are estimated to have an average “other fees and expenses” of 0.32% of asset value, while those with an asset size over $10 billion have an average “other fees and expenses” of 0.14% of asset value. So, if this amendment is passed, funds of smaller asset values or schemes with smaller asset sizes will substantially drop in revenue and may even have to withdraw from the market. Only large funds will remain viable and all small and medium funds will have to leave the market. This will seriously undermine market competitiveness and is against the unanimous wish of the Government and the public. Their original intent is to introduce more competition into the MPF System. Hence, the passage of this amendment, which has not undergone any prior consultation with the sector, will be a gross violation of the procedural justice upheld by Hong Kong and a disregard of the consultation system in Hong Kong.
Just now, someone said he had the support of the leftists, moderates and rightists, and so on. If his argument is tenable, we do not need to conduct any more consultation in the future. We just need to ask the leftists, moderates and rightists whether they support a certain proposal. If they all support it, the proposal can be endorsed. Is this the right way to do things? If the subject we have to discuss is whether a tax reduction should be introduced in Hong Kong, and the leftists, moderates and rightists all support it, then should we thus lower the tax rate? There are many such examples. Please do not treat all Hong Kong people like idiots. We are all sensible people. He must not do it so forcibly.
Besides, this amendment will upset the consensus between the sector and the Government and also the work they have done together. And, as I have said just now, it is technically unfeasible. Hence, further discussion is required. I would not say that the proposal is definitely unfeasible, but it must still be pointed out that even if the sector gives its full co-operation, it will still take at least two to three years before it can be implemented. I am thus against the forcible implementation of this amendment, which has not undergone any prior consultation, and which will not be feasible until several years later.
I will now talk about the second amendment, which is about the fee cap of 0.75% plus 0.2% on out-of-pocket expenses. The second amendment involves fewer technicalities because when compared with the first one, the 0.2% of out-of-pocket expenses is calculated on a yearly basis. It can be enforced more easily and can thus be implemented more quickly. In fact, the sector is grateful to Mr Alan LEONG because after meeting with more than 20 companies in the sector, he suggested that the Government should itself propose the fee cap of 0.75% plus 0.2% on out-of-pocket expenses.
I have discussed this with the Government. The Government says that the problem lies in the fact that the present amendment is still very crude, and if the Government is to put forward the amendment itself, it will need at least several months for drafting, because the Department of Justice must make sure that the amendment eventually put forward is satisfactory drafted. Hence, Members must understand that the present amendment is still very crude. It is just based on a rough idea and somehow allowed to be moved after some sort of discussion. If it is really passed, I would be very disappointed by how this Council does things.
Hence, I am grateful to Mr LEONG for his view. He is correct in saying that the Government should accept the idea and draft a better amendment based on it. But the problem is that we do not have enough time unless we can handle this Bill next year. So, this is not such a bad amendment because it at least recognizes that the 0.2% cap should be calculated on a yearly but not daily basis, and technically, it can be implemented more quickly. We, the sector, expect that if the amendment is passed, it can be launched in the upper half of next year, so as to benefit MPF scheme members as soon as feasible.
Although this amendment is inconsistent with the consultation outcome, for the sake of expeditiously launching the DIS for the benefit of the MPF scheme members, the sector has agreed after discussion that they are willing accept the proposal of a fee cap of 0.2% plus 0.75%. They hold that although they have not been consulted on the amendment, the idea has at least been repeatedly discussed with the Government. However, the sector still needs time to discuss the details with the MPFA and different service providers. I believe the proposal can be launched within 2017, so as to benefit the 2-odd million MPF scheme members. I hope Members can understand the painstaking efforts the sector has made, and veto the first amendment and support the second one.
Regarding Mr WONG Yuk-man’s amendment, which seeks to set the proposed management fee cap at 0.59%, I believe Members may not have seriously thought about how 0.59% has been arrived at. Why is it not set at 0.5%, 0.6% or 0.3%? But some Members still give their support because they think that the lower the management fee, the better. But we need to think about this sensibly. Is it feasible to set it at 0.59%? Ernst & Young conducted a study on the management fees of the MPF System in November 2012. It was found that the management fee at that time was 1.74%, and fund manager fees and administration cost accounted for 0.59% and 0.75% respectively, while 0.4% was attributed to sponsor charge, trustee profit and member rebates. This can tell why 0.59% is chosen. It is just the fee charged by fund managers, accounting for only 34% of the 1.74%. It does not cover the maximum administrative cost of compliance, the fees for trustees and sponsors and also rebates. It does not include any of these costs.
