State of the Mandatory Provident Fund

Hong Kong's Mandatory Provident Fund (MPF) scheme has been humming along for over a year now, but it faces a number of problems, including efforts by the government to scale it back in the face of economic recession, as well as consolidation among service providers and ongoing struggles to better educate members about how it all works.

Gain Miles is a Hong Kong insurance broker that branched out into consulting companies about MPF as the programme was drawn up five years ago. Gloria Siu, director and general manager, says the firm's customer base spans all sectors of Hong Kong's economy, but most are SMEs with staff sizes of 100-500, although she also advises some manufacturers with over 1,000 employees. She spoke with FinanceAsia about where MPF is going.

FinanceAsia: How would you assess MPF's first year?

Gloria Siu: It has been acceptable in all aspects. The compliance ratio has been quite high; Hong Kong people don't try to avoid the law. Regulators have done well considering the system is quite new, no one has done this before, and it is difficult for them to oversee the system when turnover rates at companies in Hong Kong are high and people are changing employers and service providers. 

There is another cultural problem in Hong Kong regarding employment contracts. These are not common. Most people rely on trust and they are ignorant of their rights and obligations under the law. They believe if they work hard and perform well, their employer will reward them. But MPF is complex. There has been a lot of miscommunication, and that has limited confidence in the scheme by both companies and employees.

Many industry people predicted a bloodbath among service providers within months following MPF's launch. Are there too many service providers?

Yes. We have 20 trustees and 47 MPF product providers. Almost 85% of all employees work for small and medium-sized enterprises (SMEs), which aren't prepared for MPF. When service providers pitched for business last year, it did make people have to think about it and make a choice. But service providers promised they could do everything, and there has been disappointment.

On 1 December 2000, the deadline for choosing providers, many systems were not ready and had not been tested. The first few months were chaos, banks and insurance companies' systems were overloaded. Providers had been too aggressive on marketing, they underestimated the service issue. Their customer service people didn't know anything, they just saw the basic rules but failed to understand the details.

Employers were ignorant of calculation contribution rules, they just focussed on handing over the money. This led to a lot of discrepancies, and if they weren't quickly corrected, companies could be charged interest by regulators. Employers didn't bother to understand MPF, they wanted service providers to sort it out and give them guarantees. For the first six months, a lot of automation didn't work.

Employees of course were just as unprepared. In Hong Kong culture, no one knows how to read statements, members don't know what funds they're in. But they know their own stock investments. People just want quick returns, and saving for retirement has never been a serious consideration.

And today?

After a year, many of these problems are settling. The main problem left is the operation of contributions by employers and employees. A lot of people don't know where their money is invested and when they change jobs, they don't know what to do. Should they keep their MPF contributions that they've already accumulated with their old employer? In many cases we don't recommend this, because they may suddenly face new charges from service providers. Those providers gave companies a lot of discounts to win business, but ex-employees usually face the full market rate.

It's much better if people get an idea about which MPF products perform well and move their accumulated money into a new MPF scheme. But if the provider at their new company isn't bad, and they don't face any extra charges joining the MPF programme, then they might as well put all their assets with the new company's provider.

How do people figure out performance of MPF funds?

The Investment Funds Association has weekly updates of all MPF investment funds and it ranks their performance according to a benchmark.

What about service issues?

On the service side, there is no benchmark. Every company uses different methods. Service at insurance companies, for example, is going to resemble their existing sales agency service. Feedback from clients varies. We routinely hold seminars for employees and at the same meeting at one company you can have complete disagreement. What is important, however, is if the company has a dedicated person for MPF and HR issues. If MPF is just being handled by the financial controller or an accountant, that person may understand the numbers but won't appreciate the complexities of MPF regulations.

Do you see many companies or individuals now changing service providers?

We're getting a lot of inquiries from companies to review their providers, but in most cases they'll need to wait until bonus periods end. It's only been 12 months, and a lot of providers promised things like kickbacks for companies to sign up, but over a longer period of time. Investments are locked in through employer accounts, and with the market downturn no service provider has been looking like Superman. There won't be a mass movement.

What employers could do is establish a second service provider and give the staff a choice. But it's a huge administrative headache and this strategy is only suitable for the biggest employers. The Jockey Club, for example, has multiple schemes. Moreover, if a company switches providers, that means liquidating the entire investment, and no one wants to do that at a loss.

Moreover, a lot of employees invested in guaranteed products. There are 47 guaranteed funds but up to 40% of them have æsoft', not æhard' guarantees. That means the guarantees are only honoured under certain conditions, such as a minimum investment period, which is usually 36 months.

Employees can, however, launch a new MPF account while keeping their accumulated contributions dormant with the old provider. As long as those funds remain invested, the guarantees will stay, and people can send future contributions to the new provider.

How many employees are savvy to this sort of thing?

It's growing. We host regular MPF Clubs for client's employees and HR people to teach them how to do this. People will learn more as the asset sizes grow. Right now, MPF contributions are seen as a tax over which people have no control. So far, only 2% of employers have changed their investment options û after 9/11 some rearranged fund options to be more conservative û but that's now fallen off.

Going back to the issue of service provider consolidation. Is it now kicking off, with rumours that HSBC may buy Pacific Century's MPF business?

Consolidation is the must scenario. The Hong Kong market is not big. We can have a maximum of 10 and probably only five service providers with a full trust arrangement. If a trustee has less than 5% of the market, it won't survive more than two or three years.

What about the mid-sized players?

They're all talking. But contribution rates are falling due to head cuts and lower salaries. Every provider is re-evaluating its fund size. Service providers need to raise charges, especially with new schemes. Before any of them merge, these providers need to consolidate their own internal information. The big players don't want to deal with these Mickey Mouse competitors, so some businesses may just close. At least five and probably 10 providers are now looking to exit.

The government is considering a freeze on MPF payments.

I don't understand this. After such a huge promotion effort and setting up of all these businesses, the government is talking of scaling back MPF. The Mandatory Provident Funds Scheme Authority and the service providers are against any change, or at least against raising the minimum salary amount to contribute without also raising the maximum. The MPF system is meant to protect the lowest income groups, and as it is a cap on 5% of monthly salary is not enough for people to save for their retirement. So scaling MPF back makes no sense. But Charles Lee, the chairman of MPFA, has agreed to raise the minimum but not the maximum contribution rates because of fears this would place a financial burden on employers. This is not fair to members, but it is also not fair to service providers, which are going to lose assets.

This issue is likely to go to the Legislative Council mid-year for subsidiary legislation. This argument isn't finished.