Hong Kong's MPF reform push could have side-effects

The new chair of the Mandatory Provident Fund Authority wants to usher in wider investment choices. While well-intentioned, they could create new risks, warn experts.
Hong Kong's MPF reform push could have side-effects

The ambition of Hong Kong’s pension funds oversight body to enhance members’ investment return by introducing more products and lowering administration fees is being welcomed by pension professionals.

But they caution that the reforms could have a limited impact on long-term returns and raise the risks of members making poor investing decisions. They warn that far more investment education needs to be done with MPF members, particularly about the risks of high frequency portfolio shifts diluting their overall retirement savings.

Ayesha Macpherson Lau, the new chairwoman of the Hong Kong’s pension-alike Mandatory Provident Fund Schemes Authority (MPFA), said in her latest blog that she would keep an open mind about introducing new reforms to enhance returns for the available MPF funds, which held a combined HK$1.14 trillion (US$147 billion) in assets as of end-2020. Lau said her priorities would include reviewing investment choices and lowering administration fees.

The new chair also highlighted the incoming eMPF platform, which is set to be fully deployed by 2025 and launched by early 2023. The e-platform is set to provide comprehensive MPF scheme administration services to over four million MPF scheme members and 300,000 employers. 

One practical benefit of this should be the ability of MPF members to move their funds between products and different managers.


Francis Chung,
MPF Ratings

Market participants, especially asset managers, have been urging MPFA to relax rules around the range of products into which MPF funds are permitted to invest. Currently, the funds cannot gain exposure to Chinese bonds, commodities, illiquid assets such as real estate or high yield products.

The authority has been slowly easing the restrictions. For its most recent new inclusion, the MPF in last November added the Shanghai and Shenzhen stock exchanges to its list of approved bourses, allowing MPF providers to invest some of relevant products into A-shares.

Francis Chung, chairman at MPF Ratings, told AsianInvestor that any broadening of product and investment scope by MPFA should offer fund managers to offer MPF members more investment options to generate alpha. That would especially be the case once eMPF is introduced, as members would be able to more easily shift their savings between MPF fund manager providers. 

But that increased array of options comes with a downside, Chung added.

“As standalone funds [become] available to MPF members who may not have sufficient knowledge, there’s a risk that rather than invest long term or diversify, they opportunistically invest in such asset classes which may be inconsistent to long term wealth creation and diversification principles,” he noted.

Another MPF expert also echoed Chung’s view. The expert, who declined to be named, said MPF product diversification might fail to drive good returns over the long term if investors are impatient and try to shift their asset allocations too often.

“Members are investing now to secure the pocket when they are reaching retirement and, in such long investment horizon, they should not be used to frequently shift among different strategies and products,” he warned.

The danger of doing so is that MPF members who are not investment experts end up timing market movement, and in doing so either enter appealing areas too late or miss out on assets that are genuinely undervalued.

Janet Li, Mercer

The expert warned that this is particularly the case when it comes to equity exposures. The asset class is often volatile but can offer outsized returns. As a result, it is important to hold equity exposures over long periods, including through market downturns, in order to benefit when prices bounce back.

Janet Li, Asia wealth business leader at Mercer, told AsianInvestor that the opening up of the investment scope for MPF fund providers, along with the launch of higher risk funds, can help members enjoy more investment returns if applied correctly by the right group of investors. However, such options could be detrimental to investors nearing retirement, as they have a short investment time horizon.

“This expansion of options needs to be considered together with retirement investment education and readiness,” she said, adding that the whole expansion process could take time given pension providers tend to be very prudent when it comes to expanding their investment scopes. 


According to data from MPF provider Manulife Investment Management, equity products such as its China Value Fund and North American Equity Fund enjoyed good levels of net asset inflow (see table below) over the past one year, and during the first five months of 2021.

Source: Manulife IM
Calvin Chiu, Manulife IM

Calvin Chiu, head of Asia retirement at Manulife Investment Management, says the MPF provider has seen investors readjust their portfolios over this period.

“This may be due to the fact that equity markets rallied, China being one of the first to emerge from the pandemic, and also perhaps investors had more time to think about the future,” he told AsianInvestor, in emailed responses to questions.

Chiu added that given their long life expectancies, Hong Kong retirees risk running out of money in retirement. Hence, they should consider putting their money in post-retirement decumulation solutions that aim to provide a stable income during retirement. 

While several MPF funds enjoyed very good returns during 2020, their track record since the system's inception in April 2000 is not so strong. 

During 2020, MPF equity funds and mixed asset funds recorded average returns of 15.1% and 13.2%, respectively. In comparison, the Hang Seng Index and Hang Seng China Enterprises Index respectively fell by 3.4% and 3.8%.

But from 2000 to 2020, equity funds and mixed asset MPF funds saw a 5.4% and 4.7% net annualised returns (see table below). During two decades, the Hang Seng index saw a 56.7% increase, representing a 2.27% compound annual growth rate. The inflation rate in 2000 was 3.69%, while it dropped to 2.86% in 2019 and 0.3% in 2020.

Source: MPFA

As of 2020, Hong Kong’s total MPF assets stood at HK$1.1 trillion, distributed among the 10 million accounts of 4.5 million MPF members, according to Mandatory Provident Fund Schemes Authority data. Many members have multiple accounts, due to moving jobs and opening new MPF funds with multiple employers.

However, only 100,000 people are believed to have more than HK$1 million in their combined MPF funds, according to MPFA data. The city’s population will likely need to save far more before retirement if they are to meet their living needs, particularly given the long average life spans of Hong Kong’s population.

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