Motion on “Revitalizing the Mandatory Provident Fund” (2019.02.21)

MR CHAN KIN-POR (in Cantonese): President, there have been many negative comments on the Mandatory Provident Fund (“MPF”) in society. MPF is often perceived as yielding low returns and charging high fees. I would like to take this opportunity today to talk about the issue of returns with the help of some data and facts, as I found that many people incorrectly relay erroneous messages and believe in hearsay, claiming that the MPF returns are very poor. These incorrect messages are the main reason for the negative comments of the general public on MPF.

Many people sing praises of the Exchange Fund for the high rate of return, but MPF may yield an even better return than the Exchange Fund if choices of MPF schemes are properly made. I will prove this with data. Of course, there are areas for improvement insofar as MPF is concerned. I have been advocating a cut in the administration fees over the past decade and such fees have dropped a lot, but there should still be room for a further reduction.

When it comes to the rate of return, the figure quoted in this motion, i.e. the figure stated in Dr Junius HO’s motion as amended by me, is the overall annualized rate of return of MPF schemes overall from December 2000 to December 2017, which was 4.8% per year on average after deducting the administration fees, as compared with an average inflation rate of only 1.8% for the corresponding period. While the latest full-year figures for 2018 were released just a few days ago, of which the overall annualized rate of return dropped to 4.1% due to a sharp fall in the stock market in 2018, the stock market has rebounded since January this year with the decline narrowed significantly. As such, I will stick to the latest figures as of 2018.

In fact, nearly 80% of the MPF contributions are invested in medium- and high-risk funds, including equity funds and hybrid funds. We can look at their return performances. Over the 18 years from 2000 to 2018, with the administration fees deducted from the return data mentioned as follows: the annualized rate of return on equity funds was 5%, representing a return of 5% per year on average in 18 years. The rate of return on index funds was higher at 5.5% per year on average. It is rare to find an investment with a rate of return of 5.5% nowadays. The rate of return on hybrid funds was 4.3% per year on average, which was same as that on the Exchange Fund of only 4.3% for the corresponding period. The rate of return on bond funds was 2.5% per year on average. The rate of return on guaranteed funds was 1.1% per year. The rate of return on conservative funds was 0.7% per year on average.

President, these figures speak for themselves. The rate of return on MPF is actually quite considerable. Unless it is a must to choose a guaranteed fund or a conservative fund, the rate of return on these two funds respectively underperformed inflation at only 1.1% and 0.7% per year on average. In contrast, the rates of return on MPF and the Exchange Fund were roughly the same. It was 4.3% for the Exchange Fund and 4.1% for MPF, while the administration fees were deducted from MPF but not the Exchange Fund. If MPF equity funds were chosen, the rate of return would be 5%. In comparison, the Exchange Fund pales.

In fact, the power of MPF returns would require a long time to accumulate on average, because sometimes it may fall as the investment market fluctuates. For example, the Hang Seng Index (“HSI”) dropped 4 000 points in 2018 and the rate of return for MPF was -8.83%. But do not forget that HSI surged by 8 000 points in 2017 and the rate of return for MPF was +22.3%. In the first one and a half month of the year, the stock market reported a considerable return and significantly narrowed the decline in 2018. Therefore, we should evaluate MPF from a long-term perspective. We should not look at the down market in a particular year and say the MPF performance is poor, and of course, we cannot praise MPF as “king” for the market surge in 2017. MPF is an average investment method and subject to long-term performance. After 18 years of ups and downs in the investment market and two financial turmoils, its overall rate of return still stands at an impressive level of 5%.

MPF underperforms inflation only in terms of the low-return guaranteed funds and conservative funds. Fortunately, the public is very smart. These two funds only account for less than 20% of the overall MPF. Initially, the establishment of the guaranteed funds and conservative funds was to offer a choice to those members of the public who are close to their retirement age, so that they would not be affected by market fluctuations before retirement. In addition, those who are keen on financial management may transfer their money to conservative funds as a safe haven when they feel that the “bull market” is coming to an end. In fact, many people do not understand this or even have a wrong concept, but they still often advise others to choose a guaranteed fund. It turns out to underperform inflation for sure.