However, according to the Ernst & Young study ― Members may look at this study if they trust such consultancy reports ― even in other countries practising very advanced retirement protection systems with very sizeable asset portfolios, it is still impossible to set the rate of management fees at a level lower than 0.59%. Such retirement protection schemes were implemented decades before the one in Hong Kong was launched, and their asset values are way larger than that of the MPF System in Hong Kong, but their management fees still cannot be lower than 0.59%. Our MPF scheme is way more complicated than its counterparts in other countries, and there is so much administrative work. So, how can we possibly set the rate of management fee at 0.59%? Can Members be more reasonable? If the amendment on a 0.59% management fee cap is forced through in this Council, will any companies be willing to provide the service? Is Dr KWOK Ka-ki willing to do so?
I hope Members will negative the first amendment, that is Mr WONG Yuk-man’s amendment on a 0.59% management fee cap, and support the second amendment, so that the DIS can be launched as soon as possible. Thank you, Deputy Chairman.
MR CHAN KIN-POR (in Cantonese): Supplementary information: according to the information released by the Mandatory Provident Fund Schemes Authority, the annualized return of Mandatory Provident Fund (MPF) schemes from 2000 to March 2016, net of management fees ― please note the deduction of management fees ― was 2.6%, while the inflation rate in the same period was 1.9%. Therefore, MPF return has in fact outdone inflation rate of the same period.
MR CHAN KIN-POR (in Cantonese): Mr TANG Ka-piu’s amendment seeks to force trustees to provide a guaranteed rate of investment return that can out-perform the inflation rate. Failing to do so, trustees will face financial penalties or revocation of their licence. I am sure that Mr TANG Ka-piu’s intention is good. But practically speaking, the goal of setting an investment return rate which can out-perform the inflation rate, which the amendment seeks to achieve, can only be reached if fund managers are given the freedom to decide the choices of assets, coupled with a suitable allocation of types of assets.
Trustees of Core Accumulation Fund are required to make asset allocation according to the age of scheme members. In other words, fund managers are not free to do whatever they want. Besides, they are required to invest only in equities and bonds. When fund managers are tied down with such restrictions, how could they achieve the goal stated in the amendment? I hope Member understand what the amendment really means.
Besides, if Members endorse the amendment just discussed on the 0.75% fee cap plus the 0.2% expense cap, the cap on administration fees will likely be set at a relatively low level. If that is the case, there is simply no way that the proposed guaranteed rate of return can out-perform the inflation rate. What I mean is that if trustees are allowed to calculate and set their own fee levels, they may be able to meet the requirement. But this is not the case now because we wish to restrict their administration fees to a certain cap. Hence, it is impossible for fund companies to meet the requirements stated in the amendment. Since we clearly know that they practically cannot meet those requirements and that they will be financially penalized and their licence will be revoked when they fail to do so, the amendment is improper and unjustified.
More importantly, if we force through the amendment now, and if it leads to the licence revocation for a trustee in the future, what will be the outcome? The outcome is that all employees of that trustee will be dismissed. At present, the upstream and downstream tasks of large trustees involve thousands of employees. Can Members bear the responsibility of this outcome? When Members put forth this proposal, are they aware that it can lead to such an outcome? I hope the next Legislative Council will not be like this one and Members will not do things for the sake of winning votes. They should be reasonable. They should consult the relevant sector on the impact of their proposals on society. I understand that Members may wish to deal a blow to certain persons they hate, and I am also well aware of the reason why people harbour such intense grievances against the MPF System. But we also have to consider the reality and then find out the right course to pursue. We should not tender a haphazard proposal and compel trustees to achieve our goal. I hope that the next Council will not be like this. Is it because the election is near, so Members have become so crazy? I cannot agree to this mindset.
I hope Members can get to know the situation now, and I also understand Members’ thinking, but we need to talk this out because we are talking about the livelihood of many employees in the sector. There are at least tens of thousands of people doing the upstream and downstream tasks. Do Members want them to lose their jobs? Is this fair to them? I hope Members can give this some thoughts and try to listen more. I hope Members will carefully listen to and respect the views of different stakeholders on problems related to the sector or the offsetting mechanism of the MPF System. Do not just consider your standpoint. I hope Members can accommodate each other’s views; if we do not accommodate each other’s views today, we will only end up in the same standstill when we scrutinized the Copyright (Amendment) Bill 2014. What will be the outcome then?
I hope Members can understand the will of the sector to lower as far as feasible … they will also pledge to meet the requirements. I hope we can be more understanding.
MR CHAN KIN-POR (in Cantonese): I just want to clarify that it is certainly not my intention to discriminate against the mentally ill. Neither do I want to see things escalated to matters of principle and the mentally ill used as a political tool for mudslinging or attacking other Members. As a matter of fact, many people who do not suffer from mental disorder are also highly crazy. But I should not have described Mr TANG Ka-piu this way, or I actually do not mean it this way. What I mean is that his amendments are far too extreme. And I mean I am afraid that as an election is approaching, the amendments will be getting increasingly inappropriate and extreme.
Thank you, Chairman.