Therefore, those younger members of the public who do not know how to make the choice may choose the HSI Fund. It enjoyed considerable returns in the past and I believe it will continue to be so in the future, and the advantage is that its administration fee is the lowest. My amendment proposes to promote financial management education to teach people how to effectively manage their MPF investments, because the rate of return can differ greatly if the public does not understand the real situation, misbelieve some false information and believe in hearsay, and choose an unsuitable fund as a result. Meanwhile, I wish that people who do not understand the market should not spread wrong concepts and make nonsensical speeches that may make others victims any time.

President, the administration fees of MPF have long been a cause of criticism. In the past, I have been urging the Government and the trade to take effective measures to reduce administrative expenses. In recent years, charges have also started to drop from 2.1% in 2007 to 1.52% now, but I believe there is room for a further reduction.

Nevertheless, we should give it a fair deal. There are historical reasons for the high administration fees at the initial launch of MPF. Since legislation was to be implemented at that time, a huge investment was involved given that a large amount of income and expenditure and paperwork for MPF had to be handled manually each month and new computer programmes were deployed. At that time, the size of the MPF pool was very small. Given a small pool of capital and the calculation of fees based on total assets, the high administration fees were inevitable and necessary at that time. However, as contributions continue to increase and the administrative work is gradually streamlined, the administration fees can be lowered. As such, I propose to promote paperless processes while introducing an “eMPF” electronic platform as soon as possible, so as to substantially reduce manual handling procedures in order that bigger room for administration fee reduction can be occasioned. The Mandatory Provident Fund Schemes Authority (“MPFA”) estimates that as long as the electronic platform has a 90% utilization rate, an enormous $23 billion can be saved over the next two decades. In addition, the minimum charge is only 0.71% if the public chooses the HSI Fund, which is an ideal choice given the extremely high rate of return.

Moreover, some people criticize MPF as not enough to meet retirement expenses. This boils down not to a matter of return, but an extremely low contribution ratio in Hong Kong. The Singapore Provident Fund has a high maximum level of contribution of 37%, which is 3.7 times that of Hong Kong. Naturally, it is more than sufficient to cover the expenses. The MPF contribution ratio was low as employers or employees were unwilling to contribute much when we established our scheme in the past. It is hoped that the Government will gradually enhance tax concessions for voluntary contributions to attract the public to make voluntary contributions. Currently, over $10 billion in the total MPF contributions is voluntary contributions. With such a huge capital flowing into the system, it proves that there are some points of attraction. Otherwise, all the voluntary contributions have already been withdrawn.

Mr Paul TSE proposes to allow the public to buy the Tracker Fund of Hong Kong, which charges a lower management fee, at their own expenses. I would like to remind the public of the bank charges. Since the minimum charge for trading securities via the bank is $50 for each transaction and a charge will be levied for each monthly contribution, a monthly contribution of $3,000 will incur a charge at 1.6% and a monthly contribution of $1,500 will incur a charge at 3.2%, compared with 0.71% for the MPF Index Fund. This implies that buying the Tracker Fund of Hong Kong at one’s own expenses will be subject to a charge which is more than double.

Today, the public has a deep misunderstanding or even hatred against MPF. Of course, MPF has its own problems. But more importantly, the community is full of mistaken and unfair reports or information, which gives the public a very poor impression of MPF. While all I have cited today are objective data that MPFA would publish every year, few people will pay attention to them. As a result, no one has gone through the merits while the shortcomings are magnified. How will there be objective and fair comments on MPF? I also understand that, given the negative image of MPF, it is difficult to pass the motion at today’s meeting unless MPF is “fiercely dressed down” by the motion and the amendments and it is best to keep the administration fees to an extremely low level. However, I think that it is not important whether my amendment can be passed. The most important thing is to clarify the facts about MPF, especially the rate of return, and it would be a most benevolent favour to the public if only people can realize the truth. Thank you, President.

